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Advertising on mobile phones is a trying market. Americans have been slow to surf the mobile web, in large part because dominant carriers have made browsing the web so painful.

But one young company, Admob, is showing impressive results despite all this, according to interviews and an investigation into the overall ad market. Admob puts ad banners on mobile web pages run by companies like ESPN, CBS and Weather Underground. Based on its current performance, the company is getting gross annual revenues of $42 million, according to our back-of-the-envelope math.

The San Mateo, Calif. company declined to comment on our math, but I’ll explain below how I derived it. I’m also assuming Admob keeps only a third of the revenue itself, giving the rest back to its publisher clients. This is a conservative assumption. Its rate card says it keeps 40 percent, but market analysts say Admob cuts its larger clients a better deal. That gives Admob about $14 million annually.

Why is $14 million something to get excited about? Well, in part, it’s because the industry is by most accounts about to embark on break-neck growth. The U.S. market for mobile display advertising is expected to more than double each year through 2011, exploding to $1.2 billion by 2012, from about $100 million this year, according Yankee Group analyst Linda Barrabee. She prepared one of the better analyses of revenue data I’ve seen to date (she drew on multiple sources of data in an industry where there’s no really good data). I don’t have a link to her report, but hope to post it here in an update. Her numbers do not include ads displayed by your phone’s search engine results.

So Admob has a sizeable chunk of the market. And it’s got exposure in foreign markets where the mobile web is seeing stronger growth.

Now on to the math. Here’s how I approximate the $42 million for Admob’s annual run-rate:

1) Costs: Admob has about 80 employees. The cost of a fully loaded employee is somewhere between $150,000 and $200,000 in Silicon Valley, once you consider salary, healthcare, laptops, their share of server costs, etc. Let’s assume $180,000 for Admob, as it’s backed by the respected venture firm Accel Partners. That gives you a cost of about $1.2M a month. Now, we’ve also heard on solid sourcing that the company has just “broken even.” That suggests the company is making about $14.4 million for itself, and making $42 million or so in topline.

However, to be sure, let’s triangulate the costs with what we know about revenue.

2) Revenue, based on public data, and conservative assumptions: Admob publishes its monthly impressions. In the U.S. they’re at about 1.5 billion. Also, we know that the overwhelming majority of impressions are direct response, that is, paid only if someone clicks through, not on a CPM basis. Let’s assume a click-through rate of about 0.75 percent, which is a fair assumption in the U.S. Let’s estimate a revenue per click (CPC) of 18 cents, which is also ballpark considering U.S. norms. That gives the company about $2 million a month in revenue. However, there’s a caveat. A portion of those AdMob impressions are paid on CPM, and that does tend to pay better. I’ll assume, based on what I’ve heard, that Admob gets about 20 to 30 percent of its U.S. business on this basis. So you do some subtraction and then some addition back in, and we’re at about $2.2 million in the U.S. give or take. Meantime, the U.S. only makes up 45 percent of total impressions. To achieve the annual $42 million topline estimated above, Admob would need to get global monthly revenue of $3.5 million, which is quite conceivable. We’re hearing rates in the UK are actually better than in the U.S., although Asian rates are still a fifth or sixth of the U.S. (The company’s latest stat report provides notable perspective on global trends: U.S. impressions for Admob grew a meager 1 percent in May compared to April, while impressions in Indonesia soared by 46 percent as Admob turned on ads for Friendster, the largest social network in Asia.)

Conclusion: I might be off a million or two on the annual figure, but it’s clear Admob has gotten itself a nice little business, despite the bearish comments made by some people about a weak trend in mobile advertising. Indeed, we’re early in the game. With mobile advertising about to grow so quickly, Admob looks headed to IPO-type revenues within three years.

[Update: This piece has sparked a debate. HipMojo has a different, more critical point of view, while Mukund is more supportive of my piece with his look at the Indian market. Separately, consider coming to Mobile Monday this evening, where I'll be moderating a panel including Admob's head of marketing, Jason Spero in San Francisco. We'll be focused on measuring mobile web traffic and where it's coming from.]

