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updated
Software giant Microsoft reportedly spent $500 million to acquire Danger, the company that developed software to power the youngster-popular Sidekick.

The figure, while not officially announced, was dug up in reporting by GigaOm’s Om Malik. We haven’t confirmed that exact figure, but we do have enough info that suggests investors made a very good return.

The acquisition comes after Danger swallowed some $225 million from investors, Om says, though I think that some of that may have been debt because we’ve been told the equity investment was less than that (see update below for exact numbers, which suggests the investment was indeed lower). The company’s chief executive Hank Nothhaft was insisting yesterday that the outcome was a “very, very strong exit” for its backers, and it probably was. The company’s valuation crept up steadily from 2000 from about $27 million to $190 million last year, according to our source. So investors pumping in money at these levels all appear to have done well, even the earliest ones who had their money locked up for eight years (we mentioned the investors in our story yesterday; Mobius, though, was the earliest backer).

More interestingly, however, is Om’s thought on why Microsoft is making the move — it wants to “pull an Xbox” on its mobile phone business. Not only does it want to extend beyond the business world and entice consumers, it also wants to use Danger’s software-as-a-service technology to offer “Microsoft Services” such as search, mail and instant messaging on the Danger platform, using it to compete with Google Android.

Like Om, we believe Microsoft should open up Danger’s platform in a more radical effort to make it attractive to developers. In the mobile world, it still has a lot less to lose than it does with an open strategy in the desktop software business, and in fact, it’s probably the only way it will win at this stage.

Update: Danger got in touch and said the company raised $144 million in equity (as stated in the official S-1). In addition, there was some “minimal debt financing” for ongoing operations, the company said, but it wasn’t specific.

Microsoft Corp has agreed to acquire Danger, a Silicon Valley company that makes the software for the Sidekick and other mobile devices, for an undisclosed amount.

Danger has worked away for ten years on its device software, and recently filed for an IPO, which we termed as risky (see our piece The Danger-ous IPO), because Danger has not been as open as trends would suggest it should be, and it’s difficult to see how it could really thrive on its own. It is still losing money. The IPO route has become even more risky, given the downturn in the market, and also because household budgets (upon which Danger relies) might continue to tighten.

The acquisition is somewhat surprising because because Danger has operated a platform independent of Microsoft’s Windows Mobile. However, Microsoft said that Danger’s youthful audience and popular entertainment offerings make it attractive. Microsoft is also feeling pressure from the iPhone’s raging success and from Google’s emerging Android project.

Danger’s software offers HTML Web browsing, instant messaging, games, multimedia, social networking, Web e-mail and personal information management applications. Microsoft said wants to combine these services with Microsoft’s technologies, “including MSN, Xbox, Zune, Windows Live and Windows Mobile,” but it was vague about exactly how it plans to do so.

From Microsoft’s statement:

“The addition of Danger serves as a perfect complement to our existing software and services, and also strengthens our dedication to improving mobile experiences centered around individuals and what they like.”

The Palo Alto, Calif.-based company provides services that allow people to keep in touch, stay organized and keep informed while on the go through real-time mobile messaging, social networking services and other applications ― all blended together on a single phone that is intuitive and customizable.

“Danger continues to provide an effortless and fun mobile experience for consumers,” said Henry R. Nothhaft, chairman and CEO of Danger Inc. “Now by combining our uncompromised application software and powerful back-end service with Microsoft, we can expand our innovative service offerings even further and take mobility to a new level.”

Danger was previously backed by $134 million, coming from players like Redpoint Ventures, Mobius VC and T-Mobile Venture Fund, Adams Street Partners, Deutsche Telekom, Diamondhead Ventures, inOvate Communications Group, Institutional Venture Partners, Meritech Capital Partners, Orange Ventures, Softbank Capital Partners and VSP Capital.

Danger, the company that builds software for the “Sidekick” and other mobile devices, has filed an initial public offering after years waiting hungrily for three years to make such a move.

