Content Delivery Takes the Limelight in '06

The digital media sector was among the hottest for venture capital investors last year, with content delivery networks (CDN) being among the hottest of the hot.

Recent figures from Rutberg & Co. show that provisioning and delivery infrastructure startups raised $630 million (in 59 financings) during 2006, compared to $227 million (in 33 financings) during 2005.

Rutberg analyst Peter Daley says that growth reflects both an individual $130 million funding round taken by the CDN Limelight Networks Inc. (Nasdaq: LLNW), and overall growth of investments in CDN and IP video infrastructure startups. (See Limelight Lands $130M .)

Analysts say that as more consumers buy or convert to broadband service, the need to send high-bandwidth content quickly grows. Companies like Limelight and its rival Akamai Technologies Inc. (Nasdaq: AKAM) operate networks that host and stream content close to the consumer, improving delivery times.

Digital media companies overall had a very good funding year in 2006. Digital media startups took in $4.4 billion in venture capital in 2006, as compared to $2.6 billion in 2005. The 2006 growth rate of 66 percent far exceeds the growth rates for the overall venture industry, Rutberg's analysts point out.

"On an anecdotal basis, we believe that investor sentiment is becoming more rational rather than exuberant, as was seen in the beginning of the year," writes Daley in the Rutberg report, as he describes why funding for such startups suddenly fell off in the back half of the year.

The largest single funding round in 2006 went to a mobile virtual network operator (MVNO). Amp'd Mobile Inc. took in a whopping $150 million round last May. (See Wireless Firms Ring Up More VC Bucks.)

The MVNO space however, is in a state of flux, analysts say. "In aggregate, venture funding in MVNOs decreased materially from 2005 ($836 million) to 2006 ($188 million)," says Rutberg research director Rajeev Chand. "2006 was a rationalization year for MVNOs, as network operators refocused on fewer rather than more MVNO partners and as poorly performing MVNOs went out of business."

Chand expects more of the same for the MVNO scene in 2007. "We anticipate 2007 to be a year of continued rationalization, potentially though with the emergence of meaningful leaders." (See September Funding Flows Toward Mobile.)

Other notable 2006 funding events included a $70 million round by MobiTV Inc. , a $61 million round for Handango Inc. , a $48.5 million round for MovieBeam Inc. , and a $46.6 million round for Sling Media Inc.

Rutberg data shows that "advertising infrastructure" companies got the most funding of any group during 2006. Such companies grabbed a total of $692 million in 87 financings; that's up from $364 million in 42 financings during 2005. Rutberg identifies mobile marketing and advertising as the key driver for that growth, along with surges in Web network advertising and in-game advertising.

Kansas City-based Web advertiser AdKnowledge led the group with a $48 million funding round back in March. Audience measurement firm IAG Research took in $47.5 million in May. Claria, which does "contextual and behavioral Web advertising, took a $40 million round in April.

The reason for all the VC interest in mobile advertising is simple -- demand is growing. "There’s a land grab underway on the mobile Web as major consumer brands become more confident about the value of wireless as an advertising channel," says Light Reading Insider analyst Gabriel Brown. "Operators are looking to diversify their business models away from pay-per-minute/megabyte services."

Will these funding levels continue into 2007? "VCs always like to have their own investment in play, so maybe there will continue to be more investment in 2007; but the leaders are going to be difficult to catch now," says Russell Buckley, European managing director at the mobile ad marketplace AdMob.

— Mark Sullivan, Reporter, Light Reading