Admob is a nominee for best company at MobileBeat, our mobile conference on July 24.

Mobile advertising is still a very young market in the US, as mobile web usage here has lagged after many other countries due to inferior access to quality mobile devices and services. But mobile usage is growing as access has improved, which means the opportunity for mobile advertising has, too.

Besides mobile advertising efforts by giants like Yahoo, Google and AOL, perhaps the best-known mobile ad startup to go after the U.S.’s emerging mobile market is San Mateo, Calif.-based AdMob.

However, a growing market attracts competitors, especially when it is as lucrative as advertising is in the US — a large, Singapore based company called BuzzCity arrived in the US last year.

BuzzCity has recently announced a 917 percent annual growth in the number of page views that users have accessed that show its ads, with 132 million pages being viewed in the US over the first three months of this year. It expects to reach more than 100 million US ad views per month by the end of this quarter. It has also landed big clients, including Coca-Cola.

The company, which also runs mobile social network myGamma, has a mobile advertising network that operates in more than 70 countries around the world, with more than 2,000 mobile publisher sites running its ads. Like its competitors, the company serves both text and banner ads on mobile devices, and offers advertisers analytics services to target and track ad campaigns.

Overall, the network’s top ten markets served two billion ads, which represented annual growth of 800 percent. Here’s where the US fits in to BuzzCity’s world market:

1. Indonesia : 654 million (+ 13328%)
2. India : 577 million (+ 1522%)
3. South Africa : 426 million (+ 418%)
4. USA : 132 million (+ 917%)
5. Kenya : 79 million (+ 424%)
6. Romania : 57 million (+ 446%)
7. Bangladesh : 53 million (+ 305%)
8. China : 37 million (+ 6053%)
9. Brunei : 35 million (+ 221%)
10. Pakistan : 35 million (+ 814%)

How does this stack up with AdMob. According to AdMob’s latest report (PDF here), it had nearly 2.6 billion ad views last month alone, with 1.5 billion of those in the U.S.

By giving publishers analytics tools to tracking their own traffic, ad companies can both get access to data and subtly suggest their own advertising options. Anyone who uses Google Analytics knows this. Admob, a company that sells mobile advertising, knows it, too. Today it is launching an analytics service for mobile sites, so you can see things like how many visitors and pageviews your mobile site gets, and where your traffic sources are coming from.

San Mateo, Calif.-based Admob has already been going out of its way to provide data to the world. It also publishes a monthly report on traffic on its own site that shows things like the number of users who see Admob ads, which countries they come from, and which type of phone they’re using.

You can watch the company’s video on the analytics service, above. You can sign up here for the company’s analytics service, which is currently in private beta.

Here’s the latest action:

Big layoffs at Sitoa? — San Mateo-based Sitoa has laid off approximately 40 out of 70 employees in order to get to breakeven, we’ve heard from a source. The company has tens of millions in revenues, but fees are only 10% so the company has always operated in the red. They have been trying to raise more money. Positioned as an e-commerce solution provider that gives retailers access to more products without worrying about inventory, Sitoa is having (or rumored to have) its own inventory problems due to high rates of returns and shrinkage. They have a handful of clients; Sears is one of them. There have recently been a flurry of LinkedIn updates and recommendations among remaining and former employees.

Power issue knocks GrandCentral offline — The online phone company which Google bought last year was down for most of this morning, TechCrunch reports. While the company blames a power outage on the service going down, it speaks to a larger issue as more everyday services move online — what happens if one of these services goes down? With traditional phone services, if there was a bad storm, you might lose service and understand why. With a server power issue happening in the middle of nowhere, the service can go down and you don’t even know it — you just don’t get your calls. Find our recent coverage on Grand Central here and here.

Google TV ads close to launching for the public — The service, which is currently in a closed trials, will allow anyone to buy advertising time on television stations that have a deal with Google (including A&E, Bravo, CNN, others) through Dish Network, according to Multichannel News. While much is made about of an overall shift to online advertising, Google knows how big of a business advertising on television still is, and is looking to transfer its success online to TV. The public should be able to use the service in the next few weeks.

