Despite the credit crisis and the contracting economy, investment firms that fund digital media still have cash to dole out. In the past month alone, venture capitalists at 406 Ventures, Flybridge Capital, Spark Capital, Union Square Ventures, Evergreen Ventures and others have funneled money into new-media properties, and they plan to keep doing so in the year ahead. While the prospect for quick-turnaround company sales (and fat exits for founders) in 2009 has dimmed, the spending outlook for the next year is promising for online and mobile video startups that can deliver targeted advertising, analytics and money-making vehicles for big media.
But here's the rub: Investors intend to scrutinize business plans more closely. They want proof that a business can generate revenue, and they expect their portfolio companies to deliver timetables for profitability.
2009 could be a challenging but also a "potentially explosive year," said Ross Levinsohn, former president of Fox Interactive Media turned partner with new-media investor Velocity Interactive.
"It is in these types of markets where fortunes are made if you are bold," said Mr. Levinsohn, whose firm is invested in online video shops Next New Networks and Generate.
When the credit crunch first shook Wall Street, most venture capital firms ground to a halt in October, holding off on funding as they assessed the situation. Some were outspoken in saying that the coffers would stay locked up in 2009, too. Though the markets are still bearish, some of that panic has dissipated.
Venture investors who have run through their existing funds have no choice but to sit on the sidelines during the coming lean times, because they aren't likely to raise more money right now. However, firms that have just begun to tap into their funds appear well-positioned because prices are good in this environment.
"We are only one-third of the way through our fund," said Maria Cirino, a managing director at 406 Ventures, who is tapping into a $170 million kitty and recently led a $12 million round in Digitalsmiths, which powers online video and search for big media firms. "We are sitting on a lot of dry powder, and during a time when a lot of funds have shut their doors and hunkered down, now is the time to do some great deals against very differentiated technologies solving big problems at an attractive valuation."
The venture capital world also is somewhat removed from the day-to-day whipsawing of the market because it has a much longer cycle than the rest of the economy, said Erez Shachar, general partner at Evergreen Venture Partners, which led a $4.5 million round last month in Taboola, a video recommendation firm.
"When we invest, we expect it to mature and be ready for an IPO or acquisition seven or eight years down the road," he said.