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?

Controversy has swirled around digital media-focused venture capital firm Velocity Interactive Group from its beginnings last year. Now, more details about the Silicon Valley-Los Angeles firm’s saga are being reported by PEHub.

The tale of Velocity shows how unnerving change is hitting the digital media investing market. Astronomic valuations for companies like Facebook have led to many other digital media companies raising their own valuations, as PEHub’s Dan Primack describes — throwing Velocity’s original investment plans out the window.

Velocity’s story also shows how venture capital can be a cold-blooded sport. Partner Roland Van Der Meer (top left) made a surprisingly ruthless move in December to cut off his partners (at his former firm, ComVentures) at the knees, telling them to clear out their desks on the morning of a limited partners meeting where a new firm would be announced — and this, even after Van Der Meer worked with at least one of them, Michael Rolnick (bottom in image), for nine years.

Read the story yourself, because it provides insight into the sort of mentality you may sometimes have to deal with if you get involved with venture firms. I found myself in the middle of the saga at one point when I had a surreal phone call with Rolnick as it was all unfolding. As he drove in his car a couple of weeks before the December meeting, Rolnick was telling me that a partnership with a new partner, Ross Levinsohn (middle in image above, and the former News Corp. exec who had helped acquire MySpace and was now trying to form a fund to rollup media properties) was set in stone. I knew something was up when I called Levinsohn a few minutes later to confirm, and he denied anything of the sort. Things would twist and turn over ensuing weeks, and Levinsohn did agree to work with ComVentures (but with Van Der Meer, leaving out Rolnick; read Dan Primack’s story to follow it all). It was clear things were headed for trouble.

I think Primack makes the right conclusions. The Valley’s entrepreneurs have become suspicious of Van Der Meer over the last few years, as he continues to make moves that show he is difficult to trust personally (we’ve covered these events on several occasions). Van Der Meer’s response has always been that he is just doing what good business requires, and that decisiveness, even if hurts people, is part of doing business in Silicon Valley. Fair enough, then, as long as you know his approach going into a relationship: You could get thrown on the street if you don’t perform.

At the same time, though, there’s a sense that Levinsohn and his partner Miller have the skill and contacts it takes to make a good investment team but that they may not have appreciated the depth of suspicion in the valley about Van Der Meer. Now, as the firm tries to raise the money it will need to invest media properties, the LPs are asking the same questions. This will be interesting to watch.

Coincidentally, we made several calls to Levinsohn yesterday about an unrelated matter, none of which were returned. We hope to get an update today.

Update: See comment below, which concerns Jeb Miller, another ComVentures partner cut off by Van Der Meer. I’ve never met Miller, and forgot, or was never aware of, his move to ComVentures from WorldView. I haven’t confirmed, nor do I endorse, the contents of the comment below, but it is true that WorldView is another firm that has had personal problems in its ranks (see my coverage here).

This may well be the year that the leaders in the mobile advertising space emerge, and startup Ad Infuse has taken on another $12 million to try to ensure its place at the table.

As we reported in an October story, Ad Infuse is distinguished by its focus on targeted user data. Stats like age, gender and geographical location are used to determine the best ad to serve to any particular mobile user, a method the company says will greatly boost CPMs (the amount paid per thousand views of an ad).

That data had better prove to be a meaningful differentiator for Ad Infuse as the mobile ad space heats up. AdMob, which experienced excellent growth in 2007, gets by with barely any targeting, but has served up stunningly high volumes — over 15 billion impressions to date, according to the counter on its webpage.

Ad Infuse can’t compare in terms of raw numbers, but hopes it can sell highly targeted audiences to large advertisers like Unilever, which teamed up with the company to run ads for Axe Body Spray to young males late last year. Part of the latest round of funding will go to bulking up Ad Infuse’s sales team, who will help foster more such partnerships.

CEO Brian Cowley gave us some statistics during an interview: Ad Infuse roughly doubled the number of partnerships and advertisers it had during the fourth quarter of last year, as well as boosting revenues 325 percent and doubling average CPMs to $20, and appears to be continuing its growth in the current quarter.