AdMob’s March mobile metrics data — The mobile advertising company says it served over 2.85 billion ad requests last month. Clearly, the mobile advertising market is healthy. Nokia lost some of the mobile marketing share while companies like Motorola, RIM (makers of the Blackberry device) and Apple (makers of the iPhone) rose. We previously wrote about AdMob’s statistics here. You can access the report here.

Torrent searching site YouTorrent looking to sell — The popular torrent (a file transfered online, usually by way of many users) searching site has decided to clean up its act — it will now only index and search sites which host torrents, meaning most copyrighted material will be left out. The site, which has over 10 million unique visitors a month, hopes this move will allow it to be sold, TorrentFreak reports.

Frank Quattrone is back as a banker — Quattrone and associates are starting a new boutique investment banking firm, called Qatalyst Group. During the (last) bubble in the ’90s, Quattrone was a top deal-maker, helping many promising (and unpromising) startups of the era go public. Some of his more illustrious clients included Amazon, Cisco Systems, and Netscape. After that bubble burst, he spent years fighting legal charges that he had somehow misled consumers about his clients’ viability in public markets. The charges ultimately didn’t stick. Now, Qatalyst is hoping to help modern-day startups to take advantage of their explosive success over the past few years. Rivals like Allen & Co., Montgomery & Co. as well as larger banks, have already been doing that — and now there’s a downturn in the economy, which will make both late-staging funding and liquidity events less likely. Then again, Quattrone has impressive connections and experience. Here’s what Google chief executive Eric Schmidt told Dow Jones about the news: “The launch of Qatalyst is an important development for the technology industry. Frank and his team bring unparalleled industry knowledge, a unique 25-year market perspective and candid, insightful judgment that CEOs greatly value on important strategic initiatives.” The New York Times has more (and was the source of Quattrone’s photo, to the left).

LiveJournal community upset, but the issue isn’t censorship by its new Russian owners — When SUP bought LiveJournal, the social network/blog site with a large Russian audience, last year, we were concerned that censorship might ensue. LiveJournal has become a main forum for dissent against the Russian government, and the new Russian owner, SUP, has tight connections to the country’s not-so-press-friendly government.

There don’t seem to have been any censorship issues so far, but there’s another issue that’s possibly just as shocking to freetards everywhere: SUP has tried to charge for new accounts that aren’t otherwise ad-supported, a change it announced last week. Yes, SUP wants to make money from its new purchase. It is still learning about dealing with its vocal user base, apparently, as it has since apologized for not clearly discussing the changes beforehand (even the web-celebrity American advisory board wasn’t well-notified). Here’s to LiveJournal democracy.

“By 2050 solar power could end U.S. dependence on foreign oil and slash greenhouse gas emissions” — Science-tech publication Scientific American has offered up a “grand plan” for how it could all happen. Take a look for yourself.

Yahoo VP joins Internet ad start-up — Greg Coleman has been named chief executive of search advertising start-up Netseer, after leaving his spot as Yahoo’s chief of global ad sales at the end of February. Netseer seems to be a small player in a very crowded field, but in a conversation with VentureBeat, Coleman said he was impressed by the Los Angeles-based start-up’s technology, as well as its founders’ vision. The company isn’t revealing too many details about that technology yet, but Coleman said Netseer has “mapped the Internet differently” and uses that data to make advertising more effective. For example, Netseer discovered that “cognac” and “Cuban cigars” often show up on web pages together, and could use that information to deliver targeted ads. Hopefully, it will become more clear in the next few months how Netseer stands out. Coleman’s move definitely got our attention.

AdMob’s latest stats on its mobile traffic, worldwide — The mobile advertising company has recently started publishing its own traffic numbers. It has seen a slowdown in the US market, compared to its recent numbers, but its still seeing solid growth in the UK. You can get the full report here.

