Quest for the Next Great Search Company –

Four years after getting a bellyache from too many Internet deals, venture capitalists have regained their appetite-particularly in search-related deals.

VCs invested $67 million in 15 search companies in the first nine months of this year, double the amount they funded in all of 2003, according to the MoneyTree survey conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

Interest in the space peaked in 2000, when VCs pumped more than $400 million into 49 Internet search companies. The number of deals declined in each subsequent year, but started to rise again this year. The renewed interest has been driven by a number of factors, not the least of which was Google’s blockbuster IPO and surging stock price. Other contributing factors include the growing number of consumers online, successful business models for search companies, and persistent problems related to search that VCs say the sector leaders have yet to solve.

“The Google IPO made everyone salivate and get excited about search,” says John Ludwig, a partner with Ignition Partners and an investor in Judy’s Book, a Seattle search startup that aims to replace traditional Yellow Pages to help consumers find local services more efficiently. The Seattle-based company received $2.5 million in seed capital from Ignition in September.

“As long as search continues to be the No. 2 and No. 3 activity for everyone on the Internet after e-mail, I think that we will continue to see a solid stream of funding in the search market and people trying to make it better,” Ludwig says.

Ludwig isn’t the only one intrigued by search innovation and alternatives. Several search startups that have reported funding of late:

Groxis Inc. of San Francisco, developer of visual search software technology called Grokker, raised $12 million from DFJ ePlanet and others in November.

Pluck Inc. of Austin, Texas, a specialized search tool and information manager, took in $8.5 million in second round financing from Mayfield and Austin Ventures in October.

Technorati of San Francisco, a search engine to help users search Web logs, or “blogs,” and up-to-the-minute content on the Web, raised in excess of $5 million from Draper Fisher Jurvetson and Mobius Venture Partners in August.

A number of other private