Cheezburger, With Dreams of Domination in Internet Humor, Grabs $30M From Foundry Group, Madrona, Avalon, SoftBank

1/18/11Follow @xconomy

Cheezburger became a viral Internet success story on little more than the moxie of its founders and a shoestring budget. But now it has opted to take big-time venture capital to pursue its dream to become a much bigger, more lucrative empire for humor on the Internet.

The Seattle-based company that runs a network of online humor and entertainment sites is announcing today it has raised $30 million in its Series A venture round from a quartet of big names—Foundry Group, Madrona Venture Group, Avalon Ventures, and SoftBank Capital. Cheezburger, founded in September 2007, had until now only raised $2.25 million, primarily from Seattle-area angel investors such as Andy Liu and Geoff Entress. The new financing means Cheezburger is getting three new board members who also have a lot of Web startup experience—Brad Feld of Foundry Group, Greg Gottesman of Madrona, and Rich Levandov of Avalon.

Cheezburger has shown an uncanny sense for what Web surfers will find funny and popular, rolling up a series of irreverent websites such as I Can Has Cheezburger?, FAIL blog, Memebase, and The Daily What. Through a rapid-fire acquisition strategy that extended through the first half of 2010, Cheezburger says it has built a network that now attracts 16.5 million unique visitors a month. That’s a lot of people, and they are spending a lot of time on the sites, uploading and sharing an estimated 500,000 pictures and videos a month and viewing 375 million pages, or more than 22 pages per visitor per month. Cheezburger doesn’t say publicly how much advertising revenue it has been able to generate from this beehive of activity, but it has been profitable from the start, and now employs about 50 people.

Founder Ben Huh has long resisted overtures from the venture capitalists who have knocked on his door before, but opted to take the money now. At a point when growth has plateaued at Cheezburger, Huh says he and his team reconsidered the no-VC philosophy, and started wondering how far they could take the online media empire with a little more dough.

“We wondered, if we had enough money to feel safe and comfortable, would we take bigger risks?” Huh says. “We started thinking bigger and bigger.”

Ben Huh

Ben Huh

Feld, an early investor in Internet gaming sensation Zynga, said Cheezburger fits into his strategy of investing in already large online markets that can be transformed by a venture-sized capital infusion. Feld and Huh have personally gotten to know each other over the past year and a half. Feld says he was deeply impressed by Huh long before talks heated up on the investment front.

“What they have done to date as a company with limited capital is unbelievably impressive,” Feld says. “We think Ben and his team can grow a much, much bigger company.”

Exactly what the company will look like post-infusion is still a bit unclear. Huh says he doesn’t have a “grand plan.” Huh plans to move quickly to hire about 20 to 30 people, mainly engineers, marketers, and some in editorial, he says. By the end of the year, the company could grow from 50 to about 100 people, he says. The efforts of the new staff—like those who work at Cheezburger today—will be focused on engaging Internet humor sites that mainly harness user-generated humor content, Huh says.

Engagement is the key word in that last sentence. Cheezburger already has a big audience, although it’s not much bigger than the last time I heard Huh talk about the company’s reach when he spoke at a University of Washington business school event back in May. Audience growth has slowed in the last six months, Huh says, and he wants to enlarge that pie. But even more importantly, he wants to increase user engagement, measured through things like how much sharing people do across the Cheezburger network, how much time they spend on the sites, and so forth.

The company’s mantra, Huh says, is still to deliver its customers “five minutes of happiness per day.”

Cheezburger has always relied on acquisitions of independent humor websites for its growth, as well as organic growth of its existing sites, and the new capital will allow it to think about bigger acquisitions, Huh says. The cash will allow Cheezburger to move fast on some straightforward development tasks—like iPhone and Android mobile apps—but also allow the team to think about creating features that aren’t available on the Web today, Huh says.

“Our emphasis will be on creating the best product not on the market today. We need to experiment,” he says.

Many professional commentators may bemoan the fact that sites using silly cat photos and misspelled captions are attracting mass audiences and big cash infusions, while traditional media outlets locked into obsolete business models are dying on the vine.

Huh, who trained as a journalist at Northwestern University, has heard it all before. But those critics are the least of his concerns. When I asked whether he sees something like Comedy Central as a competitor, he dismissed that, saying he’s much more concerned about how a lot of startups “kill themselves” by becoming complacent, veering into the wrong market direction, or becoming fixated on differentiating from competitors. Cheezburger is about engaging with users, he says.

So what is Huh afraid of? He will certainly be under more pressure, as some very prominent people are betting $30 million that his company could disrupt Internet humor the way Zynga did for Internet gaming.

“I’m afraid of being caught napping,” Huh says. “This is our market to lose. It’s our audience to lose. One of my fears is we will we be overcome with indigestion from acquisitions, lose our focus, lose our culture. We are here because of our users.” He added: “This is a lot of money. We can make a lot of mistakes with that money.”

Feld sounded less concerned. “I’m not afraid of anything, fear is a useless emotion in business,” he says. “The way I invest, I recognize there will be lots of things that don’t work. One of the things that appeals to me about Ben and the team is that they are extremely good at trying things out, iterating, and getting them on track with very little money, very quickly. They’ll make mistakes along the way.” He added: “We made the investment because we think Ben and the team can create one of the key and critically important companies on the Internet.”

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