Profitable Paltalk Gives VCs Their Money Back

Webcam chat subscription service Paltalk has bought out its investor Softbank Capital Partners, which had purchased 20 percent of the company for $6 million in 2004. The buyout was enabled by Paltalk’s ongoing profitability, founder and CEO Jason Katz told NewTeeVee Tuesday. Katz even paid Softbank a premium on their shares, given them “a very solid profit,” he said.

PaltalkStartup acquisitions and IPOs are rare these days, but buying out your VCs? That doesn’t happen very often. The one example that springs to mind is podcasting startup Odeo, in which CEO Evan Williams gave his investors their money back to have the freedom to change strategy and corporate structure into what would eventually become Twitter. In Katz’s case, he said it wasn’t that Paltalk was having problems or that it didn’t like Softbank, but that his profits were starting to put a fair amount of money in the bank and the structuring of Softbank’s shares disabled him from paying out a dividend to Paltalk shareholders.

Paltalk, founded in 1998, took the Softbank money in 2004, after raising about $4 million in two previous rounds of funding from other investors (whose shares it is not buying back). It’s been profitable since 2004, said Katz, but that kind of timescale doesn’t really fit into the VC model. So Katz approached Softbank last December about buying the VC out, and the deal took until just now to finalize.

What’s next? Katz said he hopes to operate Paltalk as if it were a public company, with dividends and earnings. He hopes to eventually be bought by a larger company looking to facilitate social interaction with video.

Katz said he made Paltalk a subscription service in 2001 during the last downturn, when advertising dollars dried up. That strategy has paid off, in that since then the company has made 80-85 percent of its revenue from subscriptions, though down times and good times. The service has 4 million active monthly users, with an undisclosed amount of them paying.

While Paltalk could be at the center of the burgeoning social TV phenomenon with its video chat rooms, so far it’s not. The company had tried a strategy of creating its own original live programming, sets from comedy clubs and the like, but last year decided to pull back from weekly posting obligations and high production costs, said Katz. Now it only puts on live shows every other month or so.

We would think that one of the big factors that’s hindered Paltalk has been its requiring users to download software. However Katz said the company has spent the last year and a half building a Flash client that interacts with the rest of its live video infrastructure. Users are now able to host video chats with up to 10 people in the Flash version from a web browser on any platform.

The next big plan, said Katz, is to let users sign up for vanity URLs on the domain, where they can host live video chats on their own without being beholden to any particular platform. That product is set to launch in the next quarter.