This potential represented an interesting shift because historically, VC firms back technology companies.

Indeed, the initial crop of VCs were computer-types who hailed from firms like Intel, HP, etc.  This background helped initial web companies who were creating the initial infrastructure of the web, because these needed to fully grasp how Moore’s Law would affect computing power and innovation, and thus, how web surfers would interact with the world wide web and how websites needed to time their developments to match the main device that would serve as the gateway to the Internet: the computer.

How Web Monetization Changes the Requirements of Being a VC

But, times have changed.  The computer has now taken a back seat to the Internet.  More importantly, a computer is not the sole device to connect to the world wide web.  But it’s not the connection, but the commercial reality, that is affecting VCs most.

While websites such as Google today command the bulk of their revenues from advertising sales, their intellectual property largely revolves around technology, and as such, the VCs who shepherded the respective investments were technology deans, and not media or advertising gurus.

Though, in all fairness, it should be noted that one-half of the power duo that backed Google, Michael Moritz joined Sequoia in 1986 after working as a reporter for Time magazine.  He also wrote the 1984 book The Little Kingdom: the Private Story of Apple Computer and he co-founded Technologic Partners, a technology newsletter and conference company.  The other half, of course, was John Doerr, who obtained a Bachelor of Science and master’s degree in electrical engineering from Rice University and an MBA from Harvard University in 1976. Doerr joined Intel Corporation in 1974 just as the firm was developing the 8080 8-bit microprocessor. He eventually became one of Intel’s most successful salespeople. He also holds several engineering patents.  The point is, Moritz was the exception, while Doerr was the rule.

Advertising is King

Regardless, thanks to Google’s $0 to $160B market cap march in less than 10 years, online advertising is starting to become the preferred business model for most, if not all of startups in the space.

As such, some of the traditional VC who hail from the technology bellwethers are, with all due respect to them, somewhat out of their element in today’s startup environment.

Applications

Part of the reason for that is something Fred Wilson talked about as a driving force behind the business plan of his new VC firm, Union Square Ventures.  In essence, he and his partner Brad Burnham argue that the investments in the Web’s infrastructure are a thing of the past, today, the investments that will pay off are applications built on top of the existing infrastructure.

A VC’s Customer

Independent of whether you agree with Wilson’s assessment or not, it certainly is true that the more successful exits would lend to support his argument.

Wilson also argues that entrepreneurs are a VC’s client, if that is the case, then it’s important to follow the consumer to understand which VCs will win the most amount of business over the next few years.

For me, a new media entrepreneur, frankly, a VC who can only tear apart a computer and re-assemble it bears a somewhat hollow value relative to one who grasps the intricacies of how ad agencies work, or how publishers need to cope with digital threats and opportunities.  The problem is that many of the folks who have that know-how might not be allured by the worlds of venture capitalism and as a result, VC as an industry suffers as a result.

Where is the Leadership Amongst Traditional Media Companies 

This is why I cannot for the life of me understand why traditional media companies have not created a gameplan that will allow them to invest in new media startups and technology applications that will create value for them.

To give credit where it’s due, CBS has been very aggressive this year with investments in a cornucopia of digital assets, including Spotrunner (a video ad service) as well as outright purchases in community applications like Last.fm, currently geared towards music, but clearly providing CBS with video opportunities.  But, CBS is the exception here.

Alas, a lot of that has to do with risk/reward culture and entrepreneurship.  In other words, sure, Jeff Jarvis is an old media lad with considerable new media DNA in him, but how much does he actually represent the typical executive or writer at a traditional media company?  Not much.  If you are interested in print media, read Should Print be Free?

Case Study: Online Video

We’ve all seen the studies and reports, online video is going to be large.  Video today accounts for less than 5% of online video advertising, but it is poised to grow into a considerable component of the total pie.

Today, with broadband in over 50% of homes, it could be argued that the video file-sharing platform segment is old news for VCs, especially after the #1 search company Google bought the #1 video platform company YouTube and made life for second tier players harder.

Naturally, the spotlight then shifted to video advertising; you needed to monetize the videos, after all. But, seeing the massive amount of money being poured in video ad networks, including:

- Brightcove | see my post about why Brightcove should keep it simple stupid here.
- Brightroll | see my interview with CEO Tod Saceroti here.
- Video Egg | see my interview with CEO Matt Sanchez  here.
- Tremor Media
- Broadband Enterprises
- Yume
- Scanscout
- Google/YouTube
- AOL/Advertising.com/Instream
- VideoMovement
- etc.