Even with a positive growth story, the future is still looking uncertain for Ad Infuse — as well as AdMob, AOL Third Screen Media, Google, and newer startups like Smaato, which just took a $3.5 million round of its own. However, the dust should begin to clear by the end of this year, and let us see who the likely survivors are.

The $12 million funding was provided by SoftBank Capital, and previous investors ComVentures (now Velocity Interactive Group) and Storm Ventures also participated. Ad Infuse has taken a total of $17.5 million to date, including its seed round.

updated

We’re hearing Ross Levinsohn, the former News Corp. dealmaker considered responsible for the decision by that company to acquire MySpace in its relatively early days, may team up with ComVentures, a somewhat controversial Silicon Valley venture capital firm, to help invest in early stage investments.

Levinsohn made news recently when he launched Velocity Investment Group, together with Jonathan Miller, a former exec at AOL. (See our coverage) The two want to use the firm to start “rolling up” the multitude of Internet media companies that have sprouted in recent years, companies enabled by an explosion of online advertising. By consolidating these companies into larger brands, the idea is that the fusions will have greater value.

According to two sources, Levinsohn’s relationship, if a deal is reached, with ComVentures on the early-stage side will be akin to the relationship he has with General Atlantic for later stage investments. He helped ComVentures with its $11.5 million investment in Fuse+Media in India, announced in March. Levinsohn is based in Los Angeles, but ComVentures gives him a platform in Silicon Valley, and just as importantly, gives ComVentures contacts to Hollywood and other media industry executives. Levinsohn already sites on the board of file storage company Fabrik, a company backed ComVentures, and is likely to join the boards of two other ComVentures companies. ComVentures drew on the help of Levinsohn for one of its music-oriented virtual world companies, Doppelganger, for introductions to Hollywood agents for musicians and bands.

We’re told by well-placed sources that ComVentures will try to formalize the agreement sometime over the next couple of weeks, around the time it holds a partnership meeting with its investors. ComVentures said it didn’t want to comment at this time. Levinsohn, however, seemed more distanced when we reached him for comment. He said he helped ComVentures make investments over the last ten months while he was setting up his own firm, but said there isn’t any formal tie with ComVentures in the works. He added that he has relationships with multiple valley venture capital firms. Others, meanwhile, have told us he is reluctant to jump the gun on a formal announcement. Could it be that Levinsohn is wary of being too closely associated with the fund, where partner Roland Van Der Meer has been a bit of a bull in a china shop lately (see Sequoia standoff here, and Filmloop/other issues here)?

Doppelganger, a virtual world site, has just expanded its offering aimed at teenagers and young adults– with an emphasis on music, dance, and chilling out at bars.

The new site, called vSide, finds itself competing against a number of other virtual worlds, from Second Life, IMVU and Habbo Hotel. While it will have to fight for an audience, the market is hot for these companies if they are successful. Disney recently acquired another site, Club Penguin, for $700 million — that one based on a happy world of penguin avatars for kids.

Doppelganger, of San Francisco, hasn’t experienced much buzz since the launch of its initial test version in February. It has yet to register on the radar of traffic measurement company, Hitwise, for example (see chart below for the top virtual/role playing Web sites for July 2007). However, Doppelganger’s proposition in vSide — a sort of hipper, music/video version of Second Life — makes sense. What better way to feel cool than to hang and chat with friends while listening or dancing to music in a virtual world?

Doppelganger also raises $11 million in new financing, bringing its total to $25 million. (See our earlier coverage here). The latest infusion was led by ComVentures, and included existing backers DFJ, Draper Richards, Trident Capital, KPG Ventures and Greycroft Partners

Virtual worlds are a bit of a mystery. I understand the appeal online role playing games like World of Warcraft — where there are missions to do and bad guys to kill. However, Second Life, where, to no particular end, you can walk around, hire prostitutes and barrage other players with flying penises, has always struck me as bizarre. Yet there are apparently millions of people actively using that site.