However, the Palo Alto, Calif., company lives under a big shadow emanating from Mountain View’s Google. That’s where one of Danger’s co-founders, Andy Rubin, is now working on a much bigger vision than Danger’s: A cross-platform mobile operating system called Android that lets you access your data from any phone or device (see our coverage ).
Danger plans to raise up to $100 million of stock.

Like RIM’s Blackberry, Danger’s device is popular because it offers a converged client-server application for carriers like T-Mobile and Sprint, giving consumers an experience few others have matched. While RIM lets the professional, email-focused crowd sync emails with their corporate servers, Danger has hit it off with the young, IM-focused crowd. RIM and Danger have this in common: If you break or lose your device, the data you carried on it is backed up on the wireless network, and its there to access again with your replacement device.

Danger did open up its platform for other developers to produce applications for it, so it was early to join the trend toward open platforms popular today. However, Danger’s weakness is that it is closed in other ways. It limits the range of existing popular software and applications you can access, and you can only access them with devices Danger chooses. It is popular among young people who haven’t invested years into popular programs such as Outlook or Exchange. While Google’s Android is a vision that has yet to be realized, and may not get anywhere, it represents a more radically open vision. Then there’s the Palm and the iPhone, devices that can be synced with your PC, and they are devices on platforms that are moving toward the wireless syncing model offered by Danger and RIM — especially in the case of the iPhone. Is it only a matter of time before Danger gets squeezed by such competition?

A year ago, the company raised $12.3 million, much of that coming from Sharp. (Sharp’s device using Danger is called the “Hiptop” while T-Mobile’s is called the “Sidekick.”

Danger was previously backed by $134 million, coming from players like Redpoint Ventures, Mobius VC and T-Mobile Venture Fund, Adams Street Partners, Deutsche Telekom, Diamondhead Ventures, inOvate Communications Group, Institutional Venture Partners, Meritech Capital Partners, Orange Ventures, Softbank Capital Partners and VSP Capital.

The company is still not profitable. It lost a net $12.4 million for the year ending Sept. 30, compared to a loss of $6.6 million the previous year. That’s what concerns us. With so much funding, and so much time to have worked on its project, the company should be in the black, and the IPO comes when other aggressive players aren’t standing still.

updated

San Francisco start-up Tiny Pictures allows you to take and send photos to your friends’ phones. The photos can be shared almost instantly and with groups of friends, who can then comment.

The company’s product, named Radar, will get a boost tomorrow, when Danger, which powers the Sidekick mobile device, will announce Radar’s software is available to be downloaded via a user’s carrier. The first carrier, Suncom Wireless, will likely be announced tomorrow. The two companies plan to announce others.

We haven’t written much about Tiny. It received $2.7 million from Silicon Valley venture firm Mohr Davidow Ventures in March 2006. It is one of a handful of companies that automate the photo-sharing process. All you do is take the photo, hit another button to create a message (where you can write in a subject line if you want), and then hit send. It then goes to your chosen group of friends, where they can comment. It also now does videos.

An advantage of being installed on the Danger device is that the user can remain notified in real-time when new photos or videos have arrived or been commented on. Previously, when used on a regular phone, a user would have to switch over to the Radar application.

KyteTV, which is offering real-time transmission of photos over Java-enabled phones, can be considered a competitor — when it launches.

The latest roundup of the action happening in Silicon Valley:

First evidence of YouTube wealth — What do you do with your money, when you get it? One way is to spend $20 million to buy Andre Agassi’s Tiburon estate. That’s what Stuart Peterson, of Artis Capital Management, an investor in YouTube, did, as PE Week’s Alex Haislip reports. Or you can invest it into night clubs, as some Web entrepreneurs have done.

Google Answers shuts down, while Yahoo Answers booms — This is one more confirmation that Google does best with automation. It started its answering service before Yahoo did, yet was blown away by Yahoo. Google is not adept at the messy business of getting humans involved. Yahoo claims 60 million unique users of Yahoo Answers. It just signed a deal with Answers.com, too. This is a rare victory for Yahoo, and should encourage it to stay focused on its relative advantage at implementing “community”-oriented projects.

