Lots of people have been wondering lately how Youtube could sustain such growth (following numbers are all per day: 35m video views, 35,000 videos uploaded, 100m pages views, and 6m unique visitors) with just $3.5m from their first VC (Sequoia Capital). Well, you might have noticed that Youtube.com is now adding banner advertismenets on its site. They say they will start adding contextual ads by mid-year. And they got another round of cash from Sequoia. Lots of cash. $8m. And that’s barely 5 months after the $3.5m series-A, also from Sequoia.
“The additional capital will be used to advance the company's rapid growth, expand sales and marketing efforts, and to accelerate the build-out of its world-class data centers.”
Great news for the users of the service !
Update: I picked up a bit of the discussion going on at the moment on the web. techcrunch says:
“In my mind there are now two distinct types of video sharing services. The first is the YouTube crowd and its dozens of clones, which allow easy uploading of files which are then transcoded into flash, and tagging of those files. The goal is to get video and page views, and it’s working.
It’s working so well, in fact, that it raises questions on their business model. YouTube is free but has very real bandwidth costs from showing these videos. They are dealing with this in two ways - by degrading the quality of the flash video files to reduce file size, and by raising another $8m from Sequoia”
Don’t forget that they imposed an additional limit to the 100MB max file size last week: 10 min max. Here is then another: max bit rate…
Moving on the web; interesting comment by Erik on Om’s blog:
“At the rate and volume they’re taking VC money an aquisistion will a) have to be huge >100 mil and b) unless they were very strong on the term sheet (as far as liquidation prefs and multiples) likely to make the VC’s far more money than the founders.
Their expenses are growing at a tremendous rate. They burned through 3.5 mil in 5 months, at the rate they’re growing the series B 8 mil will probably last about the same. So they’ve got a ticking clock, sell the company within 5 months or need to do a series C and take even more dilution. ”
He goes on:
“YouTube’s problem is not getting bought, it’s that they HAVE to get bought. Until you’re cash flow neutral you have very few options. YT is probably burning ~2 mil a month and growing fast.
When you need to sell you get screwed on price. Assume SeqCap has liquidation prefs and multiples (say 3X), more than 50% equity, and need to move the needle on their fund soon (don’t know if any of these are the case but none would surprise me) and end up putting in 25 mil (which would be likely if a series C is necessary). Then YT sells for a healthy $75 million, then the founders would get nothing.
The key is to take as little as possible, build a big audience and get to cash flow neutral.”
Don adds a great comment to the legal challenges facing youtube these days as well.
“The other issue YouTube needs to be careful about is porn. Porn itself is not illegal..it is all over the web. However, YouTube must use "commercially reasonable efforts" to prevent minors from viewing potential pornographic material. All the major search engines have porn filters that work reasonably well. So, YouTube could solve this issue fairly easily.
If YouTube can manage these two issues they have a very bright future.”
