Israel Digital News

Venture capitalists continued to favor the innovative activity of Web 2.0 companies last year, as $844.4 million was directed into 167 deals in 2006, more than twice as much money and nearly twice as many deals as occurred in 2005. According to new research by Ernst & Young/Dow Jones VentureOne Data.

Most of the growth remains centered in companies based in the US and Europe. The US dominated the Web 2.0 market, with 126 deals and $682.7 million invested, an 83% increase in deals from 2005 and a 136% increase in capital. San Francisco Bay Area was the busiest region in the US for Web 2.0 deals and was home to more than half of all financings in 2006.

Venture capital funds invested $100.5 million in 20 European Web 2.0 startups in 2006, up from four deals in 2005. The amount invested in Europe is more than a 200% increase from 2005. China posted 21 Web 2.0 deals, the same number that occurred in China in 2005. Investment declined by 26% to US$61.3 million.

Israel had two venture-financed Web 2.0 deals in 2006 and $22 million invested, a jump from one deal and only $1 million invested the year before. In July 2006, the Israeli Web 2.0 video entertainment firm, MetaCafe, has completed a second financing round, raising $15 million from Benchmark Capital and Excel Partners. In December 2006, enterprise-grade project management services provider Clarizen closed a $7 million round of financing from Benchmark Capital and Carmel Ventures. The research did not include the $2 million funding round of social content sharing company eSnips from Greylock Partners and Gemini Israel Funds.

"Web 2.0 is certainly a very fast-growing segment of the overall venture capital market right now. However, based on the median size of Web 2.0 deals and the conservative level of pre-money valuations for these companies, the data does not indicate that we are entering bubble territory," said Stephen Harmston, Director of Global Research for VentureOne. "Rather, what we are seeing is robust investment activity aimed at a still emerging business area."

The median pre-money valuation for a Web 2.0 company in 2006 was $6 million for both US based companies and worldwide. The median size of a Web 2.0 deal on a global basis was $5 million in 2006, an increase from the $3.3 million median the year before. The median size of a financing round was also $5 million in the US and China, but was actually higher in Europe last year at $6 million.

"The Internet has impacted every sector from media to retail to hospitality and consumer products. Now through Web 2.0 offerings, the Internet is having a profound influence on the way we share, collaborate and interact socially, not just in developed markets but also in fast growing emerging markets," indicated Gil Forer, Global Director of Ernst & Young's Venture Capital Advisory Group. "From the investor perspective, the low capital requirements, potential high return and the faster time from development to revenue are the primary drivers of the increase in venture capital investment in the Web 2.0 segment. In addition, success stories such as YouTube have had a positive impact both on entrepreneurs and investors."

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Video sharing startup Metacafe appointed Erick Hachenburg as the company's CEO. Prior to joining Metacafe, Hachenburg was Electronic Art’s senior vice president of global online publishing and managing director of EA China. Hachenburg joined EA following the company’s 2001 acquisition of casual games firm Pogo.com, that Hachenburg founded. Arik Czerniak, co-founder and former CEO, will remain on the executive management team to focus on strategic product issues and partnerships.

Metacafe, an independent rival to online video service providers like YouTube, Break.com, Revver and GoogleVideo, expanded its management team early this year, with several new key executive hires. MetaCafe named Bud Colligan, former head of software maker Macromedia and a software investor at venture capital firm Accel Partners, as its chairman. Colligan co-founded Macromedia in 1992 through a merger of Authorware and Macromind-Paracomp. Prior to Macromedia, Colligan worked at Apple Computer's Macintosh Division.

The company hired Erik Smith as vice president of content and programming. Smith, who brings considerable experience in experience in bringing companies like ESPN, Fox Sports, Disney and ABC to emerging media platforms and youth media, will be responsible for building new media partnerships and developing an engaging content mix for the Metacafe site. MetaCafe also added Allyson Campa as Vice President of Marketing and Mort Greenberg as Vice President of Sales.

Metacafe attracts a global audience of more than 17 million unique viewers consuming 550 million page views every month, according to comScore report form December 2006. The company was one of the first to compensate creators for great video through the Metacafe Producer Rewards Program that pays video creators $5 for every 1,000 views of their short videos on the Metacafe site.

The company, which has headquarters in Palo Alto, California, has also opened an office in New York City to better serve its advertisers and media partners. The company Research and Development center are located in Tel Aviv, Israel.

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Free video sharing portal, MetaCafe, has completed a second financing round, raising $15 million from Benchmark Capital and Excel Partners. The Israeli Web 2.0 video entertainment firm raised $4 million from Benchmark Capital and private investors in its first financial round.

Metacafe, that competes with two largest video sharing websites, YouTube and Google Video, serves over 280 million videos or Media Snacks a month. Established in 2003, Metacafe currently employs more than 50 people with plans to add an additional 20 workers.

In April 2006, YouTube has received $8M in Series B funding from Sequoia Capital. Founded in February 2005, The Company completed an initial $3.5 million in Series A funding from Sequoia Capital in November 2005. YouTube currently delivers more than 40 million video views every day with 35,000 new videos uploaded daily.

In May 2006, Vpod.tv, a Paris and Madrid based online video sharing site, has received $5.1 million in funding fron the French VC firm Innovacom and Jazztel founder Martin Varsavsky. Besides features simialr to what other video sharing sites have, Vpod includes the ability to integrate advertising in videos, a wide variety of output/device formats, and editing tools. Also, the service seems to have a more editorial focus in terms of videos on the site.

The venture capital rush to invest in online video sharing sites is based on the growing advertising spending on internet video. According to the Online Video Advertising report from eMarketer, advertisers will be spending at least $1.5 billion for online video ads by the end of the decade. eMarketer predicts that internet video has the potential to blend several hot marketing elements: paid search, branded entertainment, viral marketing, consumer generated media, behavioral targeting, website site brand marketing and online gaming.

Last month NBC and YouTube announced a strategic partnership that will combine NBC's quality programming with YouTube's vast audience to enhance the entertainment experience on YouTube while engaging viewers in innovative new ways to promote NBC's Fall program lineup and other preferred shows over the next year.

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