Venture capitalists poured $461 million into online video services and software companies last year in the United States, according to Dow Jones VentureSource. But the rate of funding is set to slow dramatically over the next several months.
"Everything is frozen," said Jeff Sanders, a partner with Roberts Ritholz Levy Sanders Chidekel & Fields, a New York law firm specializing in media, entertainment and technology who has helped entrepreneurs secure venture capital.
The funding outlook will likely mirror the dot-com bust when money slowed in 2000 and evaporated in 2001, he said.
"That was exacerbated by 9/11, and barring that type of type of activity, it won't be until middle 2009" that things will revive, he said.
Until then, the start-ups that have already landed seed money will likely hunker down or shop for a quick exit. Smaller video firms may be eager to sell at bargain rates, which could be attractive to Internet giants who have cash. Either way, survival of the fittest will be the name of the game in the cold months ahead because advertisers are reining in their spending.
Last week advertising agency ZenithOptimedia revised its global advertising spending growth rates downward to 4.3% for 2008, compared with a 6.7% growth projection back in June. The U.S. will bear the brunt of the hit with growth this year down to 1.6% from the 3.4% projected in June. In 2009 growth will be less than 1 percent.
Amid the declines, Internet advertising will remain steady at a 23% growth rate for the next two years, ZenithOptimedia said.
That will help online video companies that snagged their seed money in the early days. Some pioneers of the business, such as Brightcove and Veoh, even say they'll be profitable next year. "Right now the guys who have raised money and built a presence and grabbed market share are well-positioned. But I don't see a lot of money pouring into new companies," said Todd Dagres, founder and general partner with Spark Capital.
Deals that do come will be smaller, fewer and farther between. Also, the broader economic crisis simply compounds the economic forces already at play in online video—the business has entered a shakeout phase that will be marked by mergers, consolidations and the failure of some companies. Last month, for instance, online video firms Anystream and Voxant announced a merger.
"Companies will go under and companies will be acquired at lower prices," he predicted. "You could probably see a number of these video sites that had high hopes start to rein in their optimism so they'd be more interested in selling, but acquirers are less likely to make acquisitions at those prices."
Good entrepreneurs build in contingency plans for a downturn, said Raj Amin, the CEO of broadband video network HealthiNation, which has raised nearly $12 million in venture funding. That means mapping out a clear path to profitability and revenue streams to support the business as it grows.