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Archive for February 27th, 2008

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Valley Girl February 26, 2008, 12:01AM EST text size: TT

New York Comes to Silicon Valley

Look to recent funding deals for Ning and Slide to see evidence that Wall Street may be cutting out the middleman—venture capitalists

The relationship between the venture capitalists of Sand Hill Road and the securities firms and power investors of Wall Street has long been a cozy one. VCs hoping for a return on their investments will need banks eventually, while Wall Street needs VCs to nurture the most promising startups until they’re ready to go public.

Or do they?

Lately, some of New York’s biggest players have been cherry-picking the best pre-IPO investments for themselves. Marc Andreessen’s Ning was recently funded by Legg Mason (LM), T. Rowe Price (TROW), and Ziff Brothers Investments for a valuation of more than $200 million. Max Levchin’s Slide got $50 million from Fidelity Investments and T. Rowe Price, conferring a $550 million valuation on the maker of widgets for social networks (BusinessWeek.com, 1/18/08).

Predictably, pundits wrung their hands over sky-high valuations—missing entirely the real cause for alarm among Silicon Valley’s blue-shirt-and-khaki set: Wall Street is putting the squeeze on an already troubled VC community.

The VC Squeeze

If you’ve read anything I’ve written in the past eight years, you know I think the venture capital industry is in a bad way (BusinessWeek.com, 10/3/07). The calamity comes as ballooning global pension funds seeking better-than-broad market returns meet up with venture capitalists eager to fund the next Bill Gates, Steve Jobs, or Mark Zuckerberg (Facebook’s founder)—helping to create an entire asset class out of what probably should have remained a subset of niche investments.

The upshot: Very few firms are making so-called venture-style returns on all that money sloshing around Silicon Valley. Sure, last year’s initial-public-offering and acquisition numbers look good in the aggregate, but when you consider the time and money needed to birth all those “successes,” there were precious few home runs—and a lot of portfolio losses. Outside the handful of VCs that generate 90% of the industry’s returns, a lot of firms are struggling to stay viable.

VC life was already complicated by the so-called angel investors capable of parking big bucks in promising early-stage companies. A lot of hot startups are getting funding early on from angel investors who made their fortunes in the late 1990s. That, along with dramatically lower startup costs, means VCs are forced to buy in when the company is more mature and their funding brings far less ownership, and entrepreneurs are able to retain control in ways rarely seen in the Valley.

And now, thanks to Wall Street, VCs are also getting squeezed at the late-stage end. If even early-stage companies aren’t buying the mantra that VCs add value, provide guidance, etc., then surely a later-stage Web company that’s already reaching a large, valuable audience won’t. And as the Ning and Slide deals show, banks will almost always offer larger valuations—and meddle less.

An Elite Club

For Silicon Valley, the pinch may only worsen, thanks in large part to the efforts of Allen & Co. The New York firm is the expert matchmaker putting together name-brand entrepreneurs with a bank that wants them so bad, it’ll seemingly pay any price. Allen & Co. is heavily relationship-oriented, inviting the cream of the high-tech and media crop to its swanky Sun Valley Media Conference every summer. Where else can a young hotshot founder rub shoulders with Gates or News Corp.’s (NWS) Rupert Murdoch?

But don’t ask the notoriously media-shy Allen & Co. to weigh in on its power-brokering ways. Neither anyone at the firm nor those who do business with Allen & Co. would comment for this column. Last summer I asked a close friend of Allen & Co. if there was any way I could weasel my way into the conference as part of reporting on my book. “Few things in life are impossible, other than walking through a revolving door with skis over your shoulder and this,” I was told. Put another way, I found this July e-mail by searching my inbox for the words “no way in hell.”

Safe Bets

Allen & Co. isn’t entirely a black box, and Silicon Valley does well to understand how it works. While much of chummy Sand Hill Road runs on gut feeling, Allen & Co. relies more on armies of MBAs crunching numbers and running models. The firm does the hard work, finding and courting entrepreneurs, putting them through a due-diligence gauntlet, and then picking up the phone, calling a big institutional investor, and delivering a handsome investment package.

Wall Street institutions love this model for a few reasons. Instead of trying to cram more money into the few truly rock-star venture firms, they can go directly to the hottest companies. If the deal hits, they walk away with a bigger slice of the proceeds even if they have paid a higher valuation, all the while avoiding paying millions of dollars in “management fees” and absorbing losses on the inevitable dogs in a VC’s portfolio. If it misses, big deal. What’s $20 million in a startup compared with $1 billion of Google (GOOG) or Yahoo! (YHOO) stock?

