VC funding for individual blogs?

Several high profile blogs have taken VC money recently. Om Malik, formerly of Business 2.0 and writer of Giga Om, has struck off on his own with VC money from a startup VC, True Ventures. SoftBank Capital invested $5 million in HuffingtonPost.com, a blog written by Arianna Huffington. Hmmm...what are they doing with the money? What are the VCs thinking?

Om Makik and Arianna Huffington are very talented writers and smart people. I'm sure they have some plan for the money, but it isn't clear to me. Hmmm...they could throw a lavish launch party with open bar and live music. Party like its 1999. Those were the daze....

Blogs are like Open Source projects in that anyone can do them for free. There are literally tens of millions of blogs all available for free and produced by individuals with no investment. Why would you need $5M to write a blog when your investment is zero? What kind of return will VCs see from this investment?

Like Open Source, blogs will produce a few popular brand names that will attract 95% of all the attention and money. These blogs will attract advertisers and sponsorships. But, is there really enough upside to generate VC like returns? Perhaps in very rare cases, but it doesn't look like a very good sector bet.

The vast majority of blogs that do attract advertising and sponsorships will be what I call a "Lifestyle" company. A small fraction of these could graduate to "cash flow" companies, but I don't see any of them getting to the "high growth" high return stage. There will always be an exception, and Om Malik and Arianna Huffington are very high profile bloggers, but I don't see this as a bankable trend.

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Comments

[Peter Cranstone]

Bingo... finaly someone steps out and says it like it should be. $5m for what, to what with, which will then achieve "what"? I mean what's the exit strategy to get a return on that investment? When will people get it - The future of the Web is not what we put on it – it is how we connect to it and how it remembers us.

[Farhan Lalji]

If the funding is limited to blogging activity then I think you're right. However, what if the deals include possible spin-offs off of the blogs. I'm not sure what all the possibilities might be. Let's say Huffington decides to go into other activities which would have decent cash flows, say offline media, wouldn't the investment into the company/blog make sense then?

[Don Dodge]

Farhan, do you mean we should look at the possible synergies and leverage? Just kidding...that was the subject of my previous post.

These are smart people. They will figure it out. It just seems to me it could be done a lot less expensively.

[Jason Wood]

Don,

You're on a roll, save for one minor nit pick. I wholeheartedly disagree that "a few popular brand names that will attract 95% of all the attention and money." That's the antithesis of the blogosphere. Had you couched that with "...will attract a 51% of all the attention and money" I would've accepted it, but blogging is as much about the long tail as the fat base.

J

[Mike Rundle]

I can think of a few things:

- Hiring more writers
- Hiring an editorial staff
- In-house technical support, in-house design department, in-house programmers
- An office

All of which turn singular blogs into new media magazines. Makes sense to me, nobody else sees this?

[Jason Wood]

Mike...but VCs don't fund companies with an eye toward either a) a steady annual return on their investment in the form of cash back or dividends and b) 1x returns at exit.

So I think Don's point is spot on...what does a VC hope to get from their investment in Om? He's a good writer, sure, but how is that $5 million going to build a $50-$100mm media empire?

[Paul Kedrosky]

I mostly agree with Don, but I would add something to make it more specific to venture investing in open source. The latter sort of investing became defensible when it was obvious that you could build a profitable business selling support for open source products/services.

Where is the same "backend participation" for bloggers? What is the ancillary money-making service that makes a blog anything other than a lower cost of entry media outlet? Because if it's just the latter -- a new media magazine, as Mike Rundle calls it in an earlier comment -- it may be an okay business, but it isn't a venture investment.

[Mike Rundle]

Jason, who's to say that CNet, ZDNet, or another "new media" publishing empire wouldn't want to purchase GigaOM and his company? GigaOM has a gigantic readership in the tech community and is very well respected, and I imagine the site's respect and reputation will only grow as they hire new writers, expand to new topics, and generally get larger.

So GigaOM turns into the new media online magazine, one that could add a lot of value to the portfolios of other media conglomerates like I mentioned previously. How's that not an exit strategy?