Doppelganger’s vSide falls somewhere in between the two. Like in any other virtual world, you create and customize an avatar — your digital doppelganger — and can then meet up with friends, go to clubs and so on. In an interesting touch, the site has included a “murder mystery” mini-game. To solve the murder, you have to team up with other users to investigate people and evidence. As you advance, you adorn rare clothing, which you must inspect for clues to open up new parts of the world. Solving the mystery enhances your virtual status, and gives you access to VIP sections of the club.

There are also stores where you can spend real money to buy your avatar designer clothes (Jay-Z’s Roc-a-Wear is a partner). Along with in-game billboards and product placement, selling virtual goods is the way the company aims to make money.

Doppelganger is developing relationships with a number of celebrities and musicians,, most notably Tyra Banks and the successful indie record label, Downtown Records. The virtual neighborhoods are flanked by virtual apartments for celebrities and bands. You can visit these apartments as well as create your own — where you can throw dance parties and control the music.

Since February, Doppelganger claims to have since garnered a couple hundred thousand users. The company won’t say how many of these are active, but notes that those users log an average of 11 hours per month, and 77 minutes per session. Its goal is to become the “next generation of social entertainment.” As Dean Takahashi points out in today’s Merc, “there is so much competition for the leisure time of young people that it will be hard to rise above the noise.” And, as these Hitwise numbers show, Doppelganger will have to rise a lot:

OnStor, a Campbell, Calif. company offering data storage for large companies, is the latest hoping to exploit a turn in fortunes in this once-dead sector. It has just gotten $27 million in more funding from venture capitalists who now have pumped $105 million into the seven-year-old company.

Storage companies are once again filing to public, despite very questionable fundamentals for many of them — but their private investors see a window of opportunity to finally get the companies off their hands. OnStor revealed its revenue growth to VentureBeat (see below), and it’s impressive. However it is still not profitable, it says, something it says will change over the next year.

Q1 2006 = $743,925 Q1 2007 = $3,778,911
Q2 2006 = $952,008 Q2 2007 = $4,322,575

Let’s rewind to 2002. This sector was filled with “walking dead” companies in this sector. After the bubble burst, Internet companies were reeling, the last thing peopled needed was more storage. Or if they did, they didn’t need 165 storage start-ups supplying it. That’s the number of companies venture capitalists funded in the preceding five years, as we cited at the time (sorry, article is long since buried in the Mercury News archives). VCs had pumped in about $2 billion into these companies amid a frantic lemming rush, and now if those companies weren’t dying, they were slashing their workforces in a desperate will to survive.

The need for storage always remained. Big corporations need help storing and securing the vast amounts of data they compile from managing business processes, from supply chains and inventory to customer relations.

Back to 2007. The public markets are doing well (or at least were doing well, until the shocks of recent days), and some storage companies are going public after hunkering down for years. And yet, some of the look worrying still. Isilon Systems, a similar company to OnStor, which went public in last year after $70 million in backing, has suffered recently, announcing greater than expected losses..

OnStor says it has 300 customers. Like other older start-ups, it’s discovering new sales pitches for new times. For OnStor, it’s the “greening of the data center,” in other words, making a company’s data infrastructure more efficient and thereby using less electricity helping save the environment. It does this better than big incumbents like NEC and Netapp, it says.

OnStor says its “storage arrays” offer a 95 percent power savings, 90 percent fewer devices to manage and 90 space savings (!). We haven’t verified this, but it’s a nice pitch, huh, given that many large corporations are issuing “green” mandates to do their part in fighting global warming.

The funding comes from Sand Hill Capital and existing investors Foundation Capital, Mayfield Fund, ComVentures, and Worldview Technology Partners. They’ve called this a “mezzanine” round, a term used as a clear signal to the market that this is the last round before going public.

The Taneja Group, a third party research group, is about to finish a white paper for OnStor about the greening of the data center.” It’s due out any day, and we’ll be interested in seeing what it says.

