VentureBeat

It is time for our mea culpa on our coverage of Silicon Valley angel investor Ron Conway.

Not because Conway has become the most prolific investor in Web 2.0 companies, with more than 100 companies backed in less than a year and a half.

But because we’ve been critical of Ron Conway for his investments during the Internet boom, saying they were symbolic of the era’s hubris. During that heady time, he threw lavish cocktail parties, and raised cash from a group of all-stars, including people like Arnold Schwarzenegger, Tiger Woods and Henry Kissinger — which he then invested into start-ups. We’d assumed that Conway had ended up losing money on his hundreds of dot-com investments, a correct assumption until a year or so ago.

Turns out, Conway has made money for his investors, VentureBeat has learned. His first fund, Angel Investors I, raised and invested in 1998, has seen a seven-fold return (7x), and his second fund, raised and invested during 1999, has seen a 1.5-fold return (1.5x). The latter assumes a $500 share price for Google, a company that Conway had backed with a small portion of his funds. That’s quite good, considering most investors in 1999 have seen a return of about 25 cents on the dollar.

Conway is now doing it all again. He’s made more investments than anyone else in Web 2.0, having backed more than 100 companies since June 2005, which is when he sold his interest in first two Angel funds to CSFB, and began investing his own money. Some companies he has backed are Digg, Zooomr, BuzzLogic, Perenety, PBWiki, Rupture and Vizu.

Question: Will he make more money, or less money this time around?

Update & clarification: Upon further reflection, the lesson here is a powerful one, even if it sounds mundane, and that’s to invest for the long-term. We should clarify, we’re told Conway distributed the Google shares to his investors at three different points, varying in prices, and the highest being at just over $200/share. Venture funds are always measured based on the value at distribution (seldom calculated “if held”), and when calculated that way, Conway’s returns are lower than stated above. Still, had you held to the shares he distributed to you, you’d be doing well — much better than we’d assumed just a couple of years ago.

Real Girls Media, a new San Francisco start-up that wants to publish content for women, has raised $6 million in a first round of funding.

We reported earlier how another company, Sugar, had raised $5 million, led by Silicon Valley high-profile venture firm Sequoia Capital, after that blog site for women showed considerable traction. So this effort by Real Girls comes is somewhat predictable: You have to raise more than your competitor to lure talent, and because Web 2.0 is bubbly right now, you can do it pretty easily.

The company hasn’t launched yet. Rather, it is constructed in the opposite way to Sugar: top down. This should be a great case study of two polar strategies: Sugar was launched with the grit of a founder’s own money; Real Girls is formed from the comfort of a venture capital firm’s arm-chair: It is founded by Kate Everett Thorp (pictured below), who was a venture partner at San Francisco venture firm Walden VC. Her job was to look for ideas, and so formed a vision on an entirely reasonable idea in this environment — of targeting women of all age groups, offering them ways to submit and publish their views and stories.

Thorp is accomplished, so we don’t want to judge this company until it launches next year. She comes from the advertising side. She launched and sold Lot21 Interactive Advertising Group for a profit — and so her project at Real Girls will likely be advertising driven, as opposed to content driven.

The backing comes from WaldenVC, and another firm, 3i.

The first Web site, DivineCaroline.com, is due to launch in early 2007, is targeted for women aged 25 to 54. Additional sites aimed at other age groups will follow in 2007, and so the multi-blog format is also similar to Sugar’s.

If you detect a note of skepticism here, it’s because we moderated a panel last night at the East Bay SVASE, in which some VCs expressed excitement about online advertising, even though we’ve seen so much activity in this area lately. Sure online ads are roaring, but the hype is causing a bevy of me-too start-ups. See the chart below (via Battelle) for why there’s something real going on. But remember, 1999 was real too.

Every day, new ad-based network start-ups are sprouting up. Did you see our piece on SeeSaw, of San Francisco, which wants to put ads in monitors in train stations? Maybe there really are people sitting around in train stations with nothing better to do than peer at ads.

Final tip to RGM: Might want to replace the grey/beige acronym logo.

