Cash is pouring into internet media start-ups as venture capital groups, hedge funds, private equity firms and bigger media rivals with billions to invest seek the next internet sensation.

The astonishing growth in audience for online networking sites such as – founded less than three years ago and now the second most visited internet destination – and YouTube, a site dedicated to user-generated content, has fuelled interest in the sector.

The digital transformation of the media business was much talked about in the late 1990s when billions of dollars were invested in digital ventures, only to be written off. Now it is becoming a reality due to the rise of high-speed internet connections, which make it easily possible to watch video on the web.

In the first quarter of the year, US venture capitalists invested $396m in the media and entertainment sector, 80 per cent more than in the previous quarter and the biggest amount for four years, industry data shows.

Analysis by PricewaterhouseCoopers and the National Venture Capital Association showed about half the media investments were in companies focused on delivery content via the internet.

More money will be available. US venture capital firms raised $4.26bn in the first quarter of 2006, 69 per cent more than was raised last year, according to Dow Jones VentureOne.

Hedge funds and private equity investors also have more money to invest than ever before.

According to executives across the sector, the feeling in Silicon Valley is similar to what it was during the first internet boom.

“We get three or four calls per week from people looking to invest,” said Thomas McInerney, founder and chief executive of Guba, a site for viewing user-generated content set up in 1998. “These investors are going through the top 2,000 companies in the Alexa rankings [of web site usage] and all of these seem to be getting a steady stream of phone calls.”

Bolt, also a site aimed at user-generated content, is in the process of raising another round of venture capital, and executives there have found it easier than in previous years. “There has been a great deal of interest,” said Aaron Cohen, Bolt’s chief executive. “It’s a popular category.”

The realisation that the internet is changing the media business has prompted traditional media companies to develop digital strategies. Rupert Murdoch’s News Corp has been the most aggressive, spending $1.5bn on acquisitions, including $580m to acquire last year.

Just last week, two small start-ups were bought, including Ksolo, which allows karaoke fans to create and share songs.

Networking events and conferences in Silicon Valley are now swamped with scouts. “From the media companies, News Corp is the one that is everywhere,” said a Silicon Valley executive. “At even the smallest gathering, Fox Interactive people are there checking companies out.”

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