VentureBeat

What were they thinking?

Investors valued the new search engine company Cuil at a stratospheric level of $200 million post-money in December, during the company’s second round of funding before the search engine launched.

The company, which hyped itself leading up to its launch two months ago, among other things boasting of a larger index of pages than Google, was met with very critical reviews. There’s nothing really compelling about Cuil. It looks destined to struggle. It’s VP of product Louis Monier just resigned.

The valuation — something that is arrived at during negotiations between investors and a company — raises serious questions about the financial acumen of the company’s lead investor, Madrone Capital Partners, which set the price. It is irresponsibly high, considering any standard metric used by investors. Cuil’s founders included two former Google employees, Anna Patterson and Russell Power, who had helped build Google’s large index. This, while impressive, says nothing about their ability to build a real company themselves. And after launch, people quickly learned that Google’s index is in fact possibly larger than Cuil’s, and was clearly finding search results not found by Cuil’s.

The investors, led by Madrone, declined to respond to requests for comment. Other investors, including Greylock Partners and Tugboat Ventures, also chose not to comment. By deciding to invest $25 million into the company, the $200 million valuation meant investors owned only an eighth of the company. (It should be noted that Greylock and Tugboat invested $8.25 million at a post valuation of $32 million in Cuil’s first round in April, 2007.) The folks at PE Data Center did the analysis of the venture round here based on public documents.

Typically investors put in much less money and claim a far greater percentage ownership. In another case recently, Silicon Valley semantic search engine Powerset commanded a valuation of $40.5 million in its first round, which was considered very high at the time. It failed to meet investor expectations, and sold for $100 million to Microsoft, giving investors somewhat more than a two-fold return. But Cuil doesn’t offer the same semantic technology as Powerset, so it’s difficult to see how it would get more than a $100 million acquisition offer anytime soon. By valuing Cuil at $200M, it makes it extremely difficult for investors to get a return.

So who exactly are the people behind Madrone, which made such a questionable bet? Turns out, Madrone manages investments for the heirs of Wal-Mart founder Sam Walton. Madrone’s Greg Penner (pictured left), who is on the board of Cuil, is married to Carrie Walton, Walton’s granddaughter. He’s also on Wal-Mart’s board. Penner notably is also a board member of Baidu, a Chinese search engine which is doing quite well in China.

I asked the company for comment. Vince Sollitto, VP of marketing, said in a prepared statement: “Our financing was a very competitive deal. We had extensive interest from multiple investors, including even higher valuation offers. We’re very pleased with the partners we have at Cuil and the board we have assembled.”

I also asked how the company did since launch. He said initial traffic vastly exceeded expectations, and the company is “very comfortable where we are now, and focused on moving forward.” He wouldn’t comment on the traffic to the site specifically.

Compete shows traffic for Cuil falling in August after its launch in July.

[Composite image Cuil's logo via ABC News.]

Here’s the latest action:

Scrabulous returns as Wordscraper — The popular Facebook application was redesigned and relaunched less than 48 hours after it was taken down due to a potential legal tussle with Scrabble-maker Hasbro.

Dell tests digital music player — The computer maker stopped selling players in 2006 due to disappointing sales, but it has a new offering that could go on sale as early as September.

Job site Monster acquires search company Trovix for $72.5 million in cash — Monster says the acquisition should help it deliver more relevant search results for employers and job seekers. The Mountain View, Calif., Trovix, had raised $18.25 million in funding from 3i Group, Granite Ventures and U.S. Venture Partners.

Forrester Research buys Jupiter Research for $23M — Forrester plans to incorporate Jupiter’s team into its marketing and strategy division.

FBI warns of new Storm worm — The Storm worm is a dangerous botnet, so if you get an email entitled “FBI vs. Facebook,” don’t click on the link.

Mobile-chip maker ARM’s new licensee likely to be Apple — Apple’s acquisition of PA Semi earlier this year makes the deal seem more likely. As an ARM licensee, Apple would be able to tinker with ARM’s architecture and processor cores.

