5 questions with Deepak Kamra and Maha Ibrahim

Digital media consumption is growing by leaps and bounds. But as for exits, as in most sectors this past year, they’ve been scarce.

For Deepak Kamra and Maha Ibrahim, general partners of Canaan Partners, the sluggish exit environment hasn’t been a deterrent for new investment in the sector.

Over the past two years, Canaan has invested in more than 20 companies delivering content and services online. Portfolio additions include Web payment provider eBillme, social media dating service Zoosk, fantasy sports and television community site developer Watercooler and peer-to-peer loan site Lending Club.

Canaan is looking to expand its digital media holdings as well, say Kamra and Ibrahim, who define the space to include everything from online advertising to social media to e-commerce. The two sat down with PE Week Senior Editor Joanna Glasner recently to discuss the firm’s strategy.

Q: What are you looking for in new investments?

Kamra: Subscription revenue is where the action is at. That’s where Zoosk makes the vast majority of its revenue. We’re looking for more things like Zoosk, though we’re focusing more on gaming and virtual currency.

We also like companies that are doing analytics for social networks. We’re also looking for commerce applications using social networks, and how we can take social functionality and apply it to mobile.

Q: What models are you avoiding?

Kamra: We look warily on advertising-based models. It’s not that we don’t look at advertising investments. For example, we invested in Tremor Media, a leader in online video advertising. But there are very few companies that’ll be able to make a profitable living off advertising alone.

Q: Is it relatively cheap to launch a digital media startup?

Kamra: There are always going to be entrepreneurs who think: ‘I can do this on the cheap and sell it for $10 million.’ Those who really want to grow to scale have to be mature enough and ambitious enough to go and raise venture capital. Zoosk, for example, could turn profitable at any point if they wanted to. It’s just a question of how much do they spend on marketing and growth.

Q: How has the recession affected your investment approach?

Ibrahim: Q1 was difficult for a lot of our companies in digital media. Frankly, I think it was a good experience in retrospect because it caused companies like Watercooler to think about how to diversify away from advertising.

Q: When will exits pick up again in digital media?

Ibrahim: For now, the media companies are still reeling because while they’re diversified, they’re diversified in things that are considered discretionary spending. Plus, it’s been well chronicled that advertising dollars are moving away from television. That’s a big reason why large media companies, even though they have tremendous assets, are pulling back right now from acquiring companies. They have to restructure internally before they can think about growing. It’s hard to justify a huge premium on exits. For instance, if you’re Yahoo, how do you lay off thousands of people and justify a $600 million acquisition?

But we do have exciting companies that should by all rights be going public in the next two years. For example we have three in our portfolio, though I can’t name them, which are doing well over $50 million in annual revenue.