Blog and media search engine BlogDigger bought by Sonic Mountain — Blogdigger began life five years ago as a tool for searching blogs using their RSS feeds, but it has since diversified to searching a broader set of media content. It will now be part of the digital media offerings of Sonic Mountain — the company that bought Odeo last year and plans to relaunch it in April. Odeo, as some may recall, is the podcasting company started by Blogger founder Evan Williams through his incubator company Obvious (which has also created the more successful Twitter). ReadWriteWeb has the scoop here.

How Meebo could make money? — We’ve wondered how IM service Meebo, which is in the process of raising a very large round of funding, could make money. PaidContent has answers: The company is looking at advertising (it has previously told us it sees a higher-than-average response to its ads featured within its chat windows) as well as virtual goods.

AdMob, the mobile advertising company, is reporting a sharp spike in iPhone mobile browser impressions on its ads over Christmas, going from around 350,000 impressions the week before Christmas to around 550,000 impressions after, according to its internal data. (Larger screenshot, below.)

Many people were apparently given iPhones over Christmas, and started using them right away, even though the iPhone has relatively small market share.

Google and Yahoo are reporting significant incoming traffic to their sites from the iPhone’s browser, the NYTimes reported earlier today, and the overall growth of iPhone browser traffic has been far more than from other mobile browsers. Google has been responding to the iPhone’s popularity by building iPhone-specific versions of its web applications, including faster-loading pages and support for iGoogle (press release here).

The Y-axis is AdMob’s mobile ad impressions, with dates on the X-axis.

San Mateo, Calif.-based AdMob, which serves a variety of ad formats across mobile device, is itself having a great year (previous coverage here). Its total impressions were up 17.5 percent last December versus last November (2,023,094,821 vs. 1,722,213,245), and has shown strong growth over the course of last year. See graph below — and the PDF of the report here. The full set of AdMob’s reports, here.

Admob, a company that delivers ads to cellphones, has expanded in part by selling ads for other mobile services such as IM chat. It is now selling ads on Facebook. These ads will appear on mobile applications that use Facebook’s mobile platform.

Admob (previous coverage), based in San Mateo, Calif., may help Facebook applications gain users faster — by showing ads to cellphone users that try to lure them.

In the non-mobile world, many third-party ad networks on Facebook make money selling ads on applications that advertise other applications, which helps them gain users.

Admob claims its serves more than 1.5 billion ads a month globally.

As both Facebook and mobile web browsing becomes more popular around the world, the value of this market will increase.

However, we’ve heard from Facebook application developers, like RockYou for example, that mobile applications work better for monetizing existing web applications than they do for gaining new users — at least in the U.S.

Developers can check out a sample Admobile mobile application here and there’s a sample image at left.

1) We’re hearing rumors that AOL and News Corp. were looking to acquire ValueClick
2) TubeMogul to sell online video analytics
3) German Facebook-clone investors back again
4) Facebook settles New York child-safety probe
5) Mochi Media launches MochiAds for casual games
6) Google, Microsoft and Yahoo all reportedly courting Facebook
7) AdMob poaches Google engineer
8) California adds a further $125M to clean transport
9) San Francisco’s New Resource Bank receives $10M kick-start

We’re hearing rumors that AOL and News Corp. were looking to acquire ValueClick – We checked with the companies last week, and they declined to comment. ValueClick’s value, and thus attractiveness, has just tumbled now that the online-ad company has said it will bring in less revenue than expected.

TubeMogul to sell online video analytics – The Berkeley, Calif. start-up supplies video-viewing data to Web publishers, so that they can track what videos are being watched. It a sort of Google Analytics, only for video. It has raised a seed round from NetService Ventures.

German Facebook-clone investors back again — The Samwer Brothers, famed for their propensity to back German companies that copy American models, have invested in Jimdo, the website creation tool. Not surprisingly, Jimdo’s tool (coverage here) looks quite similar to Weebly. This comes shortly after their investment in a Scibd copycat, Dotkus.de.