Roundup of a busy week:

Instant messaging and email are merging, Yahoo kicks it off — Yahoo will be integrating IM through its email, Yahoo executive Brad Garlinghouse revealed during the Web 2.0 Summit in San Francisco. In retrospect, we’re wondering why this trend hasn’t happened earlier.

Email is limiting, providing no way to see whether the person on the other end is present or not (that person may not want to show you they are present, but email doesn’t even give them the option). It piles up, and it’s clunky — not letting you switch to conversation immediately, if you want to. Instant messaging, meanwhile, can be distracting, isn’t ideal for careful phrasing, isn’t as easy to archive or forward to other people. So what’s needed is a bridge, and now people are building it. We’ve heard ideas bubbling up from entrepreneurs here in the valley, but Yahoo’s move steal the initiative. Techcrunch has a screenshot of what it looks like. There’s also a Chicago company offering something similar, called Parlano, with its product called Mindalign, though its design isn’t that great. (Via Jeff Nolan).

A Web 2.0 University? — One is being created in Alexandria, VA of all places — Details here, and it’s open for registration for its AJAX and Web 2.0 “boot camp” courses.

From Google CEO Eric Schmidt’s talk — Google is working to allow users to export their search histories to other locations, such as Yahoo. Meanwhile, he rejects rumors that Google had set aside money to bail out YouTube from copyright lawsuits — though it is true that Google Video itself has been sued.

Microsoft-Google fight to be greener – Microsoft execs are bragging about building what appears to be the first carbon-neutral data center, taking care of 400 customers for the same energy it “takes to light one 60-watt light bulb.” (Via Mercury News). We reported earlier how Google aims to be carbon neutral, that is save as much fossil fuels as it burns in energy at the Googleplex and from corporate jet trips.

Put a Google map on any image — And when we say any image, we mean it. Scoble has the scoop on Maplib.

Google offering GPS on the Helio Drift phone — Here are the details. Note that is doesn’t appear to be integrated with Dodgeball, and is a step closer to matching the advantage of Loopt.

Google executive Marissa Mayer says Google is like a VC firm — Fortune has a noteworthy conversation between Huffington and Mayer:

HUFFINGTON: Whatever products Google (Charts) is developing, they are incorporating a 60 Percent to 70 percent failure rate. I find that utterly fascinating. Talk about that culture and how that translates into our lives.

MAYER: As we’ve grown, one of our challenges has been, How can we continue to innovate? We have a theory around failing fast. If you assume that one in five things you do will turn out to be really successful, and maybe two of five will be moderately successful, and the other two will languish, you want to do a lot of things. It’s all about being agile. Most of the teams at Google are three to ten people. Five people launched Google News. About five people launched Google Toolbar. They operate like small companies inside the large company. Google is a lot like managing a VC firm, because you’re placing bets on different teams.

Video companies Brightcove and Reality Digital are looking to raise VC rounds — Start-up Brightcove, which hosts video for companies and lets them insert advertising into the video, is looking to raise a round of more than $55 million, GigaOM first reported, with a post-money valuation well north of $225 million range. It has already raised $21 million in two rounds from General Catalyst Partners and Accel, and several others.

San Francisco’s Reality Digital, which does something similar, but in some ways is more ambitious (it hosts video for its clients, but also blogging and forums) is also looking to raise another round. It raised $2 million in a first round in November last year. It has ten employees, and has several customers. One is SPARQ training, which lets high school athletes promote themselves to recruiters — via Reality Digital’s video/blog platform. The athletes can have their coaches chime with their own blogs, too, for example.

Updated

Web 2.0 start-up activity is hot, and here’s the latest data.

Venture capitalists invested $455.5 million into Web 2.0 companies in the first three quarters of the year, more than twice the amount invested over the same period last year.

This comes from the latest survey by Dow Jones VentureOne, which continues to do the best research on the Web 2.0 area. It gets help from accounting firm Ernst & Young.

