"Gun shy": Investor blasts The Athletic for sale to N.Y. Times

A venture capital investor in The Athletic is criticizing the company for its $550-million sale to The New York Times, saying the media upstart was "gun shy and on defense post-COVID."

Why it matters: This is a reminder that there can be downsides to raising venture capital at high valuations.

Backstory: Powerhouse Capital's co-founders first invested in The Athletic in 2018, as part of a Series B round at an $80 million post-money valuation. But that was while they were leading a predecessor firm. Powerhouse came in on the Series C and Series D rounds, the latter of which was done in early 2020 at a $530 million post-money valuation.

• That final investment basically broke even, as a source tells Axios that the sale price is just four cents per share higher than the Series D price.
• Those that front-loaded their investments in earlier rounds will have better outcomes.
• Earlier investors told Axios they are happy with the outcome of the sale.

What they're saying: Axios obtained a letter Powerhouse sent to its limited partners, which argues that The Athletic sold too early. It reads, in part:

"The Management team opted for this all-cash acquisition at the last round's valuation rather than take on more capital to push forward with some of the international and other initiatives (sports betting, increased podcasting, more sports like F1) ... While we believe that there is still more value to unlock for The Athletic platform, it now appears that the NY Times gets to build on that foundation."

Another venture capital investor in The Athletic says that he wouldn't have "taken a potshot at management like that" in a written correspondence, but that he largely agrees with the diagnosis.

• He adds that an alternative option would have been to seek out new money, either equity or debt, in order to get profitable so that growth could become self-funded. Once management began engaging in deal talks, however — first with Axios and SPACs, and later with the N.Y. Times — it may have been psychologically hard to reverse course.

Powerhouse's Ian Doody declined to comment on the LP letter, citing confidentiality, but did say:

• "We are proud of the outcome and remain supportive of the process and the decision. ... Personally and professionally, it was a privilege to be part of this company's journey. ... Powerhouse continues to believe in the opportunity ahead for The Athletic and because of that belief, we offered to invest more capital into the company at various points."

The bottom line: This is one of the richest prices ever paid for a digital news startup via strategic acquisition, but that doesn't mean everyone is completely satisfied.

Editor's note: This article has been updated with new information on early investors.