VentureBeat

It’s been over a year since we covered Skyrider, and for good reason: We hadn’t heard anything more since the company revealed its business plan, based around monetizing peer-to-peer networks with ads, in late 2006.

In the space of about three months, we’d reported that Skyrider raised first $8 million, then $12 million more from Sequoia Capital, Charles River Ventures and ComVentures. Hopes appeared to be high, but some recent digging suggests that the company may have run into trouble.

The basic idea behind Skyrider is that P2P sharing networks like eDonkey and Gnutella (also known by the programs that use their protocols, including Morpheus and Limewire) receive massive amounts of search traffic from people looking for files to download. But unlike Internet search, which is monetized by giants like Google, ads don’t automatically pop up on P2P searches.

Skyrider, which began life as anti-piracy firm CRight, stumbled upon a clever way to force ads into search results by posing as users with highly relevant files to share. The idea must have seemed like a good one — it’s rare that two venture fundings come as close together as they did for the company in late 2006.

But then came the silence. No news or appearances came from the company, and, tellingly, Skyrider vanished at some point from Sequoia’s list of portfolio companies. (Update: Looks like I’m incorrect, it actually is on there at this point.)

However, there’s reason to believe Skyrider hasn’t gone to the scrap-heap. Finance documents recently sent by a source to VentureBeat reveal that the company has raised $5 million more. The funding is listed as a series A-1 round, which may mean the company has gone through a restructuring of some sort.

Although contacts at the company either didn’t respond or let us know that they had moved on, we did manage to get in touch with a current investor. He asked to remain unnamed, but did tell us that the technology behind Skyrider is “incredible” and “totally wicked.”

And the idea still sounds valid, as well. Despite an apparent gradual decline in users (excluding Bittorrent), P2P networks still have millions of users. So what went wrong? Perhaps search software adapted to block the ads, or the idea was just too early. But hey, if you’ve got a better idea, let us know — could Skyrider still succeed?

Updated

SkyRider, the Mountain View start-up developing an aggressive search engine for peer-to-peer traffic, has raised another $12 million in venture capital.

The round, led by ComVentures, comes just two months after it raised $8 million (see our earlier story here)

The company also showed its hand on strategy for the first time (it had been mum on specifics). It will essentially hijack the user software accessing the peer-to-peer networks, and force its own ads very high up in the search results when a user is searching for something. An intriguing play, indeed.

The company aims to monetize popular peer-to-peer networks content just like Google monetizes the Web with ads besides search results. SkyRider’s focus on peer-to-peer is noteworthy because these P2P networks have become increasingly popular as a way to distribute and access large files such as video — a particularly sexy area right now.

The company’s platform spans across P2P platforms.

Chief executive Ed Kozel, former chief technology officer at Cisco, gave us an example of how it works.

Let’s assume someone is using the popular client Limewire to search the Gnutella file-sharing network, one of the top three global P2P networks. Assume further the person is searching for music from the Dave Matthews Band. When LiveWire begins looking for the info, SkyRider’s technology has the network route the queries to SkyRider. It then serves ads in the search results. See image here.

In this case, the ad shows the Dave Matthews Band is playing at the Vegoose series in Vegas over Halloween weekend. Note that the ad is part of the results, but is marked by capital letters. This keeps it from being considered spam, Kozel said. The ad will be listed among the top three results, and if the user clicks on the ad, a browser page opens to show them the full ad. It will be a sponsored link only, keeping to the format found on Google, Kozel said.

SkyRider is compelling because it appears to be the only company doing search inside P2P infrastructure — and it’s boasting some impressive numbers. It is processing tens of millions of search queries a day, and will use the latest capital to help it handle “a couple of hundred of millions of queries a day,” Kozel said.

Kozel said SkyRider’s technology remains its secret sauce, so would not say exactly how it attracts queries to itself (Update: Nik Cubrilovic, in comments below worth reading, reveals more about how SkyRider’s tech works). But Kozel said the technology requires no partnerships.

Beside ComVentures, other investors in the round include existing backers Sequoia Capital and Charles River Venture Partners

The company chose ComVentures because its partner, David Britts, was an investor in the SkyRider founders’ previous company, Narus.

P2P networks encounter as many searches per day as Google or Yahoo, Kozel added, suggesting there’s huge potential for advertisers to reach consumers on these networks.

Like Google does, he’s seeking to help businesses connect with consumers by letting them serve advertising through SkyRider’s platform.

According to Comscore, more than 60 percent of backbone Internet traffic and up to 90 percent of upstream traffic from users is now consumed by P2P applications, he said.

Finally, while this latest effort focuses on search and monetization, SkyRider will also be developing ways to better mine information — such as peoples’ watch behaviors and histories, and geography — to improve advertising relevance, just as Google does with its technology, he said.