Allow comments anywhere on your site — There are some places on blogs or web sites where comments aren’t enabled by the site’s software. So Lev Walkin, a Cisco Security Engineer out of Santa Clara, has come up with a way to let you place them pretty much anywhere, called JS-Kit (via Techcrunch).

Will U.S. Supreme Court brake global warming action? — The future of many clean-tech start-ups here in Silicon Valley depends in part on Washington. The U.S. Supreme Court is deciding whether California can move ahead with strict pollution controls. In European, meanwhile, the opposite is happening. Brussels is forcing stricter controls on member states, rather than braking.

Danger raises $10.3 million from Sharp –This deal makes sense, because Sharp is building a Danger “hiptop” device, similar to the one distributed by T-Mobile, to run Danger’s software. Also, in case you missed it, see the update on our recent snarky post about Danger and its IPO. Hank Nothhaft took exception, and we clarified some facts. He says the company’s valuation has increased, which is a good sign.

Fuddy U.S. companies on London’s AIM — Now the Brits are suddenly asking why the U.S. companies going public on the London alternative stock market AIM are doing so poorly. Two thirds of them are losing money for investors. Could the reason be that the only reason U.S. companies listing on AIM is because 1) they couldn’t do it in the U.S., or 2) they couldn’t raise money from private equity investors (or venture capitalists) at a time when it is very easy to raise money?

Presto launches the photo service for elderly or tech-phobic — We wrote about Silicon Valley company Presto’s product a while back. Presto has $10M from venture firm Kleiner Perkins and others.

Updated again

It’s dangerous to predict your IPO. Hank Nothhaft, chief executive of Danger, the Palo Alto company providing the software for the T-Mobile Sidekick, said confidently back in 2004 that Danger had raised its last round of venture capital. An IPO was in the cards for 2005, he said.

But that’s history. Danger has just raised $10.3 million more in funding. It plans to top it off for a total new injection of $12.3 million fifth round of capital, according to a regulatory filing — and it comes at a time of increasing competition.

Redpoint Ventures, Mobius and T-Mobile Venture Fund were among the backers. (Update: We’ve heard from the company, and turns out the investors mentioned are incorrect. This is more likely money from a strategic investor; we’ll be confirming this and other details about the amount — which may also be wrong — next week).

The company had already raised $114 $134 million. We requested comment early this morning, but still haven’t heard back from the company. Increasingly the software it provides (it doesn’t provide the hardware) appears headed toward commodity status.

Berggi, a Houston start-up, is just the latest to try to “make dumb phones smart,” having raised $3 million from investors like Adara Venture Partners, to offer a download that bundles email, IM and texting capabilities, at $9.99 per extra month, according to GigaOM. (With Berggi, your phone needs to be data-enabled. It doesn’t work over Verizon or Nextel networks.)

You could argue that the device that goes with Danger’s software (called the “hiptop” by Sharp, and the “sidekick” by T-Mobile) is unique, but the effective bundle of services its offering is no longer as unique as it was back to years ago.

Update II: We’ve since talked with Hank Notthaft, and clarified a few things.
–He maintains that he never set a timeline for the IPO. We didn’t say he did, but did say he said in 2004 that it was an option for 2005. He says we over-interpreted that earlier conversation.
–The company raised $10.3 million from an undisclosed company that is a Danger customer, and thus this is not a VC round — and so Hank is still living by his word in 2004 that he wouldn’t raise another VC round. The $12.3 million total number referred to above includes $2 million in extra stock the company has allocated for various deals Danger signs; partners often request a portion of payment in stock, he said.
–The company is experiencing considerable demand, so much that it is hiring engineers aggressively, which is why it keeps opening more offices, most recently in Mass. and Atlanta. While the company is not yet profitable, it will be shortly, Hank said. “We’re not declaring victory, but we’re certainly happy with the way things are going,” he said.
–As for our Berggi comment and the threat of commoditization, Hank disagreed. He said Danger’s converged client-server application is unique. Danger and RIM are the only two selling such a package to carriers. Even Danger and RIM are different, he said. Danger serves a more youthful, more IM-focused clientele, while RIM serves a more professional, email-focused crowd, he said.
–He said the company’s valuation increased with the latest investment.