Intel working on third-generation Classmate PC — The latest version of the low-cost laptop, which is aimed at schoolchildren, could be available next month.

Omidyar Network backs nonprofit Endeavor – The VC firm from eBay founded Pierre Omidyar has committed up to $10 million to Endeavor, an organization that supports entrepreneurs focused on emerging markets

Activision Blizzard lets go of Bourne game license – The newly-merged game company dumped the license just a month after the release of the first game based on the popular film franchise.

Are communication companies the new OPEC? — The answer is yes, argues Columbia Prof. Tim Wu, because bandwidth is becoming a precious commodity.

Facebook chooses Intel servers – The Xeon 5400 processor-based servers will cover the social networking site’s hardware and software needs.

Leading broadband provider offering stake to Western investors — International cable operator Liberty is one of the contenders for a 20 to 25 percent stake in Akado.

Are blogs to blame for Cuil backlash? — The harsh reaction was caused in large part by the tech media’s over-the-top hype of the search engine’s launch, Sarah Lacy says. She makes a strong case, but loses points for not including a Cuil-related pun her headline. (The company’s name is pronounced “cool,” so the comic possibilities are endless.)

China to limit web access during the Olympic games — Apparently, the ability to access an uncensored version of the Internet wasn’t included in China’s promises to allow the foreign news media to “report freely” on the games.

YouTube’s Steve Grove weighs-in on voice-to-text –Grove offers some interesting examples of how metadata has always been important on Youtube, once you get past his explanation of YouTube’s new text-search feature for political videos (which was already announced).

After not much fanfare but plenty of anticipation, a new search engine called Cuil has launched. In spite of all the noise about the founders’ pedigree and the company’s index size, the only thing that makes a search engine tick is the relevance of its results across several dimensions. I spent an hour testing the service last night and found it has made an ambitious and interesting start out of the gate.

When evaluating a search engine, several interesting factors come into play. Does it do a good job with obscure terms? Will it satisfy the average user for popular terms such as “Las Vegas”? Is it susceptible to spammers? (No prizes for guessing: The answer is almost always a resounding yes.) Overall, I’ll try to focus this review on features that are interesting as well things that are blatantly broken in this early version.

(Disclosure: I work at Kosmix and manage the Kosmix RightHealth product. Kosmix is focused on a product that is very different from a general purpose web search engine, and isn’t intended as a direct Google — or Cuil — competitor. Also, these opinions are my own and do not represent my employer.)

First, I tried a popular query: “Las Vegas”. The point of this test is to make sure the search engine doesn’t make spectacular errors on terms for which plenty of web pages are available. So I pulled up Cuil’s Las Vegas page. Most of the results returned are reasonable, and if you use Google as the gold standard in terms of result relevancy, the first result, LasVegas.com, is on the money.

The one thing that Cuil misses sorely is any recognition of travel or local search intent. It fails to understand that a user searching for “Las Vegas” might be interested in driving or flying there. Google, on the other hand, will show you a handy map with a zip code box for driving directions.

Next, I tried a very obscure term: “Apocrine Hidrocystoma of the Eyelid”. The point of this test is to ensure that the search engine can serve results for the potentially infinite set of queries that can be thrown at it. After all, search terms similar to the one above are tried by users every day and are the source of Google’s prowess in relevance. Cuil’s results are quite reasonable.

Finally, we tried a term that is notoriously susceptible to spam: “Cialis”. Cialis is a treatment for erectile dysfunction and there are plenty of folks online trying to sell it to you and me on the cheap. Cuil fails to protect me from these guys. It has been speculated that Google prefers editorial content - such as that produced on Wikipedia - over commercial content, and it shows clear as day in this query. If you want to purchase Cialis using Google, you’ll probably have to rely on the ads over the search results.

