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.

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