Besides, with markets in turmoil, a modest investment in a private company that won’t go public for a few years represents a relatively safe bet. Even if values decline, the investment won’t have to be marked to market on a quarter-by-quarter basis.

However eager these non-Silicon Valley investors may be to get a slice of Bay Area action, they’re not throwing around money with no strings attached. Wall Street banks aren’t going to be happy with a modest acquisition. If they’re investing at these kinds of valuations, they expect a big swing-for-the-fences IPO at some point. It can take a few years, but there better be a big pot of gold somewhere.

What’s In the Stars?

And not all of these East-meets-West Coast deals are structured the same. Shakier startups too are raising money from institutions, sometimes at terms that are far harsher. I doubt No. 2 widget maker RockYou gets close to the same terms as its larger, star-studded competitor Slide. The companies that can demand the sweetheart deals need to have a great story and some serious star power. Would Ning be worth $250 million without Andreessen? Doubtful.

That means we may not see many more deals like the ones Ning and Slide closed. But the threat these banks pose to investors isn’t about the volume of deals they’re scooping, it’s about seizing the best ones. In the case of Ning, Andreessen took some money from angels, but largely bankrolled the company with $9 million of his own money until he raised money via Allen & Co. VCs never had a chance. And Levchin also funded Slide on his own, in addition to tapping friends and investors from his PayPal days. There was one true venture round for Slide, and even the legendary Vinod Khosla of Khosla Ventures had to fight to get in.

There’s only one thing worse than VCs getting pushed toward later stages of investment—and that’s not getting to invest at all.

Lacy has been a business reporter for 10 years, most recently covering technology for BusinessWeek. Her book, Once You’re Lucky, Twice You’re Good: The Rebirth of Silicon Valley and the Rise of Web 2.0, will be published by Gotham Books in May, 2008. She is also Silicon Valley host of Yahoo Finance’s Tech Ticker.

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February 26, 2008 1:41 PM PST

Bill Gates to get LinkedIn

Just a short while after abandoning Facebook due to being overwhelmed with friend requests, Bill Gates plans to experiment on rival service LinkedIn.

On Thursday, the Microsoft Chairman will post a question related to “how technology can be better utilized for charitable causes” to LinkedIn’s entire 19 million members. I’m interested to see whether Gates finds LinkedIn scales to someone of his stature any better than Facebook.

The move comes as part of a set of announcements that LinkedIn plans to make on Thursday. A pitch from LinkedIn noted the company will have a revamped home page to show off as well as a “notable advertising announcement.” They declined to say whether said announcement is with Microsoft, however.

Microsoft provides ad-serving to Facebook thanks to a sizeable investment in Facebook, while Google has an exclusive and pricey deal with MySpace. Google recently noted challenges in getting social networking deals to pay off.

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Yahoo edges out Google in customer satisfaction

By Jacqui Cheng | Published: August 14, 2007 – 10:21AM CT

Google no longer holds the gold metal in customer satisfaction—at least not according to the University of Michigan’s American Consumer Satisfaction Index. Instead, Yahoo has dethroned Google and taken first place. And while the difference in score may not be much between the two right now, the pattern over time for these companies and others is far more telling.

Yahoo scored a 79 (on a 100-point scale) this year, while Google scored 78: clearly, the two are neck-and-neck in consumer satisfaction. However, the ACSI report notes that Yahoo’s jump into first place was a 4 percent increase over its score from last year, while Google saw a 4 percent decrease during the same time period. ACSI says that to the untrained eye, Google’s home page today looks almost identical to the way it looked years ago. This is where Google’s simplicity is apparently hurting it in the long-term, as new users just aren’t seeing Google’s new offerings—such as increased storage options, additions to Google Maps, and tweaks to Google Image Search—right in front of their faces like they do with other sites. According to the report, “[S]ome users say it looks stale compared to Ask.com, which has a very different display of search results.”

Speaking of Ask.com, its ACSI score skyrocketed this year, increasing by 6 percent to a score of 75. While the search engine still sits behind Google and Yahoo, it is clearly making big gains in the eyes of consumers; the site launched with a new interface and new features in June and became the first search engine to offer completely anonymous web searching with AskEraser in July. On the other hand, AOL is starting to look “old and busted,” as it dropped by nearly 10 percent to a low score of 67.

This year’s scoring doesn’t mean that Google is in trouble—the report notes that Google is still the most popular search engine (Yahoo is apparently now considered an Internet portal). However, the president of ForeSee Results and sponsor of the ACSI report, Larry Freed, told the Wall Street Journal that the trends give more important information than the scores. “Even more important than Yahoo’s first lead over Google is the trend of their scores moving in opposite directions,” he said. “Since the ACSI is a leading indicator of financial performance on the macro scale and at the company level, we may see a real turnaround for Yahoo in the next year.”