[Michael Markman]

This is the kind of thinking that looks at "content" as slurry or sausage. Cut me off a piece.

Writers and editors can be brands just as sure as movie stars and directors. Would you invest in Spielberg? Showbiz investment is governed by who can put asses in seats. Who or what draws an audience. (The online equivalent of that metapor is even creepier--who can make eyeballs sticky. ew!)

Of course, it's always a risk, because talent can grow cold, old, or just too weird for the room.

But don't discount personal brands. They've paid off their impresarios for centuries.

[Karl]

I was starting to think I was crazy.

Step 1: Blather on a blog

Step 2: ?

Step 3: Profit!

I used to think a website needed to actually offer something, like say, tools, forums, information, to attract VCs and have worth.

Will there not be irony in a wash of web 2.0 bloggers ending in a micro-dot-com bust of 2008?

[Brad Fuller]

As I commented on Scoble's blog http://scobleizer.wordpress.com/2006/08/22/content-plays-bad-investment/, Om is producing some very informative blogs, and if they can bring more traffic to their site and continue to build the company with quality personnel that can produce great content, that’s all the better.

GigaOM does offer something, and what they offer is primarily in the techy/geeky field. As the Internet expands to include your mom and aunts, and supplants terrestrial and cable TV, GigaOM may be in a good position to become the next CNN. Perhaps they have their eyes set on other forms of news distribution such as video.

On this large scale, $5M isn't quite enough for quality content and production.

[Lloyd D Budd]

Scoble has your number.

Or maybe it is to follow Scoble or Arrington's lead and grow an organization around this new media.
http://money.cnn.com/magazines/business2/business2_archive/2006/09/01/8384325/

I don't even no why you try to include open source software in your equations here. It makes no sense!

[Robert Scoble]

$5 million isn't a lot, especially if your goal is to build up to 1,000 blogs, most of whom are getting paid $1,000 to $4,000 a month (ala the blogging networks that are stacking up).

My rebuttal to Don is here: http://scobleizer.wordpress.com/2006/08/22/content-plays-bad-investment/

[Don Dodge]

Thank you for all your comments. This is what blogging is all about...healthy debate and conversation.

I started to write a response to all your questions but it was too long, so I wrote a new post entitled "Is your blog one in a million?" See http://dondodge.typepad.com/the_next_big_thing/2006/08/is_your_blog_on.html

Let me say that I truly believe "Content is king" and it is very valuable. But, from a VC perspective content plays are usually not bankable. Most magazine empires and media companies were not VC funded. They grew organically over many years out of their own cash flow. Nothing wrong with that...it just isn't what most VCs go after.

Robert Scoble, good point about building a blog network. But again, most VCs would only invest after there was a pretty strong network already built...and growing. Remember, the title of my post was "VC funding for individual blogs?". I was talking about individuals...not networks. But if they are building a network...it could be a big business. Time will tell.

[shel israel]

Don,
Er, can you say "media properties?" How about "paid advertsing?" Did you know that Michael Arrington's blog which has grown to five blogs and a talented staff, takes in better than $60K mo. in approximately it's seventh month of being ad supported?

I didn't think so.

[Don Dodge]

Yes, Shel, I do know about Michael Arrington and PaidContent, and a few others. These guys are part of the "one in a million blogs" top 50 list. But, do they have VC funding? No. That is my point...blogs don't require VC funding, and most VCs wouldn't invest in blogs or media companies anyway.

Blogs are amazingingly easy to start. There is no barrier to entry and no cost to start. That is great. It has opened the web community to everyone and created new business opportunities.

That is also the reason that VCs tend not to invest. VCs want businesses that have barriers to entry, and that require capital to build out. They like defensible market positions, multiple revenue streams, and 10X returns.

How many large successful "media" companies were funded by VCs? I'm sure there are a couple but I can't think of any. It is just the nature of VC investing...and that is what this post is about.

[Dimitar Vesselinov]

Huffington Post is the new New York Times and GigaOM is the new CNET News.