• by Ross Fadner , January 9, 2005

Look for online advertising to again attract large venture capital dollars, said venture capital executives at the 2005 Consumer Electronics Show in Las Vegas on Friday.

Larry Marcus, general partner of venture capital firm WaldenVC, and a former Deutsche Bank analyst, said there is "massive" opportunity in the burgeoning ad market. "Internet advertising is now a $10 billion industry. That's an incredible thing for content providers," he said.

Mark Stevens, a partner at the law firm Fenwick & West, said he couldn't agree more with Marcus "about the power of the advertising model."

"It feels a little like it's 1998 again," Stevens said. Both Stevens and Marcus agreed that ad-supported media content providers once again have a compelling business model now that the ad market has matured and stabilized.

Stevens noted this success comes at the expense of older ad-driven media like newspapers--an industry that "doesn't even know its business model is dead," he said.

While online advertising currently is only projected to account for 3 percent of domestic ad spending, Marcus said he sees it surpassing both print and radio in the next several years, and then television and cable in the future.

Marcus said his firm, WaldenVC, is particularly interested in ad networks and resellers of inventory on a cost per acquisition basis. Toward the end of last year, investors starting showing their faith: at the end of summer, America Online bought Advertising.com for $435 million; in November, ad network FastClick secured $75 million in venture capital funding.

Marcus added that the firm also finds technologies that allow for contextual and behavioral targeting compelling, but privacy concerns have deterred investment. "Personally, I think privacy is a big issue," he said, emphasizing that the firm is not interested in software-based advertising companies because of this concern.

Moderator Joey Tamer, president of the consulting firm S.O.S., Inc., took note of the panelists' optimism. "We have all of you up here smiling, instead of just one of you, for the first time in three years," she said.

But, despite the overall enthusiasm, some venture capitalists expressed caution. Santo Politi, partner at Charles River Ventures, said that now is a good time to invest, "but not as good as two or three years ago," partly because advancements in technology have resulted in awkward growing pains for certain companies. He pointed out that growth is occurring in esoteric technology sectors that already have a small number of available, qualified personnel, which makes it difficult for small companies to meet the demands of expansion efficiently.