The Emperor has no clothes
Is your company the next Ozy Media?
By now, you probably know more than you've ever wanted to about Ozy Media.
That probably wasn’t the case a week ago, when we would have guessed that few industry people knew much about Ozy before Ben Smith published a bombshell story about a very bizarre investment due-diligence call.
Founded in 2013 and led by charismatic CEO Carlos Watson, Ozy Media produces a general interest website, newsletters, and videos, which it says have attracted millions of monthly unique visitors and tens of millions of dollars in funding. While trying to raise more capital last winter, things went sideways.
At the time, Goldman Sachs was close to investing $40 million in Ozy Media. During what was meant to be a standard pre-investment customer due-diligence call with the Goldman Sachs asset management team, Ozy Media co-founder and COO Samir Rao impersonated Alex Piper, who runs unscripted programming for YouTube Originals. As Rao — cosplaying as Piper — was telling call participants how Ozy was killing it on YouTube, with significant views and ad dollars, and praising Watson, his voice started to sound strange, like it had been digitally altered.
Ozy's behavior during fundraising was extremely suspect and fraudulent, yet the company's board brushed it off when it initially came to light. Once the episode was made public, the fallout began quickly and hasn't stopped. At the same time, a ton of other problems have emerged seemingly by the minute. We won’t rehash all the details here since there is a ton of great coverage of this story. It seems to have it all, from executives impersonating executives at other companies to look good for potential investors to a toxic work environment to unrealistic expectations.
The Ozy debacle raises important questions for our industry, which we all know is prone to great hype. Given this environment, how can you tell when someone is full of potential vs. hot air?
What’s wrong with this picture?
Ozy’s notorious phone call has drawn scrutiny to claims about its business performance. In 2019, Ozy said it had 50 million monthly unique visitors. A few years earlier, BuzzFeed reported that Ozy was one of many publishers juicing its metrics by buying traffic from low-quality sources. Comscore pegged Ozy Media's monthly traffic much lower — up to 2.5 million uniques during some months in 2018. In January 2020, Ozy also said it had more than 20 million newsletter subscribers, but as Smith noted, Morning Brew, which has a very successful newsletter-based business, only has 3 million in comparison. Ozy also produces six podcasts, four festivals, the Ozy Genius Awards, and 12 TV shows. On billboards, Ozy claims one of those TV programs, "The Carlos Watson Show," is "Amazon Prime's First Talk Show." But Ozy was simply using Amazon's "video direct" service to upload the show to the platform, which is a tactic YouTube channels sometimes employ to rack up extra views; after Amazon complained, Ozy agreed to take down the signs and stop making this claim.
To its credit, Ozy has had some success with its offline efforts, including Ozy Fest, production deals with the likes of PBS and Hulu, and one show hosted by Mr. Watson even won an Emmy last year. Still, even with occasional hits over a history of unproven claims, Ozy warranted much more scrutiny long before Smith's story blew its wheels off.
One of the many problems highlighted by the Ozy Media fiasco is how easy it is to raise money these days, especially if you look good on paper and have a charismatic leader with a compelling vision and Ivy League credentials. Ozy isn’t alone: From Adam Neumann (WeWork) to Elizabeth Holmes (Theranos), there are many other examples of charming founders who grossly oversold their troubled startups. Since private companies like Ozy can say whatever they want, it's up to investors and potential partners to perform their due diligence to ensure that they're not risking their money or reputations on fake or doomed-to-fail businesses.
Beware the red flags
Hindsight is always 20/20, and looking back, some people would say there were plenty of red flags with Ozy Media. How do you really tell what’s what? And how do you recognize excellence, when both excellence and fraud in many ways speak the same language?
Competence looks different for different stage companies. When you’re working with a pre-seed company it’s all about potential. If someone’s raised tens of millions of dollars, there must be verifiable metrics underneath that pile of money.
When we’re engaged in due diligence, there are several signals that immediately give us pause and cause us to triple-check everything the company has demonstrated and shared. Some of them are:
Cult of founder: There’s nothing wrong with charisma, but it's a warning sign if people buy into what a charming leader is selling without asking tough questions and scratching the surface. Is there a bona fide business underneath the leader, and who is running it? How does the company actually operate? What does the day-to-day look like? It’s a red flag if senior leaders constantly default to the CEO in interviews instead of representing their function, especially if the company is past the seed round. A fun way to suss this out is to dig into the company's business continuity and succession plan (i.e., what would happen to the company if the CEO gets hit by a hypothetical bus?).
