powerset.bmpPowerset, the Palo Alto search engine that wants do Google one better by understanding the phrases you are searching for, has raised $12.5 million in a first round of venture capital.

The company is controversial because it claims it can do “natural language” search, the holy grail of search that most experts have dismissed as impossible. See our previous story here about the company.

Significantly, the company also raised its venture capital at a sky-high valuation — even higher than VentureBeat originally reported a few weeks ago when we first broke the Powerset story. The company raised money at a pre-investment value of more than $30 million, giving the company a value of more than $42.5 million after the money was put in.

Powerset is notable because it says it can improve on Google’s search engine by understanding the meaning between words. Take, for example, the phrase, “Who did Dick Cheney shoot?” Powerset will give you results with references to Harry Whittington, Cheney’s hunting partner who Cheney accidentally shot. However, if you type in “Who shot Dick Cheney?” it will give you a response “Sorry, no results.” Google, on the other hand, can’t distinguish between these two phrases, and gives very similar results for both.

Similarly, if you type in “Who acquired IBM?,” Google will give you lots of results about companies that IBM acquired, even though that’s not what you asked — because Google can’t understand that the difference between an object and subject. Powerset, on the other hand, will give results of the various companies that acquired IBM units, including Lenovo, and AT&T — which is a better answer to the original question.

The funding came from Foundation Capital ($7m), The Founders Fund ($3m), and several angel investors ($2.5m combined). The list of angels is long; it is here.

lorenzo.jpgTo help it scale and satisfy its considerable data storage needs, Powerset has struck a partnership with Amazon’s new Elastic Computer Cloud program. The program gives Powerset access to an Amazon network of extra computers and storage, at a cost of ten cents a CPU hour — letting Powerset focus on its core search, which it wants to launch next year. Co-founder Lorenzo Thione (pictured here) writes about this here.

pell.jpgThione and co-founders Barney Pell (pictured left) and Steve Newcomb (pictured below) still insist their engine will defy the skeptics. Peter Norvig, head of research at Google, continues to give talks saying that insertion of linguistics hasn’t made any difference in Google’s results. Barney Pell, responds: “But we’re changing that.”

newcomb.jpgCharles Moldow of Foundation and Peter Thiel of The Founders Fund will join the board.

Powerset is in the process of moving to San Francisco.

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