Video sites spark fears of bubble

An investment boom is underway in consumer video websites, drawing warnings of a new bubble in the venture capital business.

The $1.65bn sale of YouTube to Google last year, along with an expected wave of advertising tied to online video, have prompted a stampede that some Silicon Valley financiers are already comparing to the dotcom bubble, though at this stage at least it remains on a far smaller scale.

Video has become the hottest corner of a broader financing boom tied to so-called “Web 2.0” internet companies. The amount of US venture capital flowing into video-related start-ups of all types jumped by 95 per cent last year to $682m, according to figures compiled by Dow Jones/Venture One.

Part of this involves software, networking and other “infrastructure” companies deemed less risky than websites trying to attract a consumer audience.

Some 30 start-ups have already raised venture capital money to create consumer video sites, according to Todd Dagres, a partner at Spark Capital, whose investments include video site Veoh Networks.

Most are in their early stages and have raised only an average of $10m each, but eventual investments in these companies as they try to expand are set to top $1bn, he estimated.

Like other financiers and entrepreneurs caught up in this wave, Mr Dagres predicted an eventual round of failures that would see most investors lose money. With many of the start-ups in their early stages and drawing in money, though, the shake-out is unlikely to come this year, he added.

Tom McInerney, founder of Guba, one of the first consumer video sites to strike a deal to distribute professional content from an established media company, said he was seeking to sell the company now rather than wait for the inevitable shake-out.

With internet users gravitating to a handful of the most popular sites and big media companies starting to call the shots over how their copyrighted content is viewed online, many start-up sites are likely to struggle to find an audience, Mr McInerney said.

Despite that, venture capitalists report a continuing flood of proposals for new start-ups trying to cash in on the video boom.