Facebook settles New York child-safety probe – Facebook, like MySpace, has been in the spotlight because pedophiles have used these social networks to contact children and expose them to porn. While a working group of attorney generals from all 50 states is still looking into the issue, New York state attorney general Andrew Cuomo announced today that his office had reached a settlement with Facebook. Cuomo had announced his own probe of Facebook’s privacy measures last month (previous coverage here). Under the agreement, Facebook will begin addressing complaints within 24 hours of being notified, responding to the the aggrieved party within 72 hours; it has also agreed to let an independent examiner oversee how it handles complaints.

Mochi Media launches MochiAds for casual games – The San Francisco company lets casual video game developers embed ads within their video-game creations, and includes analytics for measuring how much money the ads are bringing in (see screenshot, below). The company is just now launching to the public but it has already accumulated some impressive numbers. While in private beta, says it has already been working with 1000 game developers, serving over 100 million ads per month that have reached over 50 million gamers in total, worldwide. The company announced an undisclosed amount of funding from Accel Partners in August.

Google, Microsoft and Yahoo all reportedly courting Facebook – All are reportedly offering to invest in Facebook at a valuation of $15 billion. Details here.

AdMob poaches Google engineer — The stream of employees leaving Google has turned into a river. Google’s stock price has broken $600, we’re at the top of an advertising market cycle, and smart employees have to wonder how much short-term upside there’s left in that stock. Kevin Scott, a former engineering manager in search and advertising at Google, is now managing both the software and hardware infrastructure at the San Mateo, Calif., mobile ad company, Admob. The steal comes just as Google is starting to offer mobile Adsense.

California adds a further $125M to clean transport — California’s Governor Schwarzenegger signed a bill that will provide a further $125 million each year to clean vehicle and fuel technologies. The money could go towards new startups or existing companies like Tesla, which is based in the state. The bill, AB 118, follows a package Schwarzenegger signed into law last Friday which, among other initiatives, encourages the use of solar water heaters and attempts to cut energy usage.

San Francisco’s New Resource Bank receives $10M kick-start — The New Resource Bank, a so-called “green bank” that will provide loans for new cleantech projects to either consumers or businesses, has also benefitted from California’s embrace of all things cleantech. Treasurer Bill Lockyer approved an initial state investment of $10 million in the bank. Earlier this year, the new business passed $100 million in assets.

AdMob, a mobile ad provider, is announcing a string of partnerships that show it continues to grow even in the face of competition from Google, AOL and Yahoo.

We still don’t know how much money this company — or other mobile ad network companies — are making, but signs of a booming advertising market continue.

The San Mateo, Calif. company places advertising on web publisher’s sites on cell phones.

The company is announcing partnerships with major advertisers including Atlantic Records, Countrywide Home Loans (Click to Call), Electronic Arts (NCAA Football, Bejeweled), Echostar, JCPenney, Starbucks, Universal and a string of Microsoft properties, including MSN, Windows Mobile and xBox.

AdMob also serves ads for more than 2000 mobile web sites, including ESPN, CBS, Weather Underground, Maxim and Peperonity.

The market, for the biggest players, is looking good. Admob has served a worldwide total of one billion mobile ad impressions in June, for a total of over five billion since it launched eighteen months ago.

AOL Third Screen Media blogged that it had around 224 million impressions per month, but that was in early May.

Jupiter forecasts mobile advertising networks bringing in a total of $2.9 billion in 2011.

Julie Ask, a research director at Jupiter Research, says AdMob’s number is impressive, but not surprising. There are 230 million cell phone users in the US, and 35 million of them browse the Web, according to Ask.

She suggests the continued string of deals with large brands’ mobile sites are creating another wave of traffic.

Large companies like Yahoo, Google and AOL have an advantage because of their exiting large network of advertisers and publishers. In mobile ads, too, they’re able to sell targeted ads to specific web sites — sports, games, etc. In turn, they’re able to sell more lucrative advertising to these niche audiences. That puts the pressure on upstarts like AdMob, although AdMob has the benefit of backing from Sequoia and Accel (previous coverage), giving it some staying power.

