Venture Capitalists Again Under Spell of New Media Startups

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Venture capitalists have acquired a taste for media and entertainment startups — and it’s not likely to be satiated soon, they say.

With companies like San Mateo, Calif.-based YouTube Inc. and Santa Monica, Calif.-based MySpace drawing eyes and garnering investments, venture investors are looking more closely at the prospects for startup companies that create content or provide avenues for content to be delivered over Internet-connected devices.

“I think we’re definitely seeing an upward trend here in media,” says Tracy Lefteroff, global manager for private equity at PricewaterhouseCoopers.

The numbers show this could be the beginning of a rush to invest in media firms. In the first quarter, venture investments jumped 45 percent over last year’s first quarter and 24 percent over the fourth quarter of 2005 to $130.5 million, according to the MoneyTree Report from PricewaterhouseCoopers.

The increase in media-sector and entertainment-sector investment increased even when venture-capital investments overall sank. Venture invests fell 8 percent to $1.2 billion in the first quarter of this year compared with last year’s first quarter and 9 percent from the fourth quarter of 2005.

Companies that provide content for distribution are attracting attention.

“I think the venture-capital industry has never had the level of focus on consumer companies that it’s had on enterprise technology,” said Roger McNamee, partner at Elevation Partners in Silicon Valley. “The venture business really grew up around semiconductors, data storage — large equipment companies that sold to corporations. Look at it today — there’s more going on in media than at any time in the past.”

Thanks to the proliferation of broadband Internet access and speedy mobile-telephone networks, startup companies that create content — much like a movie studio — are forming and getting funding.

Web media-content companies have been around since the Internet really got its feet in the middle of last decade, says McNamee. What’s changed since is the sheer amount of time people spend on the Internet.

People under the age of 25 “spend an average of 22 hours on the Internet a week,” says McNamee. That amount of time is creating an opportunity for Web content makers to entertain those people.

“Consumers are totally in charge of what they’re entertained by,” says McNamee. “That creates a tremendous opportunity.”

One company, JibJab Media Inc., which created the popular election-year cartoon parody of Democratic Presidential Candidate John Kerry and President George Bush singing a song to the tune of “This Land Is Your Land,” received funding from Waltham, Mass.-based Polaris Ventures in June.

“They combine the creative zaniness of the Marx Brothers with the business acumen of the Disney brothers,” said Jon Flint, managing partner at Polaris, in a statement after the funding. “JibJab has the potential to be the first great brand in comedy that was originated on digital media.”

Interactive content is getting attention, too.

LimeLife, one media company that received money earlier this year, offers content geared toward women delivered over the mobile phone. The company focuses in particular on casual games — games that are easy to pick up and play.

“There were not many people targeting women,” says Renee LaBran, a partner with Santa Monica, Calif.-based Rustic Canyon Partners, which invests in media and technology companies. “There were a lot of casual games that had to do with shooting things. LimeLife is trying to do something different.”

The key for content companies starting up is to have something unique that will draw a large audience, says LaBran. But perhaps more important: companies also need to be able to consistently put out good content.

“There aren’t a lot of companies that survive long-term on a few hits,” says LaBran. “I’m more hesitant about those models because it is so hard to replicate hits. The business that survives is one that can provide solid doubles and triples consistently.”

Companies that make and sell the technology that allows media to be streamed over multiple platforms are also getting a close look.

PricewaterhouseCoopers’ Lefteroff points to two recent investments as the types that interest venture investors.

One, San Jose-based MovieBeam Inc., drew $48.5 million from Walt Disney Co., Cisco Systems Inc. and Intel Corp. The company’s service allows movies to be transmitted using unused TV spectrums to a viewer’s home, where a player picks up the signal and saves the movie. The viewer doesn’t need cable or satellite to make the system work.

Another is San Mateo, Calif.-based Sling Media Inc., which allows users to view television on Internet-connected devices by redirecting signals with a set-top box device. The company raised $46.6 million in January from Goldman Sachs & Co., Liberty Media Corp. and EchoStar Communications Inc.

“Anything that can deliver content over these mobile devices, that’s something you’re going to see more of,” says Lefteroff.

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