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VCs Stay Bullish on Web Video Startups

Apr 12, 2009  •  Post A Comment

In the midst of a deep recession, venture capitalists are still opening their wallets for Internet television startups. More than $80 million in venture money poured into the online video sector in the first quarter of 2009, about the same amount as in the fourth quarter of 2008, according to an analysis conducted by VideoNuze.
Investors expect to continue that pace for the rest of this year, with Web TV representing one of the few growth sectors in the venture capital business.
“People realize that video on the Internet is going to happen, and you know in four years that’s how people will be watching content,” said Neil Sequeira, a partner with General Catalyst, which has closed four deals so far this year to fund companies in the Internet business, a typical volume of deals for the firm.
General Catalyst is one of many prominent venture firms that remain bullish on online video despite the broader economic meltdown and its negative impact on the media and television businesses. Ad dollars continue to shift from traditional mediums to the Web and that’s why investors like Web video, said Maria Cirino of .406 Ventures.
Web video technology and services firms that have landed funding from investors this quarter include RipCode, JibJab, Digitalsmiths, Fliqz, Mixpo, Tremor Media and Visible Measures.
What’s noteworthy is who’s missing from that list: Venture capitalists aren’t funding many portals and content firms anymore. They are interested in firms that can deliver online video, measure its use and offer ways to make money with it.
The strength of investment in independent Web video companies is mirrored by major media companies’ investments in their own online efforts. News Corp. and NBC Universal are expanding their Hulu video joint venture by adding new programming on a regular basis, CBS Corp. launched TV.com as a video portal and companies including Sony Corp. are looking at alliances with Google’s YouTube.
The bullishness regarding Web video is reflected in the terms that venture-backed businesses are getting from investors. Tremor Media landed a series C round of $18 million earlier this year at a significantly greater valuation than its prior round, said the company’s CEO, Jason Glickman.
Existing investor Canaan Partners reupped because Tremor has continued to grow in the past year with very little slowdown through the last two quarters, said Maha Ibrahim, a partner with Canaan.
“While the overall online ad market is expected to retract or stay flat, video has been growing so fast that it is forecasted to maintain double-digit growth again this year,” she said.
Online measurement service Visible Measures also secured its third round earlier this year, to the tune of $10 million in a round led by Northgate Capital. CEO Brian Shin also said the valuation was slightly better than in prior rounds.
The Visible Measures and Tremor Media experiences aren’t the norm in the startup world, though. Most startup CEOs are struggling to win any money—even dollars that come with onerous terms and lower valuations.
“Valuations have come down in general, although hot companies still command a significant premium even in these times,” Ms. Ibrahim said. “We have seen cases where some properties have decided to forgo raising a round with an outside lead because they were unable to secure a favorable valuation. In these cases, the insiders have been bullish enough to continue funding the company out of their own pockets.”
Risky Move Paid Off
Mr. Shin decided to pursue new investors for Visible Measures’ series C round, a risky move that helped him secure a better deal.
“It said our progress and traction were good enough to warrant a new outside lead. It’s sort of like having multiple suitors, so you can pick the best ones, and it gives the existing investors more confidence,” he explained. In addition to Northgate, the company’s existing venture partners contributed to the third round.
Mr. Shin also started fund raising well before Visible Measures would need the money in 2010.
“If there is a sense that there is vulnerability, then you’re in trouble in this environment.
Desperation is the worst perfume ever,” he said.
Some venture capitalists prefer to focus on their existing companies. Ms. Cirino said she’s been choosing to double down on existing portfolio companies rather than make a lot of new bets.
“There’s going to be tremendous pressure on the glut of companies funded in the Web video frenzy of the past couple of years to produce real results,” Ms. Cirino said. “The Web video gold rush is over, and while that’s bad news for a bunch of companies who are still ‘speculating’ as to whom their customers might be one day, it’s great news for the pick-and-shovel companies in this space who have real value propositions.”
Recessions have a way of bringing out the best ideas, so investors are keen to check out new companies, too. Venture capitalists are seeing a lot of activity, said Jeffrey Bussgang, partner with Flybridge Capital Partners, an investor in mobile video firm Transpera.
“Web video and mobile video are white-hot, but many of the early-stage bets have been made and so VCs are now looking for proven scale and proven monetization business models,” he said.

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