By Nancy Davis KhoIf you were measuring by the size of the headline fonts, 2014 looked as if it were an inflection point for venture capital (VC) investment into the digital content industry. According to Preqin, which tracks data on the investment industry, VC funding in the digital content industry reached $683 million in 2014, more than double the $286 million invested in 2013. From Andreessen Horowitz's $50 million Series E stake in BuzzFeed, to General Atlantic's $46.5 million Series E investment in Vox Media, to the whopping $500 million channeled from Technology Crossover Ventures (TCV) and A&E Television Networks, LLC to VICE, high-profile deals seemed to signal a renewed sense of optimism by investors about the future of digital content.But if we take a step back and expand the definition of digital media to include those solutions that can help migrate traditional publishers to the digital world-think CMSs, ad platforms, and mobile content solutions-then interest in the market has been building for some time. Brian Rich, managing partner and co-founder of Catalyst Investors, which has invested in content companies such as F&W, Nine Systems, and Advantage Business Media, says, "If you look at the whole digital content ecosystem, it's been strong for years-not necessarily for private equity but certainly for VCs."Putting aside the question of whether VCs and digital content companies can play nicely together in the long term-the abrupt demise of Gigaom in March 2015 is perhaps a cautionary tale that the measured growth characterizing many pure content companies is an uneasy fit with the rapid payoffs demanded by VCs-the spotlight of VC attention on the digital content space seems certain to shine even brighter in 2015. A series of discussions with VCs already active in the digital content space revealed a real appetite for further digital content opportunities-provided those companies searching for funds bring with them scalability, engaged users, revenue, and quality.Scalability: A Critical FactorWhen assessing potential investment targets, most VCs have a standard punch list of proprietary requirements that are largely independent of industry. Catalyst, for instance, seeks companies with at least $10 million in revenue. Verve Capital Partners AG, which runs the Swiss online investment platform investiere, looks for those with revenues between 500,000 and 3 million Swiss francs (equaling nearly the same in U.S currency). David Sidler, investiere's head of communications, says the company uses a standard process to evaluate the leadership team, competitors, and the userbase.Solid business plans and a realistic understanding of the market opportunity are a given. As Brian O'Leary, founder and principal at Magellan Media Consulting, which provides research, benchmarking, and business planning services to companies with publishing and media components, says, "The hockey stick business plan-as in, ‘All problems will be solved in Year 3'-will not fly." Without the basics in place, no company-digital content or otherwise-advances in consideration.But assuming those basics are met, then (for digital content companies) scalability quickly becomes a key factor. Sidler explains, "VCs are looking for bang for the buck. Their assumption is that most of the companies they invest in will fail, so the one to two that don't have to generate enough revenue to cover the cost of all the others." For content companies in particular, low barriers to entry make scalability critical. Rich says, "Anyone can start a digital publication now. We want to see companies that understand how to replicate their solution across markets."O'Leary's advice to digital content companies seeking VC dollars is to be platform-agnostic. "You have to think about building a platform that works across audience segments and how you can make content available in as many forms as possible." O'Leary points to Vox Media as a content company that has successfully taken its model for high-end digital journalism into different verticals-with Eater (foodies), racked (fashion), and Polygon (gaming). Similarly, Nextdoor-the free private social network for neighborhoods that reaches more than 53,000 U.S. neighborhoods and could easily be extended to many thousands more-attracted an additional $110 million in funding in March 2015, from new investors Redpoint and Insight Venture Partners, bringing its fundraising totals to about $210 million in four rounds.Liza Boyd, a venture partner at StarVest Partners-which has a particular focus on SaaS and internet marketing companies, including CrowdTwist, iCrossing, and Travora Media, Inc.-agrees that scalability is important. But, she says, that on its own, it's insufficient: "You need to offer both platform and creative services. Creative services aren't necessarily scalable, but they increase the stickinesss of the platform." She cites StarVest's portfolio company Ceros, which offers interactive content marketing, as an example of a digital media play that combines elements of scalability and creative services in a way that StarVest is willing to back (to the tune of $6.2 million in April 2014).That stickiness can also stem from meaningful integration. Boyd says, "We look at how deeply integrated the company's solution is into customer workflow." O'Leary states, "You want to see companies that become a part of how people go through their day-to-day."User-Generated Content: A Proxy for EngagementAll things being equal, and particularly for business-to-consumer (B2C) players, the presence of user-generated content in a platform is attractive to VCs. In part, it relates back to the scalability question. Roger Lee, general partner at Battery Ventures, which has a stake in Angie's List, Glassdoor, and Gogobot, says, "When you have to hire people to create content, it's much harder to grow and for us to get the return we seek. That's a virtue