Not to mention the video search players:

- Blinkx
- Pixsy
- Podzinger/Everyzing/todayournewnameis | see my interview with CEO Alex Laats here.
- Hmm… Google/YouTube?

you get a sense that the smart money seems to now think that there’s a bit of a bubble going on in that sub-segment (read: Has the “Bubble Pocket” Moved from Video Sharing Sites to Video Ad Networks?).

Is there an over-investment in video ad networks?  Time will tell.  In 2007, being a display/banner ad network paid off handsomely.  After all, some of the top ad networks have fetched considerable multiple premiums: Doubleclick, aQuantive, 24/7 Realmedia all struck gold, if you include behavior targeting network Tacoda, but there are hundreds of ad networks that are irrelevant to varying degrees.

Why Applying AdSense Recipe for Success to Video Will Fail

But the level of investment in video ad networks is simply irrational, in my humble opinion.   The problem with video ad networks is simple: they all strive to become Google’s AdSense, the ubiquitous ad network platform that monetized the scores of text-based content in a contextual and scalable manner.

With text, the content was bountiful but the ads were not optimal.  Google’s AdSense, inspired one part by

- Overture’s pay per click model,
- Sprinks publisher network, and
- Applied Semantics’ contextual engine

proved to be a winner, hands down.

The Missing Variable: Content 

With video, there are, as we highlighted above, countless platforms and endless networks.  In fact, one of them, GoFish, is morphing from a platform to an ad network (disclosure: GoFish is one of the many syndication partners in our syndication network that reach over 95% of web viewers).

What is missing is professional, ad-friendly, low-cost, high-yield video content. 

These are the global trends and macro factors driving WatchMojo.com’s business plan, in fact.

Don Dodge recently mentioned that entrepreneurs know best:

Entrepreneurs see things that others don’t. At first experts will say it is the dumbest idea they ever heard. But the entrepreneur pushes ahead and makes it happen anyway. Then the experts say, that was simple and obvious…the entrepreneur was just lucky…in the right place at the right time. Entrepreneurs know what I am talking about. It happens all the time.

He is right.  Last year, I was called crazy for launching WatchMojo.com.  Today, companies that we associate with video content, from both the traditional and new media spheres call us visionary.

The Money Trail(s)…

Naturally, this converts to VCs - the smart money - to follow the opportunities.  Case in point: one more VC (Norwest) hires a media-savvy person (Joshua Goldman) to look into digital media (web video content) opportunities.  For the record, Mr. Goldman has an accomplished “tech” resume, but his experience highlights that, in the words of NewTeeVee’s Liz Gannes, “Goldman knows his way around the world of video.”

The Writing is on the Wall

Like the Benchmark hire, Norwest’s move is not done in isolation.  You will see a lot more VC money unable to reap sufficient returns or exits from technology alone, and their attention will invariably focus to digital media.

It’s also not a coincidence that last week, for example, we got our first ever cold call from a VC inquiring to invest in WatchMojo.com.

To conclude, it’s not like VCs have hitherto not invested in digital video, they have: companies like Mania TV and Ripe come to mind.  In fact, even more recently, numerous companies like Revision3 and NextNewNetworks are popping up everywhere, too.

What I am seeing, however, is that there are more and more traditionally tech-oriented VCs that will begin to look at content. But, don’t take it from me, take it from someone in the space now.  From the same NewTeeVee article:

Perhaps most surprisingly, Goldman said he had the go-ahead from Norwest to look at content startups (…) but Norwest has traditionally been devoted to information technology, emphasis on the technology. Times have changed. “It’s something my partners have agreed we will look at if the economics are right,” Goldman said.

In fact, the dynamics in media have changed from a mere five years ago.  In other words, it’s not enough to simply transpose a media-oriented person in a venture capital partnership and assume he or she will succeed.  But like all successful VCs and entrepreneurship will tell you: trial and error and experimentation is better than not trying at all.

Will every investment in digital video be a hit?  Of course not.  But, much like it happened with print media, the TV advertising juggernaut has started to shift towards digital and will accelerate its migration to the Web.

So there is plenty of room for video content startups, and that is why you will more and more VCs luring media guys in the hope of finding the next generation’s answer to HP and Google.