Mainstream is flush with cash. Millions of dollars flood into startups every single day and billions annually. There is more funding for mainstream startups than there is market cap for the entire adult industry combined.
When you read the news of those billion-dollar buyouts, however, not all is what it seems. In a lot of cases, the big sticker price is a lot higher than the actual amount paid for a business. This is because there are earn-outs directly tied to metrics like revenue and profit projections, and user acquisition targets. Oftentimes, a founder is required to stay to guide the project for several years. If they miss their targets, or leave, that cash and those stock options all evaporate into air. This was the case when the late Tony Hsieh walked away from millions of dollars after he left AdExchange following its sale to Microsoft for $250 million.
Mind you, investors are hungry for good investments. Last year in 2021, I did an investment that moved quickly from raising initial capital to acquiring companies and going public within 10 months. We rang the bell at one of the major North American stock markets and the investment immediately tripled in value. That quick and easy money is the dream of every venture capitalist. The company has barely sprouted wings and it is busy rolling in acquisitions into its proprietary platform and earning eight figures per year in revenue.
Now, while adult seems like a good investment — sex sells, right? — and a recent report has the industry valued at over a $300 billion market cap by 2030, why is there a dramatic lack of funding for new adult ventures? Why don’t big venture capitalist funds have an interest in it? Well, it comes down to toxicity and hurdles in the journey towards high exit multiples.
Stigma and Toxicity
Soon, this won’t be an issue. An entire generation has grown up with the internet and porn at their fingertips. But, for the time being, there is still a monster amount of capital and business controlled by institutional forces who don’t feel the same way — or would like to cultivate that public perception, at least. Why? Because the stigma surrounding adult keeps businesses from investing, as it can be a public relations time bomb.
Liquidity and Lack of Capital
You may be aware that there is a lot of banking discrimination in the adult industry, and the same with credit card processing. This impacts the industry in another way: it is hard to get access to large amounts of capital in order to grow a business. For the most part, adult is cut off from billions of low-interest — nearly free! — capital around the world. Banks don’t want to loan money to adult companies and they don’t want to fund adult acquisitions.
Without the massive amounts of cheap capital that mainstream companies have access to, the ability to exponentially grow an adult company is diminished. If you are lucky enough to attract the few adult-friendly investors to fund your dream, good for you! Nearly everyone in adult bootstraps their companies due to lack of capital. This causes more subtle growth curves, and the speed of return for investors is slower, also.
Lower Multiples
The team at my own company assists people with buying and selling adult websites and domains, as well as their mergers and acquisitions, so I’ve seen firsthand the exits that adult operators take all the time. But the difference between adult exits and mainstream exits is the multiples, since the multiples in adult are mostly related to underlying tech costs and profit — mostly profit — whereas in mainstream, acquiring companies are paying for more than just revenues and profits; it’s about many more vectors ranging from potential profits to cash flows, patents, trademarks, partnerships, scalability and even how much a brand name acquisition will move the stock price based on perceived value. The acquisition reasons are endless, and that drives values up. Recently, I helped a company on its way to a multimillion-dollar adult exit. That client’s complaint wasn’t the multiple they got for the project; it was how much more they could have gotten if they had pursued a mainstream business instead.
Fewer Big Acquirers
Most people name only two or three of the largest porn companies as likely acquirers in the industry. The truth is, most of the big companies don’t acquire businesses for a wide range of reasons, including risk and scalability, but most often because they are just too small. I’ve had several clients of mine name the same big potential acquirers for their business — companies that I know and work with — but I advised them as their broker that those companies wouldn’t be interested.
In the cases where I did present the opportunity, they were always declined because to a company earning eight figures or nine figures a year, it often does not seem appealing to buy something for $500,000 or $1 million. These large companies have already made their millions and want to focus on larger, more worthwhile projects that elevate their brand. There are only a few potential acquirers in adult, and those companies are not paying the kind of money that floats around in mainstream daily.
No Stock Market IPOs
For a long-term business investor, the business potential needs to be obvious. For venture capitalists, the exit potential needs to be obvious, and this is the biggest reason venture capital rarely finds its way into the adult industry. While there are many adult companies who dream of one day going public, that is going to be a tough and difficult journey.
IPOs rarely happen in adult because the stigma associated with outsiders looking in causes founders to shy away, while their limited personal tolerance for the limelight may lead them to avoid the attention that comes with running a publicly-traded adult company. Only larger-than-life figures like Hugh Hefner are usually up to the task, and they’re even rarer. Instead, the aim of adult companies is usually to create a profitable private business to be held indefinitely instead of a business that investors will buy on the stock market. Without a clear path for a high exit multiple or being able to go public, there isn’t enough reward to warrant the risk for big VC firms.
Juicy Jay is the CEO and founder of JuicyAds. Acting as “The Dealmaker,” Jay leverages his brokerage business Broker.xxx as an adult marketplace that helps people buy and sell adult websites, businesses and domains.