of the user-generated content model; by definition, they scale gracefully. That model is flourishing."User-generated content, also speaks to a site's ability to engage its audience, an attribute that VCs will obviously find attractive. Sidler says, "It's extremely difficult to actually build a community, but it's valuable. It becomes a virtual circle-the end users creating content and other end users reading it," which increases the stickiness of the site. Catalyst's Rich says, "We clearly think UGC is an area of growth," mentioning his portfolio company Conductor, which provides web presence management and includes social aspects and UGC, as a sign of their interest in the space.Looking Beyond Advertising RevenuesIn terms of revenue models that VCs find compelling, advertising continues to play an outsize role. "The predominant model is, and will continue to be, advertising," says Lee. "There's still an opportunity to build an ad-supported media company, but you have to really understand the ad space."But interest in companies that are experimenting with diversified revenue streams (such as subscription sales, data sales, events, and integrating ecommerce) is high. "We don't have a definitive business model yet," says O'Leary. "It's not ads-only, but I don't think we know yet how content will be paid for. Ecommerce will be a piece of it; maybe it will be a broadcast model, where ISPs pay to distribute premium content to their end users."Sidler recalls a company that investiere opted not to back due to its small size, but that demonstrated the kind of innovative revenue model his investors like to see. "They had a platform making it easy for voiceover artists to create audio versions of news articles that people would pay to hear. The content providers got a third of the revenue, a third went to the platform, and a third went to the voiceover artist." Adding that it's hard to generalize, Sidler says that for investiere, an ads-only revenue model would probably be a no-go.Flight to QualityDoes content quality still matter? Perhaps more than ever. Rich says, "It was a land-grab for a while," meaning that VC dollars were chasing the sites that were chasing traffic, sometimes leaving commitment to quality in the dust. But now, he says, "users are getting more clever about where they go for information. They know which sites require them to wade through pages of ads before they get to what they want or use repurchased information." In Catalyst's case, Rich says that when it sees content that isn't unique or when a site includes a high degree of repurposed content, it tends not to move forward with consideration.O'Leary agrees, saying that funders are looking for opportunities in which companies have a positive relationship with their audience, both in the content they offer and in the user experience. "They're parsing platforms that engage and respect their audience," he says, staying away from those that repackage stale content or force a user to navigate through multiple screens.Lee says the quality-checking that sits atop the user-generated content in Angie's List is an important differentiator. "They've decided that it's better to have a few rich, deep reviews than thousands of less detailed ones. To that end, the Angie's List team proactively reaches out to reviewers, fills in missing details, and cleans up those that are obviously fraudulent."The focus on quality is, according to Boyd, an opportunity for traditional publishers willing to step up to the challenge. "Traditional media players have the best content," she says. "The problem is they also have traditional infrastructure, which was built for a different world."VC Wish ListsDespite an interest in the space, Rich says that Catalyst doesn't see many opportunities that meet all its requirements. Right now, only four of its 13 portfolio companies are engaged in digital content. "Either we're not finding them or there just aren't that many pure content companies that can [meet the criteria]," he says.investiere's funders would love to see companies that tackle the question of copyright infringement in an innovative way, according to Sidler. "Circumventing publisher paywalls just isn't that hard," he says. "We'd love to see some robust solutions that would give publishers a way to address copyright infringement."O'Leary believes there's still room for companies that provide greater depth in specific industries. "Amazon pretty much owns the publishing stack now; there's no part of publishing in which they don't have a presence," he says. "Why doesn't someone do that for, say, real estate? Figure out the problems that homeowners, realtors, and construction companies have and solve them? In this way, publishers can become solutions companies."Lessons for Traditional Media CompaniesWith investment funds flowing to those companies that demonstrate an ability to disrupt traditional media models, the message to traditional media companies is clear. Sidler lays out the implications of the uptick in VC money flowing into the digital content industry in black and white. "A lot of traditional media companies are investing in keeping older users happy, while VCs are looking for investments in those markets where the users will be around for a long time. I don't personally love BuzzFeed, but it's building a loyal, young audience."StarVest's Boyd sees the challenges facing traditional publishers as yet another sign of the potential for companies in the digital content ecosystem. She says, "No publisher, at this point, can afford to not jump. It's a good time for the infrastructure companies that can help them merge content and commerce."Finally, Rich has words of advice for traditional media companies, who he says have no time left for incremental change. "Be bold," he says. "As bold as you think you've been over the past few years, in whatever changes you've made, you need to step it up."