Seeing riches in the Web's sudden emergence as a mainstream vehicle for video, a venture capital firm co-founded by Starbucks Chairman Howard Schulz has agreed to invest millions in startup VideoEgg, BusinessWeek.com has learned. The round of investment is being led by Maveron, a $600 million VC firm based in Seattle. It also includes Silicon Valley's August Capital, whose latest fund has about $550 million. Several unnamed private investors are joining the round.
The deal involves $12 million that investors are putting into the current round. It's not clear exactly how large a stake the investors purchased, although it is believed to be about 20%. It's also unclear how much each investor is committing to the current round, or what the size of their individual stakes will be. A formal announcement of the agreement is expected on Sept. 28.
It's a major milestone for a company that was launched just last year. It got off the ground when three Yale graduates—David Lerman, Matt Sanchez, and Kevin Sladek—decided they wanted to build a business around a nonprofit initiative they launched in 2002 when they were students. The nonprofit, known as Media Liquid, enlisted 6,500 independent filmmakers to make public-service announcements for nonprofit organizations.
BIG PLANS. The company, originally based in New Haven, Conn., moved to San Francisco last year and picked up an initial round of funding last winter in an earlier deal with August Capital. The company also received early funding from First Round Capital. Chief Strategy Officer Sladek says Lerman, the company's technology chief, wrote most of the code for the Web site, which allows users to take video from any source and distribute it to any sort of digital device. Sanchez, who studied electrical engineering and computer science at Yale, is CEO.
The company's next step is to bring video-based marketers and advertisers into the fold. "We think that if we can develop a platform that's useful for users, and if we can integrate it with advertising that doesn't detract from the user experience, that we can build something that's valuable," Sanchez says.
The site, www.videoegg.com, is used to download 15 million videos a day. Thanks to recently announced agreements with social networking and media sites Bebo, Dogster, Hi5, AOL (TWX), Current.tv, and Tagged, VideoEgg plans to generate 50 million downloads a day by the end of 2006.
GROWING QUICKLY. The use of online video has been growing quickly over the past year. Last summer, AOL made headlines when its Webcast of the Live 8 benefit concerts set an audience record of 5 million same-day viewers. CBS (CBS) had a hit last spring when its Webcast of Final Four college basketball drew a huge audience (see BusinessWeek.com, 3/13/06, "March Madness: CBS's Killer App"). And anyone who has followed media over the last year has heard of YouTube, an online destination where viewers download a stunning 100 million videos a day.
Convinced that the Web is emerging as a legitimate medium for distributing professional and amateur video alike, media companies, investors, and entrepreneurs are looking to capitalize on the trend. This month, Apple Computer (AAPL) said it will begin selling full-length movies from its iTunes music store, where short-form video is already a hot commodity (see BusinessWeek.com, 9/13/06, "Apple's iTV: Bridging the Big Divide").
NBC (GE) has launched a venture called NBBC, which will syndicate video over the Web. MobiTV, which streams video to wireless phones, just raised $70 million in financing (see BusinessWeek.com, 7/13/06, "MobiTV Lands a Cool $70 Million"), and startup Grouper was acquired by Sony (SNE) for $65 million (see BusinessWeek.com, 8/23/06, "Online Video: Tasty Takeover Targets").
GOOD FIT. VideoEgg isn't trying to compete with sites such as YouTube, Grouper, Veoh, Google (GOOG), Yahoo! (YHOO), or AOL, which are destinations for viewing all sorts of amateur and professional video. "We don't see a lot of value in being the second- or third-largest destination for video," Sladek says.
He believes that video is going to become ubiquitous on the Web. But video is complicated. Few Web sites have the resources to build their own video distribution infrastructure. VideoEgg plans to serve the needs of those sites, providing behind-the-scenes video infrastructure to users ranging from personal Web pages to large social networking sites.
Maveron partner Jonathan Fram said the investment was a good fit for Maveron's strategy, which focuses on mainstream consumer trends. "Online video now is mainstream to the nth degree," says Fram, a former general manager at media company Bloomberg. As video takes off, few sites will have the ability to manage it on their own. "VideoEgg has to exist. We think it can be a very big company," he says.
VideoEgg isn't alone, however. Many sites are putting resources into video in various ways. The founders of Skype, for example, are preparing to launch a video distribution site that makes use of peer-to-peer technology, a decentralized system that uses members' computers as its infrastructure (see BusinessWeek.com, 7/24/06, "Kazaa, Skype, and now 'The Venice Project'"). "We don't think anyone is doing quite what VideoEgg is doing, though," says August's David Hornik, who met the founders last year at a Demo conference.
REVENUE SOURCES? Other video sites such as Veoh Networks, a Time Warner partner with funding from Michael Eisner, also use peer-to-peer technology. But VideoEgg's chief marketing officer, Troy Young, says peer-to-peer may be well suited to popular entertainment, but not niche video.
"Peer-to-peer assumes that 100 people have the same content, and that 20 of them are online at once, so that others can access the content. That doesn't work when you are distributing millions of niche videos," he says. VideoEgg leases bandwidth from Akamai (AKAM), the Internet infrastructure company.
The biggest challenge for VideoEgg is developing a revenue model. It has started to sell ads through a new VideoEgg Network. Clients such as Unilever (UL) and Fox Searchlight (NWS) already have placed advertising on the network, which streams it in batches to users, targeting them according to their tastes and interests. The company is also partnering with Booyah Networks, of Westminster, Colo., a four-year-old marketing company that is creating an exchange where marketers can post their own online video ads.
Down the road, the company can open an additional source of revenue by helping Web sites syndicate, or share, their content, according to Fram.
No matter how well VideoEgg fares, one thing can't be disputed: The sheer velocity of its growth is further evidence that video on the Web has hatched.
Rosenbush is a senior writer for BusinessWeek.com in New York
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