Why WetPaint & Other UGC Sites Get Big Money

First the money flowed to social sites like Facebook that showed the world how to get users to interact. Then it moved on to “roll your own” platforms like Ning that allowed people to build their own social microsites. But as Web 2.0 startups get increasingly specialized, the money is following, as today’s announcement from social publishing platform Wetpaint of a $25 million Series C funding round, shows.

In the wake of Ning’s $60 million Series D round, which pegged that company’s valuation at $560 million, startups that encourage users to collaborate and publish remain hot. According to Wetpaint CEO Ben Elowitz, the build-your-own-Wiki site is adding 2,000 new sites a day — a compounded monthly growth rate of 20 percent. “When we launched, we wanted to tackle social publishing,” he said. “Our goal was a consumer-friendly wiki.” Today’s round, which was co-led by DAG Ventures, brings total investment in the Palo Alto, Calif.-based firm to $40 million. Update: Fidelity Investments joined as an investor with this round as well, Kara Swisher notes, though exactly how much it invested is unclear.

Some user-generated content (UGC) sites are showing remarkable growth. StartYourTube, which wants to do for video publishers what Wetpaint does for wikis, added 14,000 microsites in the 12 weeks following its launch. And Ning Co-founder Marc Andreesen said recently that the white-label social network was running more than 200,000 social networks, with an estimated 1,500 new networks a day.

But it’s not just the quick adoption that drives valuations. UGC sites fare better with search engines. In one case, a Wetpaint-run wiki on the Sarah Connor Chronicles had six times as many Google page one search terms as the official Fox site. The wiki format also works better than traditional discussion forums; Wetpaint’s wikis get roughly a hundred times more inbound links than message boards covering the same topic.

As a result of all this, UGC sites can charge higher-than-average advertising rates. “We’re seeing 10 to 20 times the clickthrough rates [of regular social sites],” said Elowitz. “The content and consumption is extremely topical.” Wetpaint is even considering creating its own ad network.

Alongside the funding announcement, the company is launching “Wetpaint Injected,” a way of embedding Wetpaint wikis directly into blogs and sites. Because of the way Injected is designed, search engines properly attribute the UGC to the site in which the wiki is embedded. This helps the site’s rankings significantly, and turns publishers into Wiki destinations. Companies like IGN and Flixster have already announced plans to adopt the technology. “Every time we have provided our community with tools for self-expression the results and creativity of our users have been incredible,” said Steven Polsky, Flixster president and COO.

Indeed, the services of startups like Wetpaint make sense for the likes of large publishers, consumer products companies and broadcasters, all of whom are eager to continue to engage with customers online. With embedded UGC, they not only get “gently walled” gardens in which that dialogue can take place, but get to boost their search rankings, too.