(Updated with response from Google, and a counter-response from ClickFacts)

clickfacts.bmpClickFacts, a San Francisco start-up, may be worth looking at if you’re an advertiser plagued by click-fraud.

Click-fraud is the bane of the Internet: Web site owners and others with ulterior motives have incentives to click on ads.

Ask Nate McKelvey, chief executive of Jets.com, who was paying $5 to $20 per click when someone clicked on his ad beside Google search results. He caught a competitor, Blue Star Jets clicking on his ads red-handed. By clicking on his ads, Blue Star Jets was drive up his ad budget. He traced the IP address clicking on his and other competing jet charter sites back to Blue Start Jets, and got additional proof from a New York service provider serving Blue Star, he said. But Google and Yahoo wouldn’t do anything about it. Moreover, he says the class-action settlements against Google and Yahoo are “ridiculous” because you have to show that click-fraud has happened, and even then you only get one percent of your advertising spend refunded.

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So after his story was publicized in the WSJ a year ago (sorry, no link), he had a least 30 pitches from companies and consultants offering ways to combat click-fraud. He chose ClickFacts, he said. He has no tie to the company; his first contact with it came when Clickfacts emailed him last year.

ClickFacts just beat out 36 other companies to win Silicon Valley Bank‘s annual “Entrepreneur Showcase” competition, as judged by a panel of high-profile venture capital firms, including Matrix, August, Menlo and Foundation.

ClickFacts offers a Web-hosted product. It doesn’t manually track the IP addresses of the people who are making the clicks, like many other click-fraud companies do; that doesn’t suffice anymore, because fraudsters are more sophisticated, using programs that cover up their IP addresses. Instead, ClickFacts has developed an analytics program that looks at other variables.

–It looks at customer’s keywords and analyzes which ones have a higher propensity for click-fraud.
–It compares the sites of competing companies, and shows which IP addresses are hitting each of those sites, and tries to assess patterns, such as whether the timing of clicks appear programmed, for example hitting every 3.4 seconds. But it’s also measuring traffic anomolies beyond IP address patterns, to test for “proxy” and others fraud sources.
–It tests for group activity, in case several publishing sites or other people have colluded to click on each other’s sites or other sites.
–It shows which Web sites are consistently seeing lots of clicks on an advertisement, but where those clicks aren’t leading to continued activity within an advertiser’s site.

An incumbent player in this area is Optimal iQ, which is owned by ClickForensics, but its approach relies more on reading logs.

Internet advertising revenues in the United States totaled $7.9 billion for the first six months of 2006, and its growing strongly, according to the Internet Advertising Bureau.

Chief executive Michael Caruso sold advertisements back in 1996 for the Internet Movie Database, beginning in 1996, so he has experience. Caruso’s team has six people, with ten advisors, many of them executives at companies with big online advertising budgets, he says.

The company has 11 paying customers, including one of the ten largest online advertisers in the country, a telecom company that has huge click-fraud problems. Its ads cost only $1 per 1,000 impressions, and so aren’t as expensive as those of Jets.com, but it has worse click-fraud overall. It is battling special “malware” programs that automatically ping its ads over and over. Another customer is Air royale. Caruso said the company is already profitable.

It is raising a $500,000 angel round of funding from Sand Hill Angels and a group of undisclosed individuals, to be completed by the end of the year, and hopes to raise venture capital immediately afterward. Investment banker Bob Hambrecht (Bill’s son) is chairman of the board.

Update: Google has responded to this here and here, sending some reports arguing that ClickFacts has counted as fraudulent clicks some clicks that appear benign. It has to do with when users use the back arrow after clicking through to a advertisers page: When you click on a Kodak ad, for example, and land on the Kodak page, and then click on a specific camera there, and then click back to go look at another camera, ClickFacts is wrongly counting that as a bad click.

Update II: ClickFacts has responded, in turn, saying it is surprised Google is bringing this up. ClickFacts fixed this “back arrow” problem in June, after Google first brought it to ClickFact’s attention, Caruso tells VentureBeat. In fact, he showed us a demo that strongly suggests to us ClickFacts is no longer counting those clicks as bad. He said Google’s reports above refer to an analysis of ClickFacts in February, and that Google knows ClickFacts has solved it, and so this should be a moot point. He said he wants to work with Google on other click-fraud matters, too.

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