In the past few months, two of the highest-profile and most heavily-funded online-video startups — Veoh and Joost — have given up trying to compete with Hulu and YouTube and have now drastically switched their business models in hopes of surviving.
There are many reasons why things went wrong: technical missteps, lack of premium content, tough terms from content owners such as CBS and Viacom, etc. But that’s not the whole story. Joost and Veoh had an even bigger problem, one that will likely claim dozens of other media and advertising startups that have been founded over the past three years: too much venture money, too soon.
In the last few years, the top 25 most heavily-funded video startups (excluding Hulu, which has raised over $130 million) have collectively raised over $1.2 billion in venture capital, or an average of $48 million each (see chart). The top 10 companies in the group, names like Spot Runner, Move Networks, Visible World and DailyMotion, have raised $720 million, with an average of $73 million. More significantly, nearly three-quarters of this money was raised within the first two years of the initial funding. That’s an impressive pile of dough, even for VCs.
Ad Age Digital DigitalNext MediaWorks Raising lots of money is not a problem, per se. Raising too much money too early and before hitting key milestones (e.g. getting paying customers, showing attractive margins) can be. This is particularly important for online video startups, which, due to their costs, need to be run with tighter margins from the start.
This year and next, these companies’ venture backers and boards will have to make wrenching choices: continue to fund these companies with the hope that the economy will turn around or a generous buyer shows up, shut the companies down, or sell on the cheap. This will turn into a buyer’s market for the next several quarters.
The simplest lesson to take away here is don’t raise too much money too quickly. Unfortunately, that’s easier said than done. Too much money, often, though not always, leads to poor habits like over-hiring, overspending and a lack of discipline, which itself leads to mistakes such as sticking with bad ideas too long and throwing money at a problem rather than solving it the right way.
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