The State of VC Investing in Digital Media Startups

Apr 07, 2009


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 If you follow the world of startup innovation, as I have for more than 25 years, you've likely read about how the venture capital industry is under pressure lately. The IPO market is stalled, capital flow has obviously slowed considerably, and we read almost every day how difficult it is for founders to raise early-stage capital to fund their dreams.

But how might these problems affect the digital-content business specifically? Will innovation slow in our industry? Is it really as bad as some would have you believe? I decided to seek out people on the front lines who should know best: namely, partners at three of the VC firms I most respect in the world of seed-stage and early-stage investing in the digital media space. Thankfully, I didn't have to travel far, as I was lucky enough to run into all three of these folks at the recent DEMO '09 conference in Palm Desert, CA, where they were out scouting new investments.

"VCs continue investing broadly in digital content, technology, and services," said Jeff Clavier, founder of SoftTechVC. "The bar has just gone much higher on what the companies have to demonstrate to be worthy of an investment – traction, revenues, and market potential." Clavier began investing in the consumer Internet space five years ago, at the very beginning of Web 2.0, and since then has closed more than 50 deals. Five of these firms were acquired: Truveo, Userplane, MyBlogLog, Kaboodle, and Maya’s Mom. "In my angel portfolio, I have companies like Mint, Kongregate, and Buzznet. More recently, I invested in Tapulous, maker of the number-one game on the iPhone, and in Circle of Moms, GetSatisfaction, and SocialMedia. All these companies have millions of users, but it is still the beginning for them," Clavier said.

Another well-known investor in new digital media and Internet companies is David Hornik, a partner at August Capital. Partners in his firm were among the earliest investors in such companies as Microsoft, Sun, Compaq, Intuit, Symantec, Seagate, and Skype. Since he began in the business more than eight years ago, Hornik has had the good fortune to invest in such exciting digital media companies as Evite, Tickle, Six Apart, and VideoEgg. So, what about the current climate? "Venture capitalists are being very careful about what companies they fund, with a particularly careful eye on capital efficiency," he said. "There is a general sense that online advertising is slowing down. Since a large number of the digital media opportunities are monetized with advertising, many of the companies coming up for funding will face a fairly skeptical venture community and have a tough time getting funded." On the positive side, though, Hornik said, "We believe that great entrepreneurs are undaunted by the challenging economy. And a number of things make it easy to build a company in these difficult times: plentiful talent, cheaper rents, less competition."

Hornik continued: "I'm always looking for smart, talented entrepreneurs who can tell me what's interesting. The entrepreneurs know way more than the venture community, so I've always followed their lead... I joined the venture business in June of 2000, which was a challenging time in its own right. But I found some very interesting companies to invest in then. And I'm sure that I'll find some interesting companies to invest in over the next couple of years as well. I'm looking forward to it."

My search for current insight on the venture climate continued, this time via a chat with Christine Herron, a principal with First Round Capital. This firm, which she joined in 2008, has had some very successful Web 2.0 investments, such as StumbleUpon and Powerset. A more recent investment she was excited about was GetSatisfaction. "It’s a great time to be an early-stage investor, and don’t let anyone tell you differently," said Herron. It was clear to me as we went on that she was extremely positive about investing, even in the current environment. "We’re seeing smarter valuations now, and smarter plans. They’re much more capital efficient, and more focused on business milestones, and how to get to customer acquisition," she said.

Yes, it’s true the amount of overall venture investment was down in Q4 compared to the same period in 2007. And likely that will be the case again in Q1. But a look at the number of deals being done going back to October in the digital media category on VentureDeal, an online database, shows you the money is still very much flowing. From October though mid-March, there were 57 total deals in this category alone, seven of them first rounds (Series A), ranging in size from $1.4M to $11.1M. The rest were later-stage deals, six of which were in the amount of $20M or more each – one topping out at $33M. To keep up on the flow of such deals, you can sign up for free email alerts at www.venturedeal.com. The takeaway: innovation is continuing to march on in digital media, despite the economy.

(www.softtechvc.com, www.augustcap.com, www.firstroundcapital.com)