Overall, more than $1.63 billion has been invested so far this year into 198 “consumer technology” companies headquartered in the U.S., but 79 of those companies were classified as “Web 2.0.” (See our earlier story here, for VentureOne’s definition of Web 2.0 — scroll to blue quote box)

Notably, the group finds investment valuations have remained fairly steady for Web 2.0 companies over the past two years. But it contradicts the moaning we hear from VCs and individual angel investors about how high valuations have become. (See chart at very bottom of the post; note that the valuations don’t include the angel rounds).

Below are charts outlining where the investments are going, and listing the biggest recipients and investors.

Btw, Intel Capital should be moving up the list as a big investor, based on the recent announcements it has made. We heard that Intel Capital’s Eghosa Omoigui, who has had his ear to the ground attending all the Web 2.0 conferences and parties over the past year, internally floated the idea of looking at an investment in YouTube back in March, but that the idea didn’t get much traction internally. Too bad. Intel is still one of the largest venture capital investors overall.

Intel yesterday also announced it is distributing SuiteTwo, an integrated Web 2.0 software suite for small and medium sized companies, in a hosted or self-hosted format. The package includes Socialtext (wiki software), Six Apart’s Movable Type (blogging software), Newsgator (RSS reader) and Simplefeed (RSS distribution).

It has wrapped them into a single sign-on software, through direct sales from Intel, but also via partners like Dell and NEC, Intel Capital’s Robert Rueckert told VentureBeat in a briefing Monday. Cost will be from $150 to $200 per seat per year.

SpikeSource, a company that helps integrate software, has guaranteed the suite works on Novell, Linux or Microsoft operating systems, and that they run on Intel servers.

(Update: We’ve confirmed with Intel has invested in all five of these companies — Socialtext, Six Apart, NewsGator, Simplefeed; however the amount remains undisclosed).

(Update II: To clarify, Intel has made equity investments in Six Apart and SpikeSource, but has only signed warranty deals with the other companies, essentially giving Intel the right to purchase equity if they meet certain performance guidlines.)

Valuations of Web 2.0 deals:

Like has finally launched its visual search engine company, and it’s going to appeal to the shopping set, especially women.

Users select products from images, and then Like’s search engine will find comparable items to buy. Like is owned by Riya, which we have covered before, including here.

We find it compelling. There are other players in the market, but aren’t nearly as sophisticated as Like. For example, there is Pixsta, of London, which has built a shoe search at www.chezimelda.com with about $200,000. But it is elementary when compared to Like’s technology. Like is a classic Silicon Valley play, heavy on engineers, and stoked with about $19 million in venture capital from Bay Partners, Leapfrog and Bluerun. We’re still waiting for Google to release its competing visual search, which some say is better (see our story here).

Take for example, the image here of Tyra Banks. You can select her boot by drawing a box over it with your mouse, and then check a box to have Like search for similar boots. You will get a page like the one below (see bottom). Further, you can ask Like to search for things with a similar pattern, color, and shape — using a slider for each of the variables. So if you’re looking for a handbag with buttons on it, you can emphasize pattern, and maybe color, but deemphasize shape — and have Like generate results. Here’s a tour of how it works. And here are more details of the launch.

It is not perfect. It can get confused by focusing on a color or image in the background of a picture, for example, instead of the object you’re focused on. But it’s better than what’s out there. If you search for “red strappy shoes,” Like will produce a page of results with — shocker — red strappy shoes. While this may be obvious, if you try this at Shopping.com, you’ll get only four shoes that are red and strappy. That’s because “pixel values” of an image rank highly in Like, whereas Shopping and most other search engines don’t factor this in.

For now, Like is focused on jewelry, handbags, shoes and watches. Soon, it will add clothing, and other things like fabrics and garden flowers. Everyone has their favorite shirt pattern that’s wearing out at the seams, and can relate to not being able to find another one just like it. Like will let you find a similar one easier. You just upload a photo, select it, and search.

It will also be releasing an upload toolbar, so that you can select anything you see online, hit the toolbar and have Like search for it. It will also launch a mobile SMS product.

