By Allison Leigh

Venture funds have always had the mindset of high growth potential + early stage = infinite investment return, all within the knowledge that the majority of their ventures will fail due to their high risk nature.  However these VC funds (one of which I used to work for), have gone above and beyond the normal risk/reward ration when it comes to online video.  And for those not 100% familiar with the industry, please note that the funding for online video properties dates back years before Youtube’s $1.6 billion dollar acquisition by Google (GOOG).

The early stage online video play was actually a start up called, FasTV, founded by Blair Harrison (who later founded iFilm which sold to Viacom, which is a tale for another day).  FasTV raised over $25 million dollars and created the first true premium destination for online video on the web.  The only problem was that they were around a decade early and they closed their doors in the late 90’s.

Since then there has been numerous start ups, all with their own niches in the industry:

Destinations: Youtube, Hulu, Metacafe, Veoh, Crackle (formerly Grouper).

Platforms: Brightcove, Maven Networks, The Platform, VideoEgg.

Video Ad networks: Tremor Media, BBE, Yume.

These companies have all raised from $15 million to $100 million each, and they are raising more seemingly on a daily basis.  The one’s listed above are the “successful” online video companies.  Which doesn’t mean they are profitable by any means, it just means that VC’s continue to fund them.  It would take up too much blogspace to begin naming the companies in the online video space that have gone under.

And what did last year look like for VC funding in the online video space?  NewTeeVee gave these stats for 2007:

“Profits may not have arrived for online video, but venture capitalists are still happy to pick up the bill. More and more U.S.-based, venture-backed online video companies are attracting more and more financing each year, according to Dow Jones VentureSource. Some $460.5 million was invested in such startups in 2007, up from $266.9 million in 2006. And already, in the first quarter of 2008, another $217.3 million rained down on the category.”

Venture firms are some of the more intelligent and forward thinking funding execs out there, so why would they keep putting money into an industry that has seen so little of a return (please don’t bring up Youtube’s acquisition), on the whole the industry is wrought with an exceedingly high failure rate.  The main reason why they continue to invest is due to analyst reports.  Forrester expects online video advertising spending to roughly double this year to $989 million, then roughly double again to $1.86 billion in 2009. It puts the compound annual growth rate at 72 percent from 2007-2012, far exceeding any other type of interactive marketing growth.

Online video is here to stay, and there will be business models that evolve into fully profitable enterprises.  In my opinion this will be due to increasing the number of in-stream ad units users are willing to put up combined with decreasing bandwidth fees.  There is also the belief in the industry that relevant CPA (Cost Per Acquisition) campaigns could drive up the RPM (Revenue Per Thousand Impressions).