For Web, Funding Drought

Oct 12, 2008  •  Post A Comment

The economic crisis that has frozen credit, toppled banks and sent consumer confidence plummeting worldwide is about to wreak its havoc on the online-video investment sector. That’s the conclusion of venture capitalists and other experts who are betting the flow of venture money into online video is about to dry up.
Venture capitalists poured $461 million into online video services and software companies last year in the United States, according to Dow Jones VentureSource. But the rate of funding is set to slow dramatically over the next several months.
“Everything is frozen,” said Jeff Sanders, a partner with Roberts Ritholz Levy Sanders Chidekel & Fields, a New York law firm specializing in media, entertainment and technology who has helped entrepreneurs secure venture capital.
The funding outlook will likely mirror the dot-com bust when money slowed in 2000 and evaporated in 2001, he said.
“That was exacerbated by 9/11, and barring that type of type of activity, it won’t be until middle 2009” that things will revive, he said.
Until then, the start-ups that have already landed seed money will likely hunker down or shop for a quick exit. Smaller video firms may be eager to sell at bargain rates, which could be attractive to Internet giants who have cash. Either way, survival of the fittest will be the name of the game in the cold months ahead because advertisers are reining in their spending.
Revising Expectations
Last week advertising agency ZenithOptimedia revised its global advertising spending growth rates downward to 4.3% for 2008, compared with a 6.7% growth projection back in June. The U.S. will bear the brunt of the hit with growth this year down to 1.6% from the 3.4% projected in June. In 2009 growth will be less than 1 percent.
Amid the declines, Internet advertising will remain steady at a 23% growth rate for the next two years, ZenithOptimedia said.
That will help online video companies that snagged their seed money in the early days. Some pioneers of the business, such as Brightcove and Veoh, even say they’ll be profitable next year.
“Right now the guys who have raised money and built a presence and grabbed market share are well-positioned. But I don’t see a lot of money pouring into new companies,” said Todd Dagres, founder and general partner with Spark Capital.
Deals that do come will be smaller, fewer and farther between. Also, the broader economic crisis simply compounds the economic forces already at play in online video—the business has entered a shakeout phase that will be marked by mergers, consolidations and the failure of some companies. Last month, for instance, online video firms Anystream and Voxant announced a merger.
“Companies will go under and companies will be acquired at lower prices,” he predicted. “You could probably see a number of these video sites that had high hopes start to rein in their optimism so they’d be more interested in selling, but acquirers are less likely to make acquisitions at those prices.”
Good entrepreneurs build in contingency plans for a downturn, said Raj Amin, the CEO of broadband video network HealthiNation, which has raised nearly $12 million in venture funding. That means mapping out a clear path to profitability and revenue streams to support the business as it grows.
In addition to producing its own health and lifestyle shows for its broadband network, the company also operates as a work-for-hire shop to produce branded content for pharmaceutical companies.
“That helps fund the business,” Mr. Amin said.
The key for an existing video firm to weather the downturn is to demonstrate performance, said Ben Weinberger, CEO of video search firm Digitalsmiths, which has raised $6 million in venture funding.
“VCs are not placing short-term bets,” he said. “They are investing in your future and the market’s future. No one has a crystal ball five to eight years from now. … We all know that if you have a solid team that executes well, your chances of success are exponentially increased.”
If there is a silver lining in the economic meltdown, it’s that most video experts don’t think the dip will last too long.
“Companies that are able to weather this storm, and I do believe it’s a storm that will have an end, they come out the other side and will be in an excellent position,” Mr. Dagres said. “They’ll have cash and critical mass and they won’t be living life on the edge.”


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    read on at http://richreader.blogspot.com/2008/10/where-is-safe-haven-for-online-video.html

  2. In a downturn, there is often panic – companies that have positioned themselves as low cost leaders are more likely to prevail- they do not have to endure layoffs and the time and pain that requires.
    Companies with limited cash may find themselves squeezed by strategic investors looking to take advantage of their situation.

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