Saturday, April 01, 2006

Para-sites.

Googlespawn; A minibubble is forming in the Google ad revenue stream.

Victoria Murphy Barret
1052 words
10 April 2006
Forbes
Volume 177 Issue 7
English
(c) 2006 Forbes Inc.

No one is trying to sell pet food online, yet. But a minibubble is forming in the Google ad revenue stream

Two years ago Ted W.N. Rheingold was riding out the tech slump doing Web design jobs from home. He and his wife wanted a dog, but his landlord said no. So the Rheingolds lived the dog life vicariously by browsing photos on dog rescue sites. This was his inspiration for Dogster and Catster, two sites he runs for pet fanciers to share photos and stories. Like Friendster, it's a social networking site--but with fur--and 211,000 member animals.

Before you crack jokes (What's next? Hamsterster?), know this: Rheingold's firm is profitable, growing quickly and on track to hit $1 million in sales this year. Rheingold spends $2,000 a month to rent servers in Virginia and $1,000 a month for a few rooms in a San Francisco warehouse that once housed a soap factory. He has eight employees. So far Dogster fans are doing the selling on Dogster's behalf by sending Dogster invitations to friends with dogs.

"I wanted to cover my rent. That was the business plan," says Rheingold.

Rheingold has done a bit better than that by following a strategy now consuming Silicon Valley: Throw up a site using cheap hardware and open-source software and get users to do all the work. The new Web breed repackages what's already there--photos, news, music, searches, blogs--and makes its money by suction-cupping, like remora fish, to the back of Google's AdSense program, which distributes ads to sites willing to split the revenue earned each time someone clicks on a paid link. AdSense is now generating $2.7 billion a year, roughly 80% of it distributed to partner sites.

Rheingold now has enough traffic to attract his own advertisers, including Walt Disney Co. and Dad's, a premium pet product company. Only a sliver of revenue now comes from Google ads.

Silicon Valley is abuzz again with firms such as Kaboodle, Kosmix, Become.com, Wink, Digg and Browster. These goofily named Web newbies are being nourished by Google, often compete with Google and, given how similar their business plans are to a half-dozen other startups in the Valley, hope for a quick buck by selling themselves to Google (or Yahoo, IAC or News Corp.).

"Google created a marketplace that allows new sites like us to get started," says Michael Tanne, founder of the Web search service Wink. He doesn't have to pay salesmen and instead can use the cash to improve his search technology.

"The motto of the bubble was get big fast. The rule today is get big cheap," says David Cowan of Bessemer Ventures. "What tickles my checkbook is the success of capital-efficient startups where the users themselves often contribute the feature road map, software and marketing."

The two-year-old browser technology outfit Browster raised $5.8 million in venture capital in November. Browster founder Scott Milener owes it to Google: "We could show our venture investors what we were worth. They could extrapolate our growth and profits from what we're doing just with Google."

Digg creates zero content of its own, instead linking to news stories and blogs its members have marked as interesting. It gets the majority of its revenue from Google ads and broke even last year, raising $2.8 million from Greylock Partners and others, far less than it was offered.

Everything is happening so much more quickly than a few years ago, says Michael Yang, who sold MySimon.com to CNET for $700 million in 2000. It took MySimon months to generate revenue, but his new online shopping search venture, Become.com, tapped Google ads for instant sales. Yang has raised $18.7 million in venture funding. "There is a lot of capital out there and a lot of innovation. But a lot of firms are technology features, not real companies."

In the past two years David Sze, a partner at venture firm Greylock, has seen a fivefold increase in the number of pitches from consumer-targeted outfits. "Are there lots of companies being created because it is easier and cheaper than ever? Yes. Do lots of them have silly names? Yes. But these entrepreneurs are just responding to the market," says Sze.

The new breed of entrepreneurs aren't so foolish as to think they are the next Google. Digg founder Jay Adelson knows that frugal operations and Google ads can take him only so far. "If you get enough customers, you need to invest in server farms and expertise. Lots of these companies will simply get lost in the noise."

The best the remoras can hope for is to make a quick buck selling out to one of the Web giants. In the past year Yahoo purchased photo-sharing site Flickr for an estimated $35 million and tagging pioneer Del.icio.us for an estimated $20 million. News Corp. bought social networking star MySpace for $580 million and is rumored to be buying a news site called NewRoo that has yet to launch.

Kaboodle, a repository for online research, turned down two $350,000 checks from venture firms. Some vcs told its founder, Manish Chandra, he needs to raise $9 million. "Once you take that much capital, you suddenly feel the need to ramp up to 40 people. But that might not be smart. You're still not sure where the business should go," he says.

Dogster's Rheingold met with Benchmark, the venerable investment firm behind Ebay and Juniper Networks, but no offer was made, and Rheingold isn't pushing. "Venture funding felt risky to us. We think we have a good idea. We're not sure how big it is. And for now the company is getting by just fine."

If the last bubble taught Valley denizens anything, it may be the wisdom to take the money and run--even if it's only a million or so. Slaving it out for the big bucks is very 20th century.

1 Comments:

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