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VCs See More Than Just Laughs in Goofy Internet Videos

Have you seen the video of two Chinese students earnestly lip-synching to “I Want It That Way” by the Backstreet Boys? Or how about the one of the New Jersey kid mouthing along to a Romanian pop song? The quirky videos are sweeping the Internet – and the phenomenon hasn’t been lost on venture capitalists.

VCs are starting to invest in startups that aim to satisfy consumer’s apparently insatiable appetite for weird, funny and often original content. Their first bets are on YouTube and VideoEgg, both of which allow people to easily post video on the Internet.

There are already too many startups in the space to mention. Among some of the most popular hosting services are Castpost.com, DailyMotion.com, Vimeo, Blip.tv, Vobbo.com, OurMedia.org, PhanFare, and Clipshack. That’s saying nothing of the search engines that have quickly moved into the area. For example, competing against Google and Yahoo in the video search space are Pooxi.com, Truveo, and Blinx.tv. And then there are aggregation services, including BlogTelevision.net, Singing Fish, and MeFeedia.com.

A number of factors have enabled the surge in video sharing, including cheaper bandwidth, growing popularity of social networks, and an array of tools that allow non-technical people to publish content on the Internet.

“Between 2000 and this year, people grew comfortable with and simplified the process of putting photos online to share with others,” says Josh Kopelman, a managing director of seed-stage investor First Round Capital in West Conshohocken, Pa., and founder of e-tailer Half.com, which was sold to eBay. “From 2006 to 2010, we will see the same thing with videos.”

First Round is the sole venture backer of VideoEgg of New Haven, Conn. The 1-year-old startup, founded by three Yale University grads, makes it easy to publish video to the Web by transforming video files into simple, easy-to-use Flash files that can also be edited online. Video files are typically saved in more than a dozen confusing and often bulky formats, including .AVI, .MOV and .MPG, as well as different compressing and decompressing technologies (or “codecs”).

Kopelman wouldn’t say how much his firm invested in VideoEgg, but the amount is likely in the hundreds of thousands of dollars. (First Round and another unnamed VC in August invested $400,000 in Internet ad service provider Jingle Networks, and Kopelman took a seat on Jingle’s board, according to The MoneyTree Survey from PricewaterhouseCoopers, Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association.

Kopelman says VideoEgg, which is moving to the San Francisco Bay Area, is already sewing up its next round, thanks in part to a deal with the blogging software pioneer Six Apart. As of last week, users of Six Apart’s TypePad blogging service could post video to their blogs care of VideoEgg.

Like VideoEgg, Palo Alto, Calif.-based YouTube converts video so that it can be viewed with a Flash player. In addition, it operates a video-sharing network, prompting some to describe it as the “Flickr of videos.”

YouTube has raised $5 million from none other than Sequoia Capital at a pre-money valuation of $15 million, according to Gigaom.com, a blog written by Business 2.0 writer Om Malik. Sequoia didn’t return a call regarding the investment.

With Sequoia leading, other VCs aren’t far behind. Manhattan based-entrepreneur Peter Van Dijck, who runs MeFeedia, says VCs are calling him about wanting to invest, but he’s not even calling back.

“I’m not looking for any money, but I’ve gotten a few calls,” he says with a laugh. “Usually, they email me first. I think they’re trying to figure out what’s happening in the market, and where it’s going.”

MeFeedia catalogs more than 1,000 vlogs (or video blogs, which are Web logs that use video as the primary content), which encompass tens of thousands of videos, up from 100 vlogs six months ago. Van Dijck says the business costs just $2,000 a month to operate with the help of two contractors. He says he doesn’t know how he will make money, though like many entrepreneurs in the space, he envisions growing profitable either by selling ads or by charging fees for premium levels of service, which he says that he is currently developing.

One VC from a top-tier late-stage firm who asked not to be named (he’s one of the VCs who have called Van Dijck), says that “just looking at the Asia market, where there’s tons of user-generated content and aggregators capable of tagging and indexing these files suggests to me that the opportunity here is enormous.”

The VC says the medium will make money via a combination of advertising and e-commerce, suggesting that people might buy a shirt that they see in a video, thanks to an embedded link. (Think of the “Vote for Pedro” T-shirts that became hot sellers because of the quirky film Napoleon Dynamite.) Still even he acknowledges that it’s not clear when the money will roll in or, for that matter, whether venture-like returns are a reasonable expectation. “Figuring out how to monetize is still a bit of a question mark.”

Kopelman sees e-commerce as the biggest opportunity to make money from video content on the Web. He points to a pilot test that VideoEgg conducted with eBay as an example. In the test, two identical sets of 22 different items were sold using photos, then using photos plus video footage. The items shown with video “sold for a 30% premium,” he claims.

Does that mean that Backstreet Boys’ T-shirts are suddenly going to come back in style?

To link to the goofballs who lip sync to the Backstreet Boys:

http://video.google.com/videoplay?docid=-6739710473912337648

 

Email Constance.Loizos@thomson.com