According to Dow Jones VentureSource, via NTV:
- Some $460.5 million was invested in such startups in 2007,
- This is up from $266.9 million in 2006.
- And already, in the first quarter of 2008, another $217.3 million rained down on the category.
Not too shabby. For visual effect:
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WatchMojo NewsletterI am the CEO of an online video company… and apparently, it’s a tough gig.
It’s true. Mind you, I had the choice of focusing on being CEO of a search engine, CEO of a blog network, CEO of whatever this is, and ultimately, I chose to be CEO of an online video startup because it gave me the best chance to write history and come up with a playbook and framework to build something successful in a spanking brand new industry.
Search, blogs, etc., were all “been there, done that” spaces; not necessarily in the “I’ve been there, done that” sense but rather in the “someone else has been there, done that… why reinvent the wheel” sense.
GigaOm lists the recent departures of notable CEOs as proof:
Herb Scannell of Next New Networks said his company would be better served by someone more web-oriented; Mollie Spilman deferred to her co-founder to lead Tidal TV; and Bill Joll of On2 didn’t give a reason, though it’s worth noting that his company recently had to restate earnings due to “falsified” sales accounts (the three are pictured in that order). And they’re not the only ones: Founding CEOs Josh Felser of Sony-owned Grouper (now Crackle) and Tim Tuttle of AOL-owned Truveo are also members of the recently-departed online video start-up CEO club.
Does commonality suggest cause?
Ok, this is not a coincidence, but let’s go deeper than assessing commonality.
1 - VCs do not understand media, let alone ad supported businesses
Spark Capital plunked down $8M in Next New Networks‘ Series A. Then Velocity Interactive Group and Goldman Sachs invested an additional $15M in the company’s Series B - a mere two years after the Series A. The company has raised $23M; let’s dumb down the numbers: say investors now own 50% of the firm, that gives it a value of about $50M. If VCs aim for 5x, 10x (let’s forget 100x here) that means N3 needs to exit for $250M - $500M. To put things into context, Atom Entertainment sold for $200M to Viacom and IGN sold for $650M to News Corp.
Sure, a video content company can and should sell for more… but it’s awfully hard when you swallow $23M in funding and don’t have a path to revenues, let alone profitability.
Revision 3, GigaOm states “has been on a tear lately, signing web stars Veronica Belmont, Zadi Diaz, and Gary Vaynerchuk), but the fact remains:
- they’ve raised $9M in funding already… and seeing how “they don’t seem any closer to turning a profit” that means that R3’s own CEO, Jim Louderback, will also be hard pressed to demonstrate a viable business model before long.
- more importantly, in light of the recent signings they have had, they are going after paying for talent, and that is a dangerous model for web content… no matter how proven they might seen. Remember Lonely Girl? Success if fickle, temporary and does not really convert to advertising success once advertisers realize what they actually want beyond flash and hype.
- Revision 3 remains extremely niche and tech-oriented. That is not a bad thing in of itself… but its appeal becomes increasingly limited to most would-be acquirers, who would favor something more lifestyle and neutral.
One natural fit for R3 was CNET, but now that it is in the hands of CBS… would it really want to pay 5x or 10x the most recent valuation R3 fetched? At a funding of $9M, presume a value of $20M+ at its most recent funding… projecting that same 5x or 10x multiple that means investors will balk at anything less than $100M to $200M.
Would you pay that for Revision3? Would you? I don’t see too many people paying that for Digg… Kevin Rose/Jay Adelson’s other business.
I used to own On2 stock (I got in at about $0.70 and got out at about $2.00). As a publicly traded company, yeah, I got news for you: falsify statements and you’re out. Nothing to discuss here. Let’s move on.
I don’t know much about Tidal TV apart from the fact that they raised a $15M series A. Listen, Tidal TV seems like it’s a cool idea… but $15M Series A - are you F’n crazy? Way to get behind the 8-ball. Don’t get me wrong, but a $15M Series A guarantees that you burn money before you have a clue what you are trying to do… it doesn’t mean automatic fail, but it does make it hard to succeed because time is money and with so much at stake the VCs shall get impatient, and that means the CEO shant stick around.
Hopefully, Tidal TV can prove me wrong… as a content producer, we are always rooting for tech startups and aggregators to become successful, but as I noted yesterday: increasingly YouTube is killing video-centric tech startups, not media companies.
The bottom line is it’s hard to over-deliver when you promise so much to get a lofty valuation. Rumor has it Funny or Die did a $10M round on a $100M valuation. Really? I don’t know what is funnier, that, or naming Will Ferrell CEO. I wonder how long he’d remain CEO.
As per Crackle’s CEO and Truveo’s CEO - those are acquired companies, naturally those guys won’t want to stick around at old school media companies SONY and AOL respectively.
2 - Online video advertising revenues are bullish, but remain embryonic
Online ad revenues in the US grew from $450M in 2006, to $750M in 2007, and crossed $1.25B in 2008. In four year, Forrester predicts a fat $7.1B… problem: no one has any clue what format that will come in (pre-roll, companion ad, overlay, PiP, etc.) It’s darn hard to plan to capture ad revenues down the road if you don’t have the foggiest clue what ad format you’re chasing.
For example, circa 2002-03, when the 300×250 (or 250×250) ad format took off, many publishers had never created an ad slot for this, so they had to continue running 728×90 and 120×600 ad sizes, leaving a lot of money on the table.
3 - Difference Between Social Media and Video
Let me actually be more specific about why there has been so much turnover in the corner office at online video startups:
- the social media hype train has fizzled… look at the relative inability of Facebook and MySpace to match revenues with their enormous audiences; look at the reduced projections for social networking sites. My gut says VCs figure that social networking sites are not worth their money, time, or attention.
however…
- online video is the real deal… to paraphrase Shaquille O’Neal referencing Paul Pierce:
“Take this down, online video is the motherf*****g truth. Quote me on that and don’t take nothing out. I knew it was the real deal, but I didn’t know it was this real.”