Zantaz, an email archiving software firm, saw a $375 million happy ending this week, when it was purchased by Autonomy, a company that gives major companies a search engine for their Web sites. The details are here.

However, Zantaz, of Pleasanton, Calif. has one of those depressing Silicon Valley back-stories too, where despite the founder’s hard work, he ends up with almost nothing. It includes ComVentures, a valley venture capital firm which has somehow managed to get in a legal or strategic standoff with a surprising number of entrepreneurs over the years.

Some early investors and shareholders are not at all happy about the sale, because their ownership stakes were significantly watered down by what they say were aggressive tactics led by ComVentures. The reportedly terminally ill founder, William Bankert, will end up with only $650,000 or so from the sale. Former lawyer for the company, Gerry Niesar, has been fighting since 2004, accusing the company’s board of directors, including ComVentures partner Roland van der Meer, of rigging a fifth round of funding in 2002 to dilute common stockholders (including Niesar). According to Niesar, the board waited to take additional funding until the company was nearly out of cash: This led to a lower valuation and dilution of early stockholders like himself when the round closed that August. In fact, Bankert sold some of his stake in 2001, based on his allegedly misled understanding of the company’s future.

As usual in these sorts of cases, the details are complex. For the curious, here are just a few of the documents.

1. Series E dilution from 2002 financials
2. Memo comparing early 2000 with early 2002
3. Gary’s notes
4. Memo to Zantaz litigation committee
5. Gerry’s declaration
6. Ralph Mele Email
7.Declaration given June 2005

Comventures partner Roland van der Meer was named as one of the defendants. We’ve requested for comment from Van der Meer and will update accordingly. The issue has yet to be resolved in court, but Niesar now tells us he and others are considering filing a class action suit against the directors, now that the Autonomy purchase has gone through.

Incidentally, Zantaz has lately been doing well because of the legal system. In the fall of 2002, it caught a wave it is still riding today. The US government passed the Sarbanes-Oxley act requiring, among other things, public companies to keep better records of information such as employee email. Although Zantaz was founded in 1996, it first broke even around this time. It continues to be in demand: US federal rules of civil procedure also require companies to track their archived information closely, and recently shortened one filing deadline for companies to 90 days.

Zantaz customers include nine of the world’s top 10 law firms as well as JPMorgan, Deutsche Bank, Philip Morris and BAE. The company $100m in revenues and broke even last year.

Fabrik, a company that offer online storage and easy sharing of big files, has just closed a $24.9 million deal and added Ross Levinsohn, former President of Fox Interactive Media, to the board.

Its financing came primarily from 3i, with a small chunk from ComVentures.

As noted before, Fabrik competes in an increasingly crowded market, though their website reveals an effort to create a youthful brand (compare their site, for example, to YouSendIt, Box.net, and Omnidrive). Fabrik is now going after the consumer market, even as players like YouSendIt are going the other way, targeting professionals. Other related players include SoonR, Avvenu (see coverage here), and still more are listed here in Terence Pua’s piece about why storage will never quite be free.

Levinsohn, you’ll recall, spearheaded News Corporation’s plunge into the online world, overseeing, among other things, the development of Fox.com and the acquisition of MySpace, and his joining the board is indicative of Fabrik’s intention to push past the small business market and target consumers.

Also, unlike these other companies, Fabrik has expanded into hardware. Last February, they dropped $43M to buy SimpleTech, a major provider of external storage devices, (hard-drives, USB flash drives, etc). Until then, it had partnered with Seagate (makers of Maxtor). With hardware, it has also added Western Digital to its competition. Fabrik’s intention is to be the self-described “Apple of storage,” offering a line of hardware and software products whose components work best when used together.

Fabrik’s CEO Mike Cordano tells us his company was profitable before the infusion, but that it will allow them to expand their international efforts and diversify their offerings. What types of offerings these would be remains a secret for now.

The company told us late last year it had already raised $12 million in financing, and close to 90 percent of that is still in the bank, much of it coming from ComVentures. It has now raised a significant $36.9 million.