VentureBeat

Silicon Valley venture firm Benchmark Capital has invested in a finance blog company called Seeking Alpha, a surprising move in our view, given that blogs are difficult to monetize.

Venture firms want to invest in companies going for billion-dollar markets, and Seeking Alpha is a two-year old boot-strapped company that is losing money, the company’s chief executive David Jackson confirmed with us earlier today. Blogs have become mainstream, too, so what do you think Benchmark sees in this company?

Well, it apparently sees a very focused chief executive, who wants to aggregate all of the finance information being supplied by hundreds, perhaps thousands, and maybe even millions of investors with a view about stocks, and ordering their analysis by ticker symbol and other methods. It is supplying the transcripts of quarterly corporate earnings calls, annotated data from WSJ pages and other info.

Underscoring Seeking Alpha’s ambition is a deal the company announced today with Yahoo Finance, whereby Seeking Alpha’s content is added to the stock quote pages of Yahoo Finance, alongside other mainstream content, which includes sources like Street.com and Dow Jones.

CEO Jackson said Seeking Alpha aggregates content from 200 contributors, who have signed a basic agreement with Seeking Alpha to provide the content. The contributors have an incentive to providing the data, Jackson explains, to get exposure for their newsletters or consulting services, and so they are doing it for free. One guy won a $10 million account from a client who saw his analysis on Seeking Alpha, says Jackson (though we did not independently attempt to confirm this). Seeking Alpha vets the material, and asks the contributors to disclose any conflicts of interest they may have, such as short or long positions in stocks. He has hired human editors to do this. Seeking Alpha needs the capital to build up its web team, and to help customize the stock analysis in sophisticated ways, so that it reads nicely on Blackberry devices, for example, Jackson said.

By putting the bloggers on a par with Dow Jones, Street.com and other mainstream sources, Jackson thinks Seeking Alpha will encourage even more bloggers to participate. Seeking Alpha’s aggregated content may soon dwarf the content produced by mainstream sites, the thinking goes.

So now you are getting the full image — the image of that revolutionary, proverbial long tail. “We’re tapping into the long tail,” says Jackson referring, to the long line of contributors with a good opinion about stocks he thinks will transform analyst coverage of mid- and small-cap companies that newspapers and other sources don’t have the resources to cover.

This is just the latest start-up using Web 2.0 techniques to attempt a break into the big time. Another includes SocialPicks, which we saw a demo of several weeks ago. SocialPicks, based in Silicon Valley, is trying to create a Web site to do something similar to Seeking Alpha, but is in early days, and has yet to figure out how to mobilize contributors. There is also New York based Monitor110, which just raised $5 million in funding from DFJ, which is using blogs to give investors a new edge on information.

Jackson did not disclose how much Seeking Alpha has raised. Jackson worked for five years as a technology research analyst for Morgan Stanley in New York covering the communications equipment sector, and left in 2003.

The notable $11 million investment in blog and web-site hosting company FreeWebs today made us scratch our head a bit.

We wrote about the investment in our “wire” section (left-hand side of our homepage), and mentioned there are many competitors to FreeWebs, several of them quite large. Why would a company of a dozen or so employees, which managed to bootstrap it for so long (they went without funding for five years) and which is now profitable and has 11 million registered users, suddenly go out and raise a lot of cash. Why now?

Turns out, there’s a lot of logic to this. FreeWebs has labored away, with a very low burn-rate, and it has seen millions of users join up to get the free Web sites if offers. It has proven its usefulness. And now, it is ready to leverage that platform to try to make serious money. Its ability to make a bundle more money is still unproven, though. It also needs to hire a lot more talent to get the implement the job with experienced, competent sales, marketing and product managers. The combination of risk and need for capital, then, is why it is a great time to raise venture capital.

Or at least that’s the recipe that Peter Fenton, venture capitalist at Benchmark Capital, said is what guides his firm. He’s made good money, via his investments in JBoss and Wily. He didn’t invest in FreeWebs, but explained his approach to us a few weeks ago.

In the diagram above (or if it is too small, click on diagram below and see p.3 of Fenton’s PDF file), note that the ideal time for the Series A, or first round of venture capital, is right before the company’s rising “adoption” curve (and thus value of a company) meets the declining “risk” curve. The need to wait long enough before the VC round can be forgotten, especially in bubbly times such as these — when VCs seem to be throwing money hastily on any idea they see. Indeed, it is remarkable that FreeWebs went as long as it did without getting capital.

Fenton’s model differs from the more traditional VC “farm raised” model (see diagram here), when a venture firm invests in a company at pre-defined stages — for example, when a company finishes its prototype, ships its product, etc. That model, popular for Silicon Valley’s software start-ups, should be thrown out, he said. Take the software industry. With the advent of open-source, software start-ups with useful products can pitch their early test versions to developers working for large companies (potential customers). If those developers like the product, the developers can evangelize for the software internally, and sales and testing can progress without huge marketing budgets. If the product gets adopted, it makes sense for the company to raise venture capital to expand.

Fenton backed JBoss, an open-source software company, which shipped its first product within six months of launching, and went without venture capital for a long time. “It was living on fumes,” explains Fenton. But that was a good thing. By starving through its early years, JBoss took time to experiment, a luxury afforded it by having no investors impatient for a return. Fenton invested much later, after the company already had 6 million downloads — but before it had made real traction with support contracts. “The challenge is to identify the acceleration/adoption phase before it’s obvious,” says Fenton. Indeed, Fenton’s firm — then Accel — was handsomely rewarded, and quickly too, when JBoss was sold in April for $350 million.

Back to FreeWebs. Its adoption has been considerable, but success of its more ambitious services is far from obvious. Like Six Apart, it is buying up companies to expand its offerings. FreeWebs just bought Mad4Milk.net, creator of Mooglets widgets for its “Farms” site and an expanding library of widgets. Although it’s too early to tell how FreeWebs will do, it did well by waiting and instilling a culture of frugality. Now with $11 million in capital, it has a rocket-engine, and this could be fun to watch. As mentioned, they’ve already opened an office in Silicon Valley.