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With Google CEO, Eric Schmidt, acknowledging that Google has yet to find a way to make money with YouTube, it’s not clear that video advertising and user-generated content mesh. But Jivox, a San Mateo, California video ad network, would beg to differ. The company, which launched its advertising network in March of this year, says it has had early success placing ads in user-generated videos and has already grown to over 40 million monthly viewers across video publishers in both the United States and India. On the strength of what Jivox says are strong revenues, the company has just raised a substantial $10.7 million in its first round of financing.

The market has no shortage of video advertising start-ups capable of reaching millions of people. YuMe (coverage) leads Microsoft’s video advertising and claims to reach 129 million monthly viewers on over 400 video sites. Tremor Media (coverage) says it has about 109 million. VideoEgg, a pioneer in video advertising (coverage), has a social ad network that spans Facebook, Bebo, and Hi5, and has partnerships with companies like Buzznet, imeem, and Metacafe. But Jivox is notably different.

Unlike YuMe and Tremor Media, which primarily target brand advertisers advertising on premium content, Jivox is going after the local advertisers. Jivox founder and CEO Diaz Nesamoney says that the key to his company’s early success is its do-it-yourself video ad creator. Using web-based editing tools and a large inventory of pre-made video clips and catchy music, local advertisers who would otherwise not have the budget to produce a video ad can do so, and for free. Because small-time advertisers are less brand-conscious than their big-name counterparts, Jivox can place their ads in user-generated videos.

This strategy might sound dubious, but there’s actually something to it, because Jivox steers clear of the lowest-common-denominator. One of its main partners is ExpoTV, a site for user-generated video product reviews. While one might argue that user-generated video product reviews aren’t exactly riveting (and it seems ExpoTV’s traffic has recently taken a dive), an advertiser on ExpoTV is not going to see his or her company represented near a video of homeless people fighting and someone watching a video product review is likely in the mood to buy.

Nesamoney says that 2-3% of viewers click on Jivox’s in-stream ads, which appear before, after, or in the middle of a video as it plays. These ads generate between $30-$40 for every thousand views, despite the fact that the majority of people dislike them.

The round of funding was led by Opus Capital, and included a large investment from India’s Helion Venture Partners. Nesamoney says the nascent Indian ad market will be key to his company’s growth, and that he went with Helion because its partners know how to maneuver within it.

With all the video content online, the video advertising market is booming. Investors are still placing bets on new companies, and existing companies are getting more aggressive with ad techniques.

The latest company to raise money is YuMe, a Silicon Valley company offering a video-centric ad network. It has just raised $9 million more from prominent firms DAG Ventures, Khosla Ventures, Accel Partners, and BV Capital.

A second company, Blinkx, is already public, but its latest video ad product is controversial: It lets anyone with embedded video on their blogs place contextually relevant text ads inside them even if the videos aren’t ours. To test it, we pulled a YouTube video about Halloween made by One True Media, for example, and inserted ads on to it. We could make money on it by showing it VentureBeat, if we wanted. See image below. Note it gives you the option of showing the ads inside or outside of the video. Details here.

A company named Revlayer had done something similar a few months ago, but disappeared a day after launching. However, it was more obtrusive, placing an entire banner over a video before it started, and wasn’t necessarily contextually related. It’s site is still down, as of this writing.
While the market is expected to become quite large, rising from around $775 million this year to $3.11 billion by 2010, there is no shortage of competition for new companies like YuMe.

Last month, ad network Videoegg raised $15 million. There’s also Adap.tv and, of course, Google. Meanwhile, the big ad serving companies like ValueClick and Ad.com are making forays into video, as well.

Redwood City, Calif.’s YuMe is interesting because its technology works across multiple platforms: It can serve ads into downloaded video and video streamed on websites and mobile phones. This is in contrast to companies like Kiptronic, which focuses on downloaded video, or AdMob, which does only mobile.

YuMe’s chief executive and founder, Jayant Kadambi, says his company aims to place ads in videos from the “mid-tail” of online video, which he defines as “anyone that is not an NBC or CBS.” These include customers like Somagirls.tv, JoeCartoon.com, RedOrbit, Vuze and Pando — medium-size, professional producers and distributors whose content is safe for brand-conscious advertisers. In this mid-tail, the company currently serves between 150-250 million ads a month.

Jayant says that he raised the round mostly to scale YuMe’s infrastructure, recruit top notch executives, and build a sales force. The company previously raised $7 million.

YuMe Networks is new start-up using a machine and human approach to help advertisers decide when to run ads by videos.

YuMe reminds us of Yahoo’s old approach to search engine technology: Helping along machines with a little bit of human intelligence. Let’s face it, machines still aren’t good enough to classify video accurately enough for cautious advertisers. No one wants to repeat the blunders committed by Google a few years back, when its machines inserted ads for suitcases besides gruesome articles about suitcases filled with body parts.

YuMe searches for information supplied by video creators and other data sources and classifies video clips into categories, such as “automotive.” YuMe uses speech-recognition technology to confirm that a video’s audio track is related. But then it also employs people in India to make sure that videos are about what they say they are. (See WSJ story; sub required) The company launched today.

The company has received more than $7 million in funding from Khosla Ventures, Accel Partners, and BV Capital and others.