Bloggers lure VC dollars

Venture capitalists have made a number of recent investments in news-related blogs, hoping that the promise of big revenue and low cost pans out. Dave Keating reports.

In 2002 Rafat Ali was a struggling journalist living in New York City and trying to find a job. Two publications he had worked for, Inside.com and the Silicon Alley Reporter, had shut down. It seemed no one was interested in his expertise on digital media. So, he decided to start a blog.

“Nobody was hiring because the recession was going on,” Ali says. “I started my blog to raise my own profile as a journalist, to get a better job. I’m glad I didn’t get a job, because it led to starting a whole new company.”

The blog Ali started was paidcontent.org, a site focused on trends in digital media and digital publishing. Ali started the site as just a hobby, but before long he got a call from an advertiser asking if he could pay to place an ad on his site. Before long, more advertisers wanted to place ads, and the site turned into a profit-making business.

Alan Patricof is banking on news content blogs

This week ContentNext Media, the company Ali eventually founded to house paidContent.org and two other media technology blogs he started, received first-round funding from Alan Patricof’s new venture capital firm Greycroft Partners. Ali says the investment was less than $1 million, and that the money will enable him to expand the company – which also includes mobile technology news blog MocoNews.net and Indian online media news blog ContentSutra.com. The company now employs eight people on a freelance basis, and Ali hopes to hire them full-time.

The investment by Patricof, who’s made wildly successful early-stage investments in Apple Computer, America Online and New York Magazine, is being heralded as a sign that investors are now considering blogs a viable outlet for journalism rather than just a place for gossip or opinion. The news-related nature of these sites can attract a niche audience that brings targeted advertising dollars, and the operating costs for such sites are extremely low.

“To be in print media today is a very expensive proposition, but the economics of the blog world has very attractive margins associated with it,” says Patricof. “The cost of your product is the cost of your editors. It’s a pretty different economic to have than in the traditional media.”

Patricof’s investment follows a number of investments in news-related blogs started by independent journalists. True Venture Partners recently invested less than $1 million in GigaOM.com, a blog about broadband technologies started by Business 2.0 contributing writer Om Malik. Mark Cuban, the owner of the Dallas Mavericks who sold Broadcast.com to Yahoo!, has invested in Sharesleuth.com, a site started by former St. Louis Post-Dispatch reporter Christopher Carey. The site will focus on exposing fraud and corporate misdeeds.

This type of investment isn’t new, but it is unfolding differently. In the 1990’s venture capital firms poured money into content deals, and many sites started by former journalists received loads of funding. But when the Nasdaq collapsed, many of these sites did as well. This time around could be different. Online advertising revenue has been steadily rising, and news blog sites have reached a level of sophistication that enables them to attract readers on a more permanent basis. Ali says his site has been profitable from the first day it accepted an advertisement, and he said he expects the site to generate a few million by next year. The company has hired former Details Magazine president and publisher Jeff Stern as a director and chief operating officer to help it use the capital raise to revamp the company. Ali says both he and Patricof are on the same page in their excitement for the potential of news blogs.

“I had been having conversations with a few VC firms,” Ali says. “I met Alan in February and we talked for awhile, and within 20 minutes of me telling him about the company he immediately got it. It made sense to go with him, because he has the connections in the media industry.”

Most VCs are investing in blogging tools or social media. Our site is a news site, and it’s a very different thing.

Rafat Ali, ContentNext Media

Patricof left Apax Partners, which he founded in 1969 under its previous name Alan Patricof Associates, in March to launch Greycroft Partners and its new fund with an initial $50 million of capital. Patricoff said he left because the firm had slowly moved away from its venture roots and concentrated more on growth financing and buyouts, and he wanted to get back into the venture business. Greycroft announced its first deal – an investment in a Series A financing of web-based musician showcase PumpAudio.com – in May.

According to the book Blog! How the Newest Media Revolution is Changing Business, Politics and Culture, several billion advertising dollars are moving each year from traditional media to the web, and with costs for operating a web site being drastically lower than a print or broadcast outlet, the potential for profit is very high. The book’s authors note that traditional media advertising revenues usually command a 1x or 2x premium in measuring equity value, but the same dollars in web advertising revenues are likely to bring a 3x to 10x premium.

However Ali cautions that it can be difficult for VCs to invest in pure content plays and journalism sites. He says in the past VCs have mostly invested in content sites that focus on entertainment, and many VCs coming from a software background would have a hard time understanding the media business.

“Most VCs are investing in blogging tools or social media,” he says. “Our site is a news site, and it’s a very different thing.”

A different thing, perhaps, but one with high potential for profit.