Stephen Wellman at Information Week considers AdMob’s odds:

Advertisers have been eager to experiment with the third screen and AdMob successfully translated this desire into business success.

Despite this, I still have to question AdMob’s success. Is this a sign that AdMob has a killer business offering or that Google and Yahoo are too big and too slow to innovate?

I suspect it’s a combination of both. I give credit where credit is due. AdMob delivered. But, I suspect they know deep in the back of their minds that they should have lost already.

Serving ads on mobile phones is a lucrative business, forcing companies with a stake in the game to engage in aggressive marketing — perhaps too aggressive.

Millennial Media, one of a handful of Young Turks targeting this market, is a case in point. The company, which recently raised $6.3 million, has just launched a marketplace for advertisers and publishers that has a fake ad counter on its home page.

In its fervor to stay up with aggressive players like Admob and Third Screen Media, the company’s marketplace, called Decktrade, sports a counter (go to page here; see screenshot below) that gives the impression it is scrolling all the new ads being bid on within the marketplace. The counter (go to the page here; screenshot below) shows the bids, the click-through rate (CTR) and estimated cost per thousand impressions (CPM). The counter is moving rapidly.

You know it is fake because if you disconnect your computer from the Internet, the counter keeps ticking. A tipster pointed this out to us, after he’d done some analysis. The counter’s data is all hard-coded (download code as text); there’s only one phone for Turkey, the Nokia 6680, for example. What is odd, is how elaborate the scheme is. CPM values are set to be $8.5 + a randomly generated number, keeping ads at a nice high rate — all the better to get publishers eager to join. This is sketchy. If these sorts of randomized counters are being condoned by the industry and its insiders, we suggest people start calling companies on this; it’s misleading. We’ve requested comment from the company’s public relations firm, but have yet to hear back.

This sort of thing was bound to happen. The temptation to create the impression you are the market leader is great. EBay and Google showed the biggest marketplace wins. Mobile ad spending was only $871 million last year, but is expected to reach multi-billions in coming years. And the counter idea is a blatant copy of competitor Admob’s impressive counter. Three weeks ago, Admob raised $15 million from high-profile Silicon Valley investors Sequoia Capital and Accel Partners. Even then, we noted that companies appear to be getting carried away with their stats, and wondered aloud whether anyone is holding them accountable. Third Screen Media, for example, said on its Web site it served 175 million ads a month, after earlier telling the WSJ that it showed 350 million a month.

Here’s a copy of Millennial Media’s announcement about Decktrade. Millennial’s backing comes from Bessemer Venture Partners, Columbia Capital and Acta Wireless. The company is headed by Paul Palmieri, formerly with Verizon Wireless and Advertising.com.

(Update: Apologies for the earlier version. A switch in servers and move to a new version of Wordpress recently caused a glitch, causing a draft to be published instead of the final version.)

(Update: This morning, the company has changed its homepage, freezing the counter and saying it is only for “marketplace simulation.”)

PixSense, latest start-up to offer video compression, is hiring! — This Santa Clara start-up claims no one has been able to compress a video by 85 percent to share it via mobile phone.

It is offering such a feature to consumers and carriers. Some 90 percent of cell-phone users don’t have a set data plan, meaning they pay for bandwidth they use while sending pictures. PixSense will lower costs. It will also sell its technology to carriers, a spokesman told us. It has angel funding of $1 million and is a raising a venture round. The start-up has 30 people, and here’s the kicker: It plans to employ 150 by next year.

Veeker buys Thumbdrive, to pursue mobile video messaging — Veeker, a San Francisco company building a mobile video-message sharing service targeting young users, told GigaOM that it has acquired San Francisco-based mobile software development company ThumbJive, which also has employees in China.

Mercora, that Santa Clara radio song-sharing service, launches service for smart-phones — Mercora says its wireless music service “beat Steve Jobs to the iPhone…And we’ve beat Microsoft to the Zune.” Dubbed “M,” the service allows smart-phone users to listen to music that sits on their PCs. Further, M subscribers can share music with each other — by accessing each other’s PCs.
We wrote about Mercora here.

Piczo, another sleeper social site? — The San Francisco social networking site, which focuses on teens and photo-sharing, is boasting 17 million registered users. It has raised a total of $7 million, according to GigaOM’s Liz Gannes, who brings us an update on the relatively closed, privacy-conscious site. (We’d reported earlier only $4 million raised). Sierra Ventures and Catamount Venture are the backers.

PayPal prepares a way for users to store files — Techcrunch has the skinny on the yet-to-be released service, called DropBox, which creates a secure storage area within a user’s account. We called PayPay, and there is no intent to create a digital distribution platform of any kind. It is merely offering what most mainstream payment providers do, including a way to batch-process payments instead of settling one payment at a time, said spokeswoman Sara Bettencourt. She declined to provide more details.

Cynical blog Dead20, which has covered the valley’s Web 2.0 companies with scorn, is down — It has an error message saying “Bandwidth limit exceeded,” after the author, who has been writing in anonymity, is all but outed.

Facebook founder puts Microsoft on hold — The WSJ, in its recent story about Facebook, reported how Facebook executives told their Microsoft peers “they couldn’t do an 8 a.m. conference call because the company’s 22-year-old founder and chief executive, Harvard dropout Mark Zuckerberg, wouldn’t be awake, says a person familiar with the talks. Microsoft executives were incredulous.”

No surprise here. We, too, remember showing up for an interview at Facebook last year at 10am, and having Zuckerberg show up late. Only Facebook co-worker Matt Cohler was in the office, who told us some engineers had only just left after working through the night.

Remember Imeem, the company that lets you share your desktop contents directly with others? — It is raising money. It has also changed its business strategy. We’ll report more soon.

AdMob, a company that sells advertising on mobile devices, said it raised $3.6 million in its first round of venture funding — We reported earlier on the funding, but the SF Business Journal has the exact amount.

This story about ITU is a tragic one, and a lesson for us taxpayers in California to be vigilant about how the state deals with venture capital firms.

A few weeks back, we reported on the failure by the Southern California-based venture firm ITU to raise a new fund. The failure, we reported, was sparked in part by Harvard’s decision to pull its money from the firm.

Now a story in the LA Times tells us why Harvard took that step. ITU had suggested its portfolio companies, including three in California (the start-ups aren’t mentioned by name), give donations to political candidates the firm was friendly with, including California Controller Steve Westly. This is tragic, because by all appearances, it was an effort to manipulate Westly to be friendly to ITU, which was dependent on large pension funds where Westly was influential as a board member, and even more influential had he won the election (i.e., as governor, you have a role in picking board members for the funds). More importantly, it is state money that would be supporting ITU.

The guys at ITU, defending themselves, say they merely made suggestions that the portfolio companies make donations, and no pressure was intended. This is silly, because there was enough pressure on the companies for them to start griping about it. They even approached us about it.

The LA Times should be commended for reporting this story. The tipster who gave us the original story about ITU’s problems stayed on the phone long enough to suggest we look into “political donations” made by its portfolio companies. We sniffed around a bit, but without any further leads, we couldn’t get very far and let it drop.

But the LA Times did not make explicit, except for a brief mention at the bottom of the story, the real reason this story looks like a scandal. ITU was dependent on investors such as the huge California state pension funds (CalPERS, CalSTRs) for its money. This is significant because we, the Mercury News and others fought hard, and successfully, in 2003 for appropriate disclosure rules — including a demand that the financial performance of companies like ITU be disclosed. This helps ensure that only good-performing firms receive state money, and not mediocre ones dependent on political contacts for their money.

Disclosure of performance results may not be enough. The LA Times references to political relationships at the bottom of the story are concerning, and makes you wonder:

TU’s principals and associates have given $19,500 to Westly and $20,000 to state Treasurer Phil Angelides, who defeated Westly in the June gubernatorial primary. These donations are not in dispute.

Westly spokesman Russ Lopez said the controller has met with Brownstein privately — including meetings in New York, where Brownstein introduced the controller to other potential donors…