purpleyogi.jpgPurpleYogi, one of the earliest Silicon Valley companies to focus on “extreme personalization of the Internet,” has finally been sold for $158 million after a dramatic series of twists in business strategy.

The Mountain View, Calif., company launched in 1999.

rakesh.jpgIt later abandoned its initial model of focusing on media and consumers, and offers some valuable lessons to today’s entrepreneurs focused on Web 2.0, who may also be panicking for lack of a business model: It helps to be scrappy — and to raise plenty of money in good times, so that you can keep plugging away so that you do find a model that works. And the answer may not be in the sexy media/consumer sector.

For PurpleYogi, the strategy worked: After changing its name to Stratify, burning through a few CEOs, and ripping up its plans a several times, it finally focused instead on electronic-discovery software for the legal industry, a relatively boring area, but one that paid the bills. Now the company has just announced that Iron Mountain will buy it for $158 million in cash.

Back to 2000: I remember using PurpleYogi that year on my desktop while reporting for the MecuryNews. The downloaded client sat in the corner of my screen nicely. It fetched news from around the web that was relevant to me. For example, I selected the terms “start-up”, “technology” and “venture capital” and PurpleYogi would bring in the free available content so that I wouldn’t miss anything.

PurpleYogi, started by a group led by Rakesh Mathur (pictured atop; see the happy story of its beginning), a founder of Junglee, initially raised a whopping $30 million — them were easy times — but with little idea of how to make money. By 2001, after the bubble burst, it was left scrambling for a way to make money. Luckily, however, it had been frugal. It still had $20 million in the bank. It made its first significant change: It focused instead on helping companies mine the web for “unstructured data” related to their business, and then manage the data for them by selling them software. For example, after Sept. 11, the company began serving the CIA, trawling through millions of Web and other electronic documents, including those written in Middle Eastern languages, looking for specific relationships between words within pages. Even this didn’t work. But transformation had begun. By mid-2003, Stratify realized that serving the legal industry was more lucrative.

ramana.jpgThere was significant pain along the way. At one point, the company had to reset its value to zero, buy back shares from some investors, and take on a fresh round of about $8 million. The company went through several CEOs. But notably, the CEO who got it done in the end was Ramana Venkata (pictured left), an original founder. Mathur, meanwhile, left a few years back (see our coverage here and here) to start Webaroo, a company that itself is going through twists to its model.

The faithful backers of PurpleYogi finally hit pay dirt, too. The few who hung in there included Mobius Venture Capital (a firm that, ironically, decided to close shop last year, and not raise another fund, in part because of lack of success after the downturn) and the CIA’s In-Q-Tel. Other investors along the way were Intel Capital, Infosys Technologies, At India and Skyblaze Ventures, though it’s not certain whether they got any return.

2001-11-07

Start-up helps CIA in terrorism fight

Agency’s venture arm takes stake in Stratify

By Matt Marshall
Mercury News

The Central Intelligence Agency may seem a bizarre source of support for struggling Silicon Valley start-ups, but it may be a sure patron in a dour economy.

Ask Nimish Mehta, chief executive of Mountain View’s Stratify, formerly known as Purple Yogi. His company combs through billions of Web pages to find answers to users’ questions.

This week, it accepted millions in venture funding from the CIA’s venture capital arm, In-Q-Tel. In return, In-Q-Tel wants Stratify’s help in trawling through millions of Web and other electronic documents, including those written in Middle Eastern languages. “That would be nice to have,” says Eric Kaufmann, a partner at In-Q-Tel’s Menlo Park office.

Neither the CIA nor the company will disclose the exact amount of the funding, for fear of offending the CIA’s other portfolio companies, which have gotten less. The amount was more than $1 million but less than $5 million.

The deal could be a good omen for Stratify, which wasn’t pulling in much revenue under its dot-com business model. Indeed, if Mehta has his way, he’ll be stealing a page from Oracle CEO Larry Ellison’s playbook.

Rewind about 25 years. Back in the late 1970s, the spy agency became Oracle’s first customer. A happy camper with Oracle, the CIA helped open doors for Ellison at other government agencies and corporations.

This way, Ellison survived through the recession years of the early 1980s with no venture capital injections at all. And by not watering down ownership with VC investments, Ellison emerged with 39 percent of Oracle’s shares — and since has become the nation’s second- or third-richest man.

Mehta, a former Oracle executive himself, says he doesn’t want venture capital, and didn’t seek out the CIA’s investment. He joined Stratify in February, when it was still Purple Yogi, a frugal company that still had $20 million of the $30 million venture funding it had received over the past two years.

But like Ellison, Mehta sees a good customer in the CIA, one that can open similar doors for his company. “I’ve seen Larry fight that battle, and I want to fight it the same way,” says Mehta, who once reported directly to Ellison.

The parallels run deeper. Mehta wants Stratify to tap into what he believes is a huge potential market for mining, and then ordering, “unstructured” data. Oracle and its early competitors discovered the database-software market — which orders “structured” information.

Of the information that a typical company carries on its Web server and computers, 85 percent is unstructured, Mehta says. That’s why Mehta says he can build Stratify into a giant that rivals Oracle.

That’s also the reason why the CIA is interested. In-Q-Tel’s Kaufmann says Stratify is better than its competitors because it creates a hierarchy for the information it seeks, has superior classification technology, and is nimble in the way it allows users to decide what research to conduct. The company is brainy. It has about 15 employees with doctorate degrees. Twenty of its 75 employees are engineers based in India.

Stratify recently won a deal with Infosys, a management-consulting company that uses Stratify’s software in the products it offers to clients. Investors say Stratify is more advanced than Autonomy, a publicly traded U.K. competitor. “It can handle millions of documents and can crawl over everything looking for stuff,” says Bill Burnham, a partner at Softbank Venture Capital and an earlier investor.

He and other investors encouraged Mehta to take up the relationship with the CIA. In times like this, any funding at all is “nothing but positive,” says Purvi Gandhi, a venture capitalist with H&Q Asia Pacific, who also invested in the company.

The CIA deal was in the works before the Sept. 11 attack, and it was sought out by Gilman Louie, In-Q-Tel’s chief executive. Louie, otherwise known as Q — a reference to the technologist Q in James Bond movies who shows 007 the latest gadgets — is a man who “pulses with energy,” according to Mehta. That the CIA sought a deal that is relevant for the attack’s aftermath is a coincidence, Mehta says.

Mehta has presided over a 21 percent reduction in workforce, preparing the company to survive through 2003 — even before the CIA’s investment.

Mehta learned the hard way. His previous company, Sunnyvale’s Impresse, went out of business early this year after burning through about $80 million in venture capital.

Purple Yogi was frugal, but Mehta says newly named Stratify is even cheaper now that he’s arrived. Forget credit cards, free food, massages or big-budget outings. To have fun, the company created a 21-hole miniature-golf course on premises. Employees went to a baseball game on public transit.

And Mehta’s cubicle is tiny. He recalls his senior vice president’s digs at Oracle: a sprawling private office, a waiting room, a secretary, a training room and sauna. “My personal bathroom was as big as my cubicle,” he says, pointing to his new humble digs.

He’s not Ellison yet.

END