The world's second-richest man and money-losing internet companies don't obviously go hand in hand. So when Bill Gates' Cascade Investment led a $26.2 million (€18.9 million) investment in gay and lesbian publishing and dating group PlanetOut last month, many in the venture community took notice.

At first glance, it was hard to fathom Gates' willingness to invest in a company that has hemorrhaged money since it spun out of an MSN channel in 1996 with venture backing from Sequoia Capital. Although PlanetOut owns the popular dating website and is widely considered to have the strongest position in the gay and lesbian market, it has nonetheless experienced serious financial difficulties. After listing publicly in October 2004 at $9, the company's shares went into free fall and today trade at just $1.59. First-quarter losses this year were $6.9 million, and in July the San Francisco-based company announced it was closing its international offices in London and Buenos Aires.

Yet the fact that Cascade, which makes both public equity and venture capital investments, is still prepared to back the site reflects a high degree of confidence that niche dating sites are the way to go. Investors have watched closely the success of companies such as Spark Networks, formerly known as MatchNet, which owns a collection of highly targeted dating sites. MatchNet originally launched in the late 90s with the Jewish singles website JDate, backed by $12 million in venture capital. The company soon launched other sites such as for African Americans and for Mormons. It proceeded to a $20 million IPO on the American Stock Exchange and reported $68.9 million in revenue in 2006.

Vineet Buch, a principal at Menlo Park-based global investor BlueRun Ventures, is one of many venture capitalists eyeing the niche dating market. Although BlueRun has not yet acquired any companies in the sector, Buch says it has been actively searching for such opportunities in the US, India and China. The main reason for his enthusiasm for these sites, he says, is that they solve the problem general dating sites have encountered in getting down the cost of winning new business.

“It's incredibly expensive to acquire customers in [the online dating] business,” he says. “A mass market site like or eharmony, they have to use very broad-based customer acquisition techniques like TV ads, billboards and blanketing the web with banner ads. But they're very untargeted, so they have very low yields on their advertising and they pay a high cost per customer acquired. If you're a site like JDate or ChristianSingles you can focus advertising much more precisely.”

Considering that the average customer on a dating site leaves dissatisfied, acquiring more visitors as cheaply as possible is central to success. PlanetOut, for instance, has aggressively placed ads for in gay and lesbian neighborhoods, events and publications. According to the company's investor information, having access to this targeted community has been central to its ability to attract 6,000 new registrants to every day.

New niche dating sites seem to spring up every day, with some of the latest entrants including for addicts, for sports enthusiasts, and for disabled people. But Buch cautions that just because they seem to be gaining an edge over less targeted sites doesn't mean they are guaranteed to succeed.

“It's not so much a question of which type of site, general or niche, will win out,” he says. “The real threat is that more and more of the younger generation are meeting online via social networks, which are free, and those sites are taking users away.”

The idea that online dating sites could end up being perceived as old-fashioned may seem bizarre, but is not so farfetched when you consider the speed with which social networking sites are gobbling up more and more users. But Bill Gates for one appears confident that users will still look for love online the old fashioned way. And it would take a brave person to bet against him.