Credit or Crunch in the Digital Media Sector?

Venture capitalists are upbeat on the future of digital media investment.

Revenues will be pushed down in the Digital Media market over the coming months, but the economic downturn will provide opportunities for both big players and later stage startups. The sector as a whole will continue to attract funding as a result of real productivity growth. This is the strategic view that emerged from a series of interviews with TMT Venture Capital key players carried out by industry analysts at StrategyEye this week.

"There was strong consensus among those interviewed that TMT- focused VC funds are likely to sustain investment in digital media, relative to other asset classes, " says Isabella Thomas, Senior TMT Analyst at StrategyEye. "This is because they represent a relatively new opportunity in an area of the market that will, arguably, be more resilient to downward economic pressure."

StrategyEye asked senior figures in TMT-focused venture capital firms, including Ariadne Capital, Creative Ventures Group, SPARK Ventures and Advent Venture Partners, to give their opinion on how the economic downturn will affect funding of digital media companies. They agreed that digital media is likely to be more resilient than other sectors in the economy and highly unlikely to experience the contraction occurring in other industries. This is because the digital media industry has shown consistent growth in many areas during the past decade and can continue to capitalise on this. Larger, more established players will benefit, say the VCs, as they shift their investment focus to later stage startups with more mature business models. Later stage deals were the only type of funding class to rise in the second quarter of 2008, while seed or early stage and expansion funding declined.

The view of the VCs is that the main players are likely to strengthen their hold on the market through later stage buyouts, in particular smaller size acquisitions, benefiting both ends of the market. However, earlier stage startups, perceived as less able to generate revenues, will have a harder time.