For Web, Funding Drought

Belt-Tightening Time for Internet Startups

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The economic crisis that has frozen credit, toppled banks and sent consumer confidence plummeting worldwide is about to wreak its havoc on the online-video investment sector. That's the conclusion of venture capitalists and other experts who are betting the flow of venture money into online video is about to dry up.

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.
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