Analytics Add Up for VCs

Compute this: Venture capitalists have made a ton of money in the data analytics market.

VCs first cashed in on enterprise analytics, with business intelligence companies like Hyperion Software and Business Objects selling for billions.

Next came Web analytics, which produced its own set of winners like Coremetrics and Ominture, the latter of which sold to Adobe Systems for $1.8 billion.

Today, VCs are entering the next logical frontier of social and mobile analytics. And this time they think they can make even more money.

“If this market is at all analogous to Web analytics, some people will do very well indeed,” says Anthony Lee, a general partner at Altos Ventures, and an investor in social analytics startup Kontagent. “Actually, our sense is that the opportunity will be even bigger because you can drive so much more activity off of social data.”

Kontagent, which creates analytic tools used by many social game companies, has raised about $6 million in venture funding from Altos, Maverick Capital and angel investors. Its tools provide game developers with instant feedback on how users are interacting with their games, such as where they are dropping off or what virtual items they are purchasing. The developers can leverage this data to make changes to their games on the fly and, presumably, retain users and drive more sales.

Currently, Kontagent’s analytic tools are used in games that are played by 70 million people and the company is crunching some 20 billion data points a month.

“For socially oriented developers, the whole basis of your existence is measuring what users are doing daily and then responding to that,” Lee says. “In the past, we lived in a world where new product releases happened every two or three years. Now, product cycles are every single day.”

Jordan Levy, a partner at Softbank Capital, knows it’s still early days for social analytics, so he doesn’t want to get too excited.

If this market is at all analogous to Web analytics, some people will do very well indeed.”

Anthony LeeGeneral PartnerAltos Ventures

“I’m a believer that history repeats itself,” he says. “If this market shapes up like Web analytics, with companies getting acquired for $1.8 billion like Omniture, count me in right now.”

Softbank has made several bets on social analytics, including Buddy Media, which raised $23 million in its latest round, and SocialFlow, which recently closed a $7 million Series A round. Investors included Softbank, RRE Ventures, AOL Ventures and others.

SocialFlow’s technology tries to make sense of the rush of data constantly spewing from Twitter and Facebook feeds. The company helps marketers determine the best time to send a tweet or post on Facebook based on real-time data streams.

Levy says that it’s impossible for companies to make informed social media decisions without analytics. He points to a recent example.

“During the Royal Wedding, everyone was tweeting about Kate Middleton’s dress,” he says. “So if you are Bergdorf Goodman and you sell designs from Alexander McQueen, you don’t want to miss that opportunity. You want to be part of that conversation and market your product at the exact moment everyone is talking about it.”

SocialFlow maintains that clients using its technology typically experience an average increase of at least 20% in clicks per tweet.

Even though New York-based SocialFlow would settle for being the next Omniture, not every social analytics startup will be a blockbuster. In fact, very few will get out of the gate, even though new ones are launching almost every day. A decade ago, when the Web analytics market was getting revved up, there were hundreds of competitors, many of them venture funded. But at the end of the day, there were only a few that mattered.

Stacey Curry Bishop, a partner at Scale Venture Partners, remembers those days, mostly because her firm invested in one of the winners, Omniture. Today, Scale has returned to the analytics market with an investment in Vitrue, a social media analytics firm that scored $17 million in its latest venture round in February from Scale, Advent Venture Partners and others.

The Atlanta-based company, which has raised about $35 million in venture funding to date, helps such clients as Best Buy, Ford and JCPenney understand how much a particular Facebook post can generate in sales, or what the true value of a retweet is.

You have lots of vendors coming into the market, but only a few that will emerge as premium companies, just like in the Web analytics market.

Stacey Curry BishopPartnerScale Venture Partners

“You have lots of vendors coming into the market, but only a few that will emerge as premium companies, just like in the Web analytics market,” Bishop says. “No one company is so big yet, but we wanted to pick who we thought would be the winner and put some money behind it.”

Lee of Altos so bullish because, he says, there are 700 million Facebook users and 300 million smartphones supporting hundreds of thousands of apps. Companies that can truly make sense of the massive amounts of data being generated as a result stand to be very valuable indeed.

That’s certainly what Sonja Hoel Perkins, a managing director at Menlo Ventures, was thinking when she led a $15 million investment in Flurry late last year. The company provides real time data to app developers about how consumers are using their mobile applications, including how long they stay on a page and how long before they drop off entirely. Based on Flurry’s performance data and analysis tools, developers can constantly tweak their products and provide a better user experience.

Some 45,000 applications are now using Flurry, which has raised more than $25 million from Menlo, Draper Fisher Jurvetson, InterWest Partners, First Round Capital, Union Square Ventures and other investors.

“Analytics is fundamental to success,” Perkins says. “The companies that are winning big don’t necessarily have the best products or the cleverest designers. They are winning because they know exactly how people are using their apps.”

As an investor, Perkins says she loves the fact that the mobile/social analytics market is untapped. But she also understands that the very newness of the market also brings its own set of challenges. Flurry, for instance, had quite a scare last year when it was rumored that Apple was going to disallow any application that had built-in data collection and analytics tools from its App Store.

Thankfully for the San Francisco-based company, that never happened. Still, the rumor drove home a salient fact for investors.

“The rules in this market can change at anytime, and you have to be able to navigate those changes and adapt if you want to survive,” Perkins says.

Ask Levy of Softbank what keeps him awake at night when it comes to his investment in Buddy Media and SocialFlow, and he’ll tell you the revenue model. After all, most companies are trying to figure out how to simply get started with Twitter and Facebook. Trying to get them to take the next step and purchase social analytics tools is just one more hurdle.

The companies that are winning big don’t necessarily have the best products or the cleverest designers. They are winning because they know exactly how people are using their apps.”

Sonja Hoel PerkinsManaging DirectorMenlo Ventures

“We are early here, so we have to convince people that should be spending money on analytics, and then it’s a matter of how much will they spend?” Levy says. “It’s a long sales cycle and as a result the revenue model is challenging. I know we are providing extraordinary value to our customers, but it will take longer and more proof points to get them to see it.”

And then there’s the question of signal to noise. In other words, how much of the data is actionable and how much is just garbage?

“The promise with social analytics is that you can take massive amounts of data and process it quickly and inexpensively to get insights you can turn into actions,” says Matt McIlwain, a managing director at Madrona Venture Group. “But the problem is having access to clean, relevant data versus messy, inaccurate data. The trick is to normalize the data and make it actionable.”

McIlwain recently invested in a stealth Seattle-based startup called Sewichi that plans to tackle this and other problems related to social analytics.

And while everyone is the space is racing to be the next Omniture or Coremetrics, there is always the fear that these leading Web analytics firms can get serious about social media and crunch the competition like so many stray bits of data. After all, they already have the brand recognition and an entrenched customer base. Both companies are launching new products around social analytics.

And so is Google. The internet giant recently acquired a Canadian startup called PostRank that measures social stats, such as how many retweets or Facebook shares a piece of content gets. The acquisition underscores Google’s growing commitment to social analytics.

With so much new data being created, it’s only logical to find intrepid ways to monetize it. “Anytime you can extract meaning from data and help companies build better relationship with their customers, that is very meaningful,” says Perkins of Menlo Ventures. “That’s what happened with enterprise and Web data, and now it’s happening with social media.”

Of course, it also doesn’t hurt that this is an area where investors have traditionally made a lot of money. And hope to make a lot more.

Tom Stein is a freelance writer based in Palo Alto, Calif. He can be reached at tom.stein@yahoo.com.