There are many reasons why things went wrong: technical missteps, lack of premium content, tough terms from content owners such as CBS and Viacom, etc. But that's not the whole story. Joost and Veoh had an even bigger problem, one that will likely claim dozens of other media and advertising startups that have been founded over the past three years: too much venture money, too soon.
In the last few years, the top 25 most heavily-funded video startups (excluding Hulu, which has raised over $130 million) have collectively raised over $1.2 billion in venture capital, or an average of $48 million each (see chart). The top 10 companies in the group, names like Spot Runner, Move Networks, Visible World and DailyMotion, have raised $720 million, with an average of $73 million. More significantly, nearly three-quarters of this money was raised within the first two years of the initial funding. That's an impressive pile of dough, even for VCs.
Raising lots of money is not a problem, per se. Raising too much money too early and before hitting key milestones (e.g. getting paying customers, showing attractive margins) can be. This is particularly important for online video startups, which, due to their costs, need to be run with tighter margins from the start.
This year and next, these companies' venture backers and boards will have to make wrenching choices: continue to fund these companies with the hope that the economy will turn around or a generous buyer shows up, shut the companies down, or sell on the cheap. This will turn into a buyer's market for the next several quarters.
The simplest lesson to take away here is don't raise too much money too quickly. Unfortunately, that's easier said than done. Too much money, often, though not always, leads to poor habits like over-hiring, overspending and a lack of discipline, which itself leads to mistakes such as sticking with bad ideas too long and throwing money at a problem rather than solving it the right way.
I should disclose here that, as a partner in VC firm Canaan Partners, I am invested in and serve on the boards of several media and advertising startups, including Associated Content, Motionbox, Peer39, Tremor Media and Vivox, and I have previously invested in two successful video companies (Arroyo Video Solution and Broadbus Technologies).
In any new technological era, too much money inevitably rushes in to fund too many me-too companies. In the late 1990s, it was optical networking companies and dotcoms; more recently, ad-supported media, social networking and so-called Web 2.0 companies have been targets of the influx. Most VCs, myself included, have been guilty of making these mistakes.
Not all of the companies in this group will fail. True, many will run out of money and either shut down or get acquired for much less than what was invested. Others will turn into good but not great businesses. However, a select few will turn into great companies with highly profitable business models and significant revenues.
I continue to be bullish about the online video space. Roy Amara, a noted futurist, once said, "We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run." It's hard to believe that it's only been three years since YouTube exploded onto the scene.
It's difficult to predict the pace and course of how the online video space will change, but there are reasons to be optimistic, as the costs -- production, streaming, and storage -- continue to decline and as users and businesses invent new ways to best leverage this new medium.
|Date of 1st Funding||First 2 Years
|% Raised in First 2 Years|
|25||Next New Networks||$23||3/8/07||$23||100%|
|TOP 25 - Total Funding||$1,203||$865|
|TOP 25 - Average Funding||$48||$35||74%|
|TOP 10 - Total Funding||$728||$519|
|TOP 10 - Average Funding||$73||$52||72%|
Source: Venture Source
|ABOUT THE AUTHOR|
In addition to his work at Canaan Partners, Warren Lee blogs about the New York startup scene at www.yetanothervc.com.
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