Why is content such a dirty word in venture capital?  We have seen a few generations of technology entrepreneurs and investors, but there have been far fewer successful outcomes for media startups.  In fact, most of the value has remained in the hands of the Traditional Media Companies (TMCs), and as such, executives in those fields have not really had the vast war chests to fund new startups in media. And frankly, many content executives have been shell-shocked by technology disruption, so they tend to avoid content investments and favor media technology startups when they move over to investing.   If you look at the “digital media” companies in most VCs portfolio, it’s not content but rather tech that focuses on the media industry.

VCs Look for Disruption

While all VCs look to invest in passionate entrepreneurs and companies that operate in big markets, some particularly fancy businesses that can shrink a market: “We love investing in technologies and business models that are able to shrink existing markets. If your company can take $5 of revenue from a competitor for every $1 you earn – let’s talk!”  boasts Josh Kopelman of First Round Capital, who has gone on to invest in Appnexus, Say Media, Uber and Turntable to name a few.

The Internet shrinks industries by disrupting the incumbents.  We have seen this in technology and in media.  Newspapers have shrunk, magazines too.  The next frontier remains television: a $75 billion advertising industry in the U.S. and a $250 billion one when you include theatrical and home release sales.  It’s a big market, and everyone from Google to Apple and Amazon are looking at disrupting it.  And they have a good shot at doing that.

Apple’s late Steve Jobs is said to have “cracked it” – it being television.  Google is further ahead, in large part to the $1.65 billion YouTube acquisition.  YouTube is now forking over hundreds of millions of dollars to content producers to lock up more premium, brand-safe programming.  Incidentally, despite all of the buzz and money that is flowing into the space, the VC community is standing idle.  Why?

Why are VCs Allergic to Content?

Speaking of First Round Capital, they were one of the first VCs I spoke to when I launched WatchMojo.  They were also one of the many VCs who turned me down because they “didn’t like content”.  It’s no secret that VCs have shown an aversion to investing in content.  In fact, to some like Brad Feld, their definition of investing in content is investing in a platform that aggregates user-generated content (UGC), what marketers and producers generally view as anti-content, if such a thing existed.  That kind of thinking is why VCs have had a poor batting average in video investing: content will be ad-supported and marketers have rejected advertising alongside UGC.

On the one hand, most VCs hail from technology companies and they just don’t understand the content business.  On the other hand, most video content investments have been duds because they have sought to duplicate television on the Web; that is a recipe for disaster.  Ripe raised $45 million, Next New Networks raised $30 million.  We adopted a more efficient model and are trying to disrupt cable in our own small way.  We’re not alone: VC Mark Suster is making a big bet on Maker Studios, which has scaled by focusing on low-cost content and aggregating views on YouTube: “the reason most content companies have failed is that they sought to build own-and-operated properties and had high cost models”, he stated on a panel I was moderating at Streaming Media West.   He’s right.  He pegged YouTube’s investment in content at closer to $250 million, and not the $100 million that the media has reported.  It’s Google’s attempt to scorch the online video world and try to lock up a large chunk of the premium content segment. There’s another way Google is scorching video advertising: skippable ads and their TrueView initiative, but we’ll leave that for another article.

Will Television Suffer the Same Fate as Print and Music Industries?

While few people predict the television industry to suffer a fate similar to the print or music industries, it’s no secret that Hollywood is bloated and it’s likely that its cost structure and revenues will shrink, but it is and will remain a powerful industry.  In fact, it has always been far more tech-savvy and aware than its print and radio brethren, but history repeats itself and thinking that somehow the Traditional Media Companies (TMCs) can hold back time is foolish.  The genie is out of the bottle.

Then Why Aren’t TMCs Investing in New Media Programming

The Traditional Media Companies are not investing aggressively in lower-cost, made-for-Web (and mobile, tablets) programming.  They have absolutely no financial incentive to see online video advertising grow and hit the projections because a lot of that will invariably come at the expense of television.

Ultimately, online video content can be promotional or commercial.

To TMCs, in all likelihood, it will be promotional: it allows them to bring down distribution and marketing costs.  Video content is an investment, a cost of goods sold or marketing expense, but it’s a necessary part of the marketing mix and the most popular activity online, what people spend 47% of their online time doing.

This Creates an Opportunity for New Media Content Producers

Content is not a zero-sum game, so long as new media producers create content to fill the hole and demand online, then they can over time replace the mindshare previously held by the TMCs.  If you doubt that look no further than Disney’s decision to partner with YouTube even though it’s an investor in Hulu.  You also have to wonder when Viacom will sign a peace treaty with YouTube.  How much longer do they really want to not be on the largest video platform in the world?  How does that now grow the MTV brand and Viacom’s revenues?

VCs Remain on the Sidelines

You would think that VCs would see this opening and aggressively fund content, especially when you consider that we’re in the content consumption phase of the Web’s evolution: we have built the infrastructure and platforms, now it’s all about feeding the insatiable appetite of consumers who spend 33% of their time on new platforms (web, mobile, tablets) while marketers are only spending 19% of their ad budgets accordingly.  Kleiner Perkins’ Mary Meeker sizes the opportunity at $20 billion (see slide above).

Until more VCs come along who get the dynamics of media and online video, and back content plays, then they will be leaving a lot of money on the table.