• by Mark Walsh  @markfwal, September 19, 2008

The financial meltdown unfolding this week will accelerate the shakeout of digital media startups--especially among me-too companies such as online ad networks, agreed venture capital executives gathered at the OMMA Global conference Thursday. 

Assembled on a panel titled "Dot Bomb 2.0?," the venture investors acknowledged that capital won't flow as freely in the wake of the financial crisis gripping Wall Street, but they did not predict a replay of the dot-collapse of 2000-2001.

Warren Lee, a principal at Canaan Partners, said there has been a "fairly rational allocation" of about 20% of overall venture dollars to technology companies, reducing the risk of having funding concentrated too heavily in any one industry. Even so, he acknowledged that "there is a mini-bubble for some sectors clearly overfunded and that don't have proven business models."

While Lee did not specify any particular category, others were quick to nominate ad networks as one type of Internet company that is likely to suffer as a result of broader economic woes. With the proliferation of some 400 ad networks of every stripe, especially in the last year, panelists predicted a thinning of the ranks.

"I'd say a percentage of companies are going to go away," said Satya Patel, a principal at Battery Ventures, who also pointed to mobile startups as potential casualties of the downturn. To survive in a harsher climate, ad networks will have to show that they can turn reams of data into valuable information for clients and have staff capable of interacting easily with agencies, he said.

When it comes to social media, moderator Henry Blodget of Silicon Alley Insider challenged Dennis Miller, a general partner at Twitter investor Spark Capital, to explain how the company that created the mini-blogging craze was going to make money. While Spark aims to capitalize on the huge audience Twitter has built, Miller said it would be "arrogant to say we knew what the (business) model looked like."

But he added: "There are very few companies that have the potential to become a verb, and at the end of the day, those are multimillion-dollar companies." Obviously, Google comes to mind, but whether Twitter will come close to matching the search giant's success is still a long shot.

Miller faulted marketers for being too reluctant to jump into online advertising at the same time that they are willing to advertise on cable networks such as Spike that feature in-your-face programming like ultimate fighting contests. "The slowness of advertisers is one of the biggest obstacles to growth," he said.

The deteriorating economic picture is not likely to embolden advertisers who were already squeamish about placing their brands against emerging media. By contrast, Miller said, "our job as investors is to place big bets."

For his part, Porter Bibb, managing partner at MediaTech Capital Partners, did not sound as if he was about to make bets on any companies that were not showing the promise of profitability. "Anybody not making money is in trouble," said Bibb, who cited a portfolio company supplying closed-circuit TV to 35 million Chinese college students, as among the firm's most exciting investments.

Brian Wieser, direct of industry analysis for Magna Global, said the problem for many ad-driven new media startups is the difficulty the biggest advertisers and agencies have sorting out which could actually benefit their brands. And until marketers are able to easily advertise across all media, newer formats will have a tough time.