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Yahoo’s “new” search: don’t look now, but Yahoo is on the rise

By Jacqui Cheng | Published: October 02, 2007 – 11:40AM CT

Get ready for the “new” Yahoo Search, a revamped version of the old search that now offers blended results, improved analysis of search intent, and a new “Search Assist” tool. The improvements made to the world’s second largest search engine are designed to make the site more interactive and better able to offer rich results. The company claims that these are the most significant changes since switching back to its core search technology from Google in 2004.

Yahoo appears to be doing something right, which is good news for a company that many believe is destined to always play second fiddle to Google. Web analysis firm Compete recently published data on search queries between several of the top search engines and found that although Google still retains a substantial market share lead over the competition, Yahoo appears to trounce Google when it comes to search fulfillment. That is, more Yahoo queries result in a successful clickthrough to one of the results—75 percent of searches, in the month of August, compared to Google’s 65 percent and Live Search’s 59 percent. This data seems to indicate that Yahoo’s results do a better job at presenting information that is useful to the user. Building on this success, Yahoo’s new search enhancements look to improve further on the core search experience.

The most significant change, Search Assist, tries to help predict what the user is looking for and offers up variations or alternatives. It has been added as an AJAX layer on top of the page that pops up when it senses that the user is hesitating on a search query. Looking for something that starts with “ars?” Maybe you’re looking for Ars Technica, ares, ars national, or ars poetica.

The tool can also offer up related concepts—Yahoo! Search VP Vish Makhijani offers up a query for “energy savings” as an example, which causes Search Assist to present a plethora of search options and alternatives that don’t necessarily contain the term “energy,” but could be related. “In testing Search Assist, we found that users were 61% more successful in completing their task with this new search feature at their disposal,” Makhijani writes. For those who are simply slow or hesitant typists, Yahoo (thankfully) does offer an option to turn off Search Assist if you should so choose.

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Big three search engines to use common indexing tool

By Eric Bangeman | Published: November 16, 2006 – 09:35AM CT

Google, Microsoft, and Yahoo will all begin using Google Sitemaps in an attempt to standardize and improve the website indexing process. Sitemaps are XML files describing the layout of the site with associated metadata. Those files can let web spiders know the last time a page changed and how important a changed page is so that the indexing process is streamlined. With sitemaps, only pages with changes are visited, which saves bandwidth.

Sitemaps was originally created by Google in June 2005 and released under the Attribution/Share Alike Creative Commons license. Yahoo began using it within a couple of months its release. Combined, Google, Microsoft, and Yahoo have an 85.3 percent search engine market share as of July 2006 according to comScore.

In a joint statement, Windows Live Search general manager Ken Moss said, “the quality of your index is predicated by the quality of your sources and Windows Live Search is happy to be working with Google and Yahoo! on Sitemaps to not only help webmasters, but also help consumers by delivering more relevant search results so they can find what they’re looking for faster.”

“This is a great development for the whole community and addresses a real need of webmasters in a very convenient fashion,” according to Danny Sullivan, editor-in-chief of Search Engine Watch. “At industry conferences, webmasters have asked for open standards just like this.”

If you want to learn more about Sitemaps, information—including the XML schema for the Sitemap protocol—is available from the Sitemaps website.

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Yahoo opens up search with web-based solution

By David Chartier | Published: February 26, 2008 – 12:17PM CT

As Yahoo tries to stave off a determined Microsoft takeover, the company has announced one of its most interesting new search innovations in recent memory. By opening up a new search platform for third parties to build upon, Yahoo search results will soon offer a lot more relevant information in the form of images, restaurant reviews, and virtually anything else developers can dream up.

Announced on the official Yahoo Search Blog, the company’s new open search platform will allow third parties to build browser plug-ins that can augment Yahoo search results and insert additional relevant data. As you can see in the example Yahoo provided, crowd-sourcing local review site Yelp has added a restaurant rating, contact information, and links for reviews and photos to a Yahoo search for “Higuma Japanese Rastaurant.”

 
 To be clear, this new platform won’t allow third parties to alter the actual ranking of search results; only to include relevant information about them. Yahoo refers to this new platform as enabling “the next generation of search results.” Users will have complete control over exactly which sites and services are allowed to insert their data via some kind of web-based preference system.

The most likely solution is for Yahoo to collect all open search add-ons in a new user-customizable preference area. Developers from third-party sites will submit their service to Yahoo for approval and inclusion in this preference area, where users can decide which, if any, services to enable. This system of course has the major advantage of being portable since there is no software to download, enabling users to log into their Yahoo account from any machine and view the same results they are used to on their home computer.

