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Money is tight in the VC community for local startups, with the dollar outlay down by 30-40 percent, and money raised just a third of what was raised in 2008, per research by Canaan Partners; There is also expected to be a sharp consolidation among sites that have received funding.  But three top VCs speaking on the “Money Panel” at ILM:09 cited excellent opportunities in specific  sectors of the local ecosystem, including retail, promotions, video and content aggregation.

The challenge is meeting a VC’s standard for advertiser and user volume – always a problem with heavily fragmented local services.Comcast Interactive Capital’s Michael Yang noted that he can’t seriously consider anything with less than one million unique visitors per month. Barring that,  “We’re more apt to sit back and see if you can break through the ceiling,” said Yang, who formerly ran marketplaces for Yahoo.  Still, Comcast is studying the market closely, especially “commerce and marketplace solutions, as opposed to pure directory plays.”

Patricia Nakache of Trinity Ventures echoed Yang’s interest in commerce and marketplace plays.  She noted that most of the attention in local has previously been on Yellow Pages-oriented considered purchase. “What online hasn’t cracked yet is the impulse purchase,” which she calls “the new frontier.”

Citing as a prime example  Groupon, a collective coupon site that just received $32 million in funding, Nakache  said lessons from retail sites are soon going to be widely applied to local promotions and local advertising. She also sees opportunities in verticals and classifieds.  The broad appeal of broad sites such as Craigslist will be complemented by verticals such as in the healthcare field. “There is an opportunity for a more curated experience,” she said.

Canaan Partners’ Warren  Lee also looked for opportunities with verticals, especially in retail.  “In the same way that ad networks evolved and became more vertical, we’re seeing similar things on the retail side. Broad sites like eBay will either verticalize themselves, or give way to more narrowly tailored sites, “especially as people become more capable of merchandizing things online,” and boost their “sophistication in marketing and attracting consumers.”

Lee says it all comes down to scaling audiences and expenses. He finds aggregated content especially compelling for this reason.  Sites such as Associated Content, Demand Media and, for instance, have really brought out the long tail thanks to the “power of search.”  Associated Content’s articles from 2005 made more money in 2008 than they did when they  were first written, he noted.”It is a sustainable, highly scaleable model.”

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