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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.]

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.

Google is dominating the search business. New numbers from Hitwise suggest Google controlled over 67 percent of all U.S. searches in March — its highest number yet. That apparently isn’t stopping some big time investments in field.

Search start-up Cuill (yes, as the title suggests, it’s pronounced “cool”) has secured a large second of equity financing. The company is currently in stealth mode and little is known about it. On its bare-boned site, the company does promise to be “pioneering a new approach to search.”

There is also an about page for its web crawler bot, which it has named Twiceler.

The company certainly has the right pedigree. Its founder and chief executive, Tom Costello, formerly worked at IBM where he developed the WebFountain Internet analytics engine to survey unstructured data on the web. Prior to that, he created the late 1990s search engine Xift. The two other founders, Anna Patterson (who also serves as president) and Russell Power, both previously worked at Google where they were instrumental in TeraGoogle, the large search index.

The rest of the team is sprinkled with alumni of Google, IBM, eBay, Alta Vista, Xerox PARC, the Internet Archive and Stanford University.

This latest $25 million round was led by Madrone Capital Partners. The Menlo Park, CA-based company previously secured an $8 million round from Tugboat Ventures and Greylock Partners.

We previously covered the service here and here.

Investments in clean-burning combustion engines are picking up, as VCs bet that batteries and exotic fuels like hydrogen won’t be the end of the story for powering automobiles.

The latest is Achates Power, a San Diego, Calif. startup working on a clean diesel. Although details are thin, the company’s website promises to create “new benchmarks in fuel economy and power density.”

Constructing a new type of engine is a risky bet, relying not only on the ability of a small team of engineers to quickly work out all the kinks, but also on a market that has changed little in decades to adopt a totally new type of equipment.

However, diesel engines have a number of advantages over spark-ignition engines, the kind typically used in American passenger vehicles. Those include a greater efficiency, more torque and lower emissions of some gases, including CO2.

A design that tackled the remaining problems — including higher weight and the toxic soot diesel engines tend to produce — would have a shot at capturing a vast market. Khosla Ventures also recently bet on a diesel motor maker called EcoMotors, which has many of the same aims as Achates.

The investment in Achates was reported by VentureWire (subscription required). Besides Sequoia Capital, investing firms included Rockport Capital Partners, Interwest Partners and Madrone Capital Partners.