Miscalibrated market position: Something may be off if you’ve only ever heard of a company through its own paid marketing or events. For a media company, in particular, it's a tip-off if you've never come across it or its content organically. Or, more commonly, a company may position itself against a certain competitor and in a specific industry subsector but its customers and partners perceive it to be elsewhere. Both Serena Williams and amateur club players technically play tennis, but they are in no way, shape, or form competing against one another (a fact that is painfully obvious to Ms. Williams but frequently escapes the club player).
Disorganized org: Sometimes companies have weird structures. Good signals to look for are senior and executive titles without clear laddering underneath or uniformity in experience. Or functional areas reporting to an unusual executive, such as account management reporting into the CFO while sales reports into the CEO. It’s not just about vanity titles: Lopsided orgs have tremendous challenges scaling the business.
Touting dubious awards: Industry recognition is usually great, but sometimes a company that touts questionable accolades may be a red flag. Let’s face it: Some awards programs aren’t at all competitive. There may be times when the sole entrant in a category will win for simply paying an entry fee, depending on how the rules are structured.
Check under the hood
If you see red flags and want to dig further, here are some of the tactics we’d recommend:
1. Dig into their relationships: A company may talk about its partnerships and clients, but is it a direct relationship or do they work through an intermediary? For example, we sometimes hear ad-tech companies say that they work with a premium publisher such as Condé Nast, when in reality, they buy Condé Nast inventory through a supply-side platform and then resell it.
2. Understand their metrics: At some point, all companies will share some metric to show you how great they are, but what exactly does the metric mean? How does it translate to revenue and what drives it up or down? If a company says it has a million clients, what does that mean for you and how does it drive value? If a tech company claims to have 100 data scientists, how does that connect to the business? When Ozy shared in meetings that it had 25 million email subscribers, the very next questions should have been about open rates, engagement rates, and subscriber LTV.
3. Check references: Can you connect the company to real people who can provide feedback?
What does the culture look like? Are people overworked? What is the churn? Day in the life of an employee? If there are meetings on Sundays or young people wielding executive titles while also being responsible for doing the job of the “team” they're leading, there is, at best, reason to question the sustainability of the business. At worst, there may be an Ozy Media-level of exploitation. Run.
4. Study how they're organized: It’s time for some sleuthing. Based on a variety of publicly available info sources (such as Glassdoor for employee comments, The Org for org structures, and even LinkedIn for some sense of key teams), it may be possible to gauge whether a company is properly organized to execute its go-to-market strategy. What are their open roles and do they make sense for the business? Does the company have a lopsided organization? For example, does the size of its sales team seem in line with the amount of revenue it claims to produce annually? Does the composition of its sales team seem logical, or are there random titles lumped in? If a 60-person sales team has only five counterparts in customer success/service, that could point to a deeper operational challenge. For tech due diligence, when someone says they have X engineers, consider their structure, how they’re deployed, and how many PMs are working with the team. Is tech leadership proactive or excellent at executing on a given direction?
The bottom line
The most upsetting part of the Ozy Media story is how the company blamed this incident on a one-off mental health crisis. Mental health is a serious and important topic, and it should be handled as such, rather than used as a scapegoat for an episode that sounds more like fraud, with those participating in the call on behalf of Ozy complicit. There was no proactive approach from the Ozy Media board to address the supposed mental health episode once they were made aware of it. Instead, the board took action only after the incident was made public (and that’s before board members started rapidly resigning).
The onus is on industries, if not regulators, to police their own environments. Audit your partners every now and then because that deal you struck five years ago that sounded great may need to be revisited now. (We wrote about this here and here.) If a company that wants to partner with you is widely known for poor business practices, do not under any circumstances strike a business development deal with it. If reference checks are coming in lukewarm or it’s hard to find an actual person who can vouch for a company or individual, take the hint and move on. And most importantly, to quote the MTA’s slogan, if you see something, say something.
As Marc Goldberg, CRO at MethodMI and friend of Sparrow said to Insider:
"The underbelly of internet advertising is in plain sight if you know how to and where to look. The Ozy example is just one that has hit the headlines."
How do you define excellence and potential in your field? Would that definition be the same across different people in your organization or for companies at different stages?
Thanks for reading,
Ana, Maja, and the Sparrow team
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Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.