The search giants have needed to revamp their basic approach of a search box with bland result lists for quite some time, and opening up the platform is a great way to go about remodeling. Giving developers power to offer a choice to users, without the need for specific applications or add-ons, will present Yahoo’s open search to the widest array of browsers and devices possible.

Update

Amit Kumar, Yahoo’s open search product lead, informed Ars Technica that open search is in fact entirely browser based, with no ties to specific browsers or plug-ins to download like we originally thought (in the future, the team could benefit greatly from using clearer terminology to describe the product). Naturally, this changes things for Yahoo’s open search, as it can potentially work on all the other applications and devices we were originally concerned about.

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Yahoo Buzz: A Lot Like Digg

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Technology February 26, 2008, 12:01AM EST text size: TT

Yahoo Buzz: A Lot Like Digg

The first of Jerry Yang’s turnaround projects is little more than another version of Digg.com, and fails to demonstrate Yahoo’s ability to innovate

Yahoo! (YHOO) is unveiling the first major initiative of Chief Executive Jerry Yang‘s turnaround bid—and the first since Microsoft’s surprise takeover bid—with a news-oriented site, similar to Digg.com, that lets users vote on articles from top Web publications, guiding which ones get prominent billing on Yahoo’s massively trafficked front page. The new Yahoo Buzz, launched Feb. 25, “embodies the strategy that Jerry has talked about,” says Tapan Bhat, Yahoo’s vice-president for Front Doors.

What that strategy means for Yahoo—and whether it justifies the company’s rejection of Microsoft’s (MSFT) takeover bid—has been an open question since Yang took back the reins eight months ago. As the first product constructed from the ground up with Yang’s vision in mind, Yahoo Buzz has the burden of concretely demonstrating how his leadership can change the company’s declining fortunes in arenas increasingly dominated by Google.

Adding Buzz to Ad Revenues

In particular, the new service epitomizes Yang’s focus on boosting ad revenue by making Yahoo a key destination for more than just content from the company’s own sites (BusinessWeek.com, 9/11/07). Buzz may certainly help make Yahoo a more engaging site for both users and advertisers. But it fails to prove Yahoo can generate the kind of game-changing ideas necessary for the company to forgo Microsoft’s offer, now valued at roughly $41 billion, or demand a significantly higher bid.

More than 100 major news sites have agreed to place Yahoo “Buzz Up” buttons next to their articles and other content. The partners include Gannett’s (GCI) USA Today, News Corp.’s (NWS) Wall Street Journal, and Time Warner’s (TWX) Entertainment Weekly. A click on the button is tallied as a user endorsement and sent to Yahoo’s Buzz page. Those with the highest scores are considered for placement on Yahoo’s front page. But Yahoo is retaining some editorial control: An internal team will have final say over the stories featured on the main home page. Yahoo says this is to guard against articles deemed lewd, violent, or capable of exposing the company to legal liability—like the stories voted to the top of Digg last year explaining how to hack past the copy protection on digital media (BusinessWeek.com, 5/3/07).

The initial launch also includes “widget” applications that can be embedded on any site to display the most popular stories on Buzz, helping Yahoo brand itself as a leading destination for news. Yahoo plans to expand the Buzz program to other publishers not involved in this test phase. Bhat also sees a future where Yahoo will be able to personalize the home page for users based on the articles they have “buzzed” over time.

A Copycat with Scale

But investors and analysts may be underwhelmed by Yahoo Buzz, as far as Yang’s vision goes, in that it’s not a new idea. The concept is strikingly similar to Digg.com, a social news site with more than 25 million unique visitors a month, according to that company’s statistics. Even the “Buzz Up” buttons are reminiscent of the “Digg it” buttons already featured on many of the same leading sites. “It is great to see more and more companies embracing the power of communities,” says Digg Chief Executive Jay Adelson, insisting he’s not concerned about competition from Yahoo. “We’ve seen literally hundreds of clones appear, and those include ones from multibillion [dollar] corporations like Time Warner.”

There are a few key differences between Yahoo and rivals that could help Buzz stand apart. Chief among these is scale. Yahoo is already one of the leading destinations on the Web. The opportunity for publishers to see their stories featured on Yahoo’s front page, where it could be seen by tens of millions in a day, is a strong incentive to install “Buzz Up” buttons on their sites. “The scale and scope of this is unparalleled,” says Bhat. “The number of people who come to [Yahoo’s home page] is bigger than any page on the Web.”

Despite these advantages, Buzz is still Yahoo’s version of a social Web site that already exists. What Yahoo may need most right now, as it tries to prove it deserves its independence, isn’t Buzz. It’s fresh ideas.

Holahan is a writer for BusinessWeek.com in New York .

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