Jewelry, shoes and clothing command $15 billion in online sales, and merchants spend about 10 percent of their revenue on customer acquisition — meaning there is about $3 billion floating around to pay Web sites and other sources for lead generation. If Like can just get one percent of that, or $30 million in revenue, chief executive Munjal Shah says he’ll have a nice company on his hands. (He’d better hurry, because Google’s product will probably take some wind out of his sails).

Our favorite event at the Web 2.0 Summit is the Launch Pad, where 13 new start-ups launch and give a five-minute presentation.

Richard McManus has a good, succinct review of the 13 companies, so we won’t duplicate.

We weren’t that inspired by this year’s crop, though. The AJAX magic of last year was so thrilling that we’ve gotten used to it, and crave something new. 3B looked cool, because it offered a new-age way to view Web pages — in three-dimension, with the user as an avatar walking around hallways. However, we were left wondering why anyone would use it.

Perhaps that’s why we gravitated toward the useful products. There were several niche services, for example sites that appealed to musicians and hobbyists. Overall, though, Sharpcast and Omindrive were the winners, in our view. They help you store your files more simply, from multiple sources. Sharpcast lets you save and edit data from any device and have it all synced.

If we had to anoint a winner of Launch Pad, we’d pick Omnidrive. Sharpcast’s presentation hit several snafus. Omnidrive offers something similar; it saves to Omnidrive online when you save things on your desktop. The data from multiple sources gets saved all to one place. It also gives you a folder that shows you all your files from different services like Flickr. You can drag and drop files into the Flickr folder and they will be uploaded to Flickr as well.

We say this even though we know Omnidrive has lots of competition. Fact is, simple storage of multiple files from various applications remains unsolved: We’ve seen lots of storage products, and have been frustrated by the little quirks each one seems to have.

Omnidrive also has sharing features and opened its platform for developers to build other products and tools for (open APIs). We’ve just noticed they’re opening up the service to anyone who signs up, with a 1GB free account.

Definitely a lot of hype flowing the halls, though. We met several people who hadn’t been able to get tickets to the sold-out Web 2.0 conference — so they’d taken up residence in the rooms outside the main conference rooms to avoid getting carded — and held meetings there instead.

Updated

For the third quarter in a row, U.S. venture capitalists poured more money into private companies than they did last year. They invested $6.36 billion in the third quarter, five percent more than last year. They backed 611 companies, two percent more.

These are the findings of the latest report by Dow Jones VentureOne and Ernst & Young.

The third quarter investment levels were slightly lower than the second quarter, but dips are common in the third quarter, when summer can often slow dealmaking.

Overall, the levels are more robust than any time since the post-Bubble trough in 2001. It is the first time since then we’ve had three consecutive quarters in which investments exceeded $6 billion.

Factors contributing to this trend include the robust merger and acquisition market and the positive results of recent technology IPOs, the survey said. These give venture capitalists a way to “exit” their investments profitably, and encourage them to invest more.

Deal flow in alternative energy more than tripled from a year ago, and the “information services segment,” which includes Web 2.0 companies, saw 41 percent more deals than in the third quarter of 2005, the survey said.

More early-stage financings were done, too, perhaps driven by the more than $35 billion in new venture capital funds raised over the past 18 months, the survey said.

In the third quarter, 38 percent of all VC deals were seed or first-round deals, the highest allocation percentage this year. However, this activity was stronger in healthcare, where 44 percent of the deals were early stage, than in the information technology segment, where only 32 percent of the deals were early stage. The following gives you some idea where the latest action is: In the specific IT sub-sector of “information services,” which includes Web 2.0, some 61 percent of the deals were seed and first round deals. In energy, 79 percent of the deals were in these early stages.

However, it is important to note the overall dollar amounts being pumped into these Internet companies is relatively small. There’s a lot of early-stage experimentation in Internet companies, but companies in other sectors are pulling in bigger dollar amounts.

Venture capitalists pumped $1.16 billion into “biopharmaceutical” companies, for example, or 9 percent more from the $1.27 billion during the same quarter a year ago. Information services companies pulled in $491 million, and that’s actually down from $538 million the same quarter before.