With online video becoming more and more omnipresent online, VCs who have skin in the game know that they can still go yard despite stalled efforts and founding CEOs on board… so sooner or later, they don’t mind taking out the knives.
That, my friends, is what you are seeing here.
All right, back to running a successful online video startup.
If NBCU gets Weather.com, it propels itself into a Top 10 media property… From Alley Insider:
1. Google / 128 million unique visitors
2. Microsoft / 123 million
3. Yahoo / 116 million
4. Time Warner / 108 million
5. News Corp. / 79 million
6. eBay / 66 million
7. InterActiveCorp. / 65 million
8. Wikimedia Foundation / 57 million
9. Amazon / 55 million
10. NBC Universal / 51.2 million (estimated unduplicated audience after Weather.com acquisition)
This is worth nothing, because this combo would incidentally be pushing New York Times off the list. We’ve already noted how NYT is the largest newspaper company on the Web. This is not surprising, for a supposedly dying business, NYT seems to be doing a lot of cool and smart things online. The problem is, it’s not doing enough, and what it is doing, it is not doing fast enough. But at least it is doing something, which is more than some other firms in their peer group.
Anyway, back to NBCU, this is not immaterial, because CBS’ recent acquisition of CNET had numerous purposes, none of which was more important than propelling CBS into a Top 10 media property:
CBS said it would combine those assets with its existing Internet properties, which would make CBS / CNET one of the top 10 U.S. Web firms with 54 million monthly users.
CBS has been assiduously building its Web presence over the past 18 months, since bringing in Silicon Valley deal maker Quincy Smith to lead its strategy. In addition to CBS-branded Web properties, it has launched a content and ad network of 300 sites. CBS has also made several smaller acquisitions, such as finance video blog Wallstrip, high-school sports destination MaxPreps.com and music discovery site last.fm.
While social networks are the hot properties of the moment, CBS is doubling down on premium content, Smith said, anticipating a greater shift of brand ad dollars online.
“It’s a business that’s easy for CBS to understand,” he said. “The bulk of the [online ad] revenue has been search. What else is there? CNET is making a good living off online content.”
You see where this is going: it’s gobble or be gobbled season. This is all nice and dandy, and both CNET and Weather.com bring a lot to the table beyond eyeballs and traffic…
With so much cash to play with and eroding revenues in their traditional offline businesses, Big Media will continue to acquire but also start to look at generating revenues from the underlying assets they buy.
YouTube is leaning towards accepting longer form content, defined by content longer than 10 minutes but smaller than 1 GB. This is done to increase revenues, but I am not sure this will have the desired impact… What will get YouTube to increase revenues, read on.
The Background
After officially signing on as a YouTube content provider in the summer of 2007, in February 2008 we earned the right to sell ads around our videos. We do millions of streams each month, and I have a background in ad sales, so I welcomed this decision by Google/YouTube.
For months I kept my mouth shut both as a courtesy and legal obligation (we have an NDA)… but then noticed that Google was disclosing this decision quite openly. For example,
I still hesitated to say anything, until I saw AdAge fully run with the story… quoting even more YouTube managers and listing Revision3 as an example of a partner selling ads (hum… thanks for the plug, YouTube… considering that we probably begin selling ads earlier, but I digress).
From Theory to Practice: What YouTube Needs To Do, Now
Anyway, this morning I was on a sales call, closing a deal for our inventory on our channel… and it occurred to me that YouTube needs to essentially become more transparent and “open source” this. Well, open source is the wrong term, I mean introduce transparency, basically.
Before I say anything else: bear in mind that when Ad Age ran that story, Alley Insider pulled a Valleywag and posted the standard contract on its site, prompting YouTube’s legal brass to send a cease and desist… So, I will not be talking about the specifics of the deal requirements that pissed off GooTube’s legal department. In other words, if you are a member of YouTube’s legal team: nothing to see here, move on… but maybe send this to YouTube’s Sales Chief.
But the point is: YouTube has 2 main requirements pertaining to deal size and floor rates (I don’t think I am saying anything there, frankly, as these are obvious requirements to any deal).
So here’s the problem:
What YouTube should do to both sell more (increasing sale through is always critical) and increase CPMs (what drives higher total revenue). In other words, say I could log in to YouTube and see:
- all of the campaigns that YouTube had sold against our content
- what CPM these campaigns are paying… and
- how much inventory each campaign eats up.
If we have 1M unsold inventory, then sure, I can sell that at the floor CPM… but if I see that we are “sold out” but 50% of that inventory is being sold at - say for example - $13 CPM,
Then, say I am talking to Coca Cola to run ads around our safe, ad-friendly content… I can tell them: sure, you might only be asked to pay $X as a minimum CPM, but you won’t get any impressions.
I can tell that advertiser than they should pay $14, for example. Right now, I’m flying freaking blind people!
This way, I know how much Coca Cola has to pay to see some inventory but I won’t be forced to charge them too high of a price to ensure that they get some inventory, but risk pricing it too high and making it all but impossible for them to meet their ROI metrics.
This way:
- YouTube brings in a deal that pays a slightly higher CPM
- I see what inventory is idle or low-paying
- I sell a portion of inventory that I know is deliverable… which is key and perhaps THE single greatest challenge facing YouTube (well, apart all of that crappy content and pirated stuff, of course).
If YouTube did this, I think they can generate more revenue almost instantly…
All right, enough typing, let’s fire this off to San Bruno and Mountain View.
