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As you all have no doubt noticed lately a lot of blog networks are receiving funding from big name VCs. The most well known blog networks to receive funding recently are GigaOm, b5 Media and Sugar Publishing (PopSugar, etc.), The blog network has truly become the hot new investment for early stage VCs. Why? Well, VCs have seen that blog networks are garnering traffic at a rapid pace and have the potential to make huge sums of money from advertising. The most well known example of this right now is TechCrunch. Mike started the blog as a hobby and now takes in over $60,000 per month in advertising from it (note: Mike has not taken funding).

So, investing in blog networks does make sense if you look at how the businesses can grow and how the coveted network effects can be harnessed to drive even more traffic (using Digg, etc.). However, my interest lies in why the blog networks need the money and, if they need it, how much do they need?

There are some easy answers to whether or not blog networks need some money or to why they would want it; writers, ad sales (this can be outsourced to a certain extent), admin, office space, servers, bandwidth, office supplies, etc. Om, for example, took $1mm or so for GigaOm which will cover all of those costs and leave some room for growth. But what about a network like Sugar Publishing who took ~$5mm from tier one firm Sequoia? Do they need $5mm? To answer that question I decided to do a little research on what kind of capital it takes to start a print magazine. Perhaps there are some similarities.

Turns out that you need between $50k and $100k to start a low end magazine/newsletter but if you want to launch a glossy newsstand publication like PC Magazine you’ll need to spend at least $5mm (sources: MagazinePublisher.com, MagazineLaunch.com and Cheryl Woodward’s book “Starting and Running a Successful Newsletter or Magazine”). Interesting. Seems like we hit the exact number that Sugar Publishing took and I would consider them, and the other blog networks I mentioned, the high quality newsstand variety.

A lot of the cost to start up a big time magazine lies in the printing and infrastructure which you don’t have in the online world and with bandwidth and storage being cheap where does that money go? Staff, office space and the like are a big expense for online publishers but are still not enough to justify a large investment. While talking with some friends about this it seems the answer may be that Sugar and others are planning on using some of their money to acquire other properties, networks and talent. With a few acquisitions Sugar starts to look cheap at the $5mm investment price.

With the costs being laid out I am now drawn back to the VC side of the table. I am guessing that the pre-money on Sugar was around $10mm or so (perhaps a little more as TechCrunch speculates) which means that Sequoia ended up with about one third of Sugar. VCs are usually looking for a 10x return meaning that, in this case, they want to sell the business in the end of the day for around $100mm. This then means Sugar will need to get to about $10mm in cash flow per year ($833k per month).

If you take a look at Sugar’s current pageviews (which are growing incredibly fast – I have heard they are at 13mm per month now) they will have to grow them by 8 – 10x or so and achieve a good CPM to be able to get to that revenue level (not including feed ad inventory which will become more of a factor – disclosure: I work for FeedBurner). Not at all impossible judging by how fast they are growing and by the demand for quality women focused content online. Also, if the acquisitions do come into play this type of growth could be achieved fairly easily.

I hope that you have found this little bit of analysis interesting and I would love to hear your comments. It is going to be very interesting to see how or if the different funding amounts and approaches will affect blog networks and whether or not the VCs will get the 10x returns they are looking for. It still seems to me like a lot of money is being put to work but I also don’t want to discount guys like Sequoia who have had a lot of big wins over the years.

Photo Credit: Noah Wesley from Flickr