VCs now wait for 'blockbuster hits' before investing in Internet content

At a major gathering of the leaders in Internet content production this morning, producers learned why it may be tougher than ever before to receive first-stage funding. Today, their shows need to already exist...somehow.

NEW YORK CITY (BetaNews) - A cornucopia of Internet content producers, from the somewhat-known to the wholly unknown, arrived here for an online media conference produced by industry publication AlwaysOn. They met with representatives of some of the nation's biggest venture capital firms, and the news they got this morning may have been sobering.

Whatever hot air was used in the previous decade to inflate the Internet bubble has apparently run out. Now, venture capitalists are looking for content producers who are already pumping out hit Web programs, said Tim Draper, founder and managing director of Draper, Fisher, Jurvetson. It helps if those hits are serialized, like a soap opera, instead of being one-hit wonders, Draper added.

In the parlance of the business, this means that the "first stage" is now up to the startups, and VCs are only coming in on the "second stage."

How big of a hit must content be for VCs to add fuel to the second stage? The answer came very explicitly from Eric Hippeau, managing director of Softbank Capital, and a former senior executive at Ziff-Davis Publishing during its glory years.

"If you can't put together five to ten million uniques [visitors per month]," Hippeau remarked this morning, "you can't even get the VCs on board."

The reason for this, remarked Velocity Investment Group co-founder Jonathan Miller -- the former CEO of AOL -- is because VCs are simply listening to what their prospective startups' chief revenue source wants. Today, it's no longer subscribers but advertisers that drive the content industry, Miller said, and advertisers want to be associated with a brand that works. That brand tends to be a movie or a running show, not the URL of its producer or distributor.

Last May, in a landmark event in the industry, media giant Viacom provided $45 million in funding for the lucrative Internet TV venture Joost. That venture promised both an innovative platform and a treasure trove of content.

Analysts and observers have noted that Joost may be delivering only one out of two.

Now, venture capitalists are more cautious, said Drew Lipscher, a founder in Greycroft Partners. There are two types of investments today, he pointed out: a company that produces movies (or more accurately, an investment in the movie which just happens to have been produced by somebody) and the platform upon which movies may be delivered. VCs appear to be treating those separately now.

Draper added that there's a good side to this. The inflection point appears to have been the Viacom investment, a period of time VCs now refer to as simply "Viacom."

Prior to "Viacom," Draper pointed out, fewer investment opportunities arose; now those opportunities are more numerous, though disparate. There are currently two principal types venture capitalists look for -- companies providing a platform or companies providing content -- and ne'er the twain shall meet.

The OnMedia NYC conference from AlwaysOn continues through tomorrow.