Apart from the relevance issues, Cuil has an interesting take on user interface. Results are presented in a three-column grid format. The engine also tries to associate an image with the result. Sometimes, the image is the site’s logo — presumably, the presence of images is supposed to anchor the page and make it easy to read and scan. More interestingly, Cuil tries to present exploratory terms in the right column under a box titled “Explore by Category.” The idea is to allow users to make connections to the query term at hand in an easy-to-read format. While the feature is useful, I found the accordion menu treatment to be jarring and unnecessary.

There is another thing missing that’s a little more subtle. Google Universal Search, which launched last year, tries to blend search results from Image Search, Blog Search, Local Search, News Search as well as general Web search. For example, given the recent salmonella outbreak, a search for “salmonella” on Google turns up relevant news results. Similarly, a search for “pizza” will consistently return a map with several local pizza delivery services and their phone numbers. Cuil fails to do any of these things but can be forgiven for the simple fact that plain old web search is hard enough to pull off right. Blended/universal search can follow.

Overall, I recognize that any real comparison with Live Search or Google Universal Search is unfair. However, the point of this review is to highlight the fact that Cuil does a very reasonable job in this nascent stage. While it is nowhere near replacing any of the major search engines as a default option, I hope that it will become a worthy underdog over the next two years or so.

Even though I try to approach every startup with an open mind, there are few companies more likely to provoke knee-jerk skepticism than those claiming to compete head-to-head with Google in Web search. But a new company called Cuil looks like it could actually give Google some real competition.

For one thing, the executives behind Menlo Park, Calif.-based Cuil (pronounced “cool,” and previously spelled “Cuill”) should have a good idea of what’s needed to take on the search giant. Cofounders Anna Patterson and Russell Power both helped create Google’s large search index TeraGoogle, while the third cofounder, Tom Costello, (who is also the company’s chief executive and Patterson’s husband) worked on the WebFountain analytics engine at IBM and as a researcher at Stanford. Their vice president of products, Louis Monier, has worked at Google and eBay, and is best known for designing pioneering search engine AltaVista.

Until now, Cuil has been getting attention for the pedigree of its team and for raising $33 million from Madrone Capital Partners, Tugboat Ventures and Greylock Partners. The company has been secretive about its product, but Patterson recently gave me a sneak peek of the Cuil search engine, which is launching tonight.

The biggest difference between Cuil and competitors like Google is the size of its index. At launch, Cuil’s index includes 120 billion Web pages, making it three times the size of Google’s, Patterson says. (This may be a bit confusing, since Google just announced that it has found 1 trillion unique URLs on the Web. The distinction is that Google doesn’t include all those pages in its index.) Bigger is better, and not just for the obvious reason that Cuil can return more results for most searches. That larger index also provides Cuil with more data to determine which results are most relevant. Patterson says Cuil can index more pages for a fraction of the normal cost because each query is directed to a specialized, subject-specific machine and doesn’t require a search of the full index.

Cuil has some other cool features. Its ranking is based less on popularity (which is commonly measured by links, although Microsoft researchers just presented a paper on BrowseRank, a new ranking method based on the number and duration of user visits), and more on content. For example, Cuil would understand that someone performing a search for “baby,” “aspirin” and “fever” is probably looking for medical advice, and results with related medical terms would be ranked higher than a gossip page about Britney Spears’ baby. Cuil also uses a tab-style layout to make it easier to break down your search into related searches and smaller subjects.

A smart approach. But with Google’s market dominance, will anyone use it? Well, Cuil probably won’t become your top choice for a Web search right away, but Patterson notes that many users have backup search engines that they visit when Google’s results are unsatisfactory. People may give Cuil a chance as their Google backup, and if the results are consistently better, usage will rise. As with other search companies, Cuil’s business model is based primarily on advertising, although it’s launching without ads.

Cuil didn’t make a demo version available to me, so I haven’t had a chance to really kick the tires. I’m certainly looking forward to giving it a try over the next few days. If you give Cuil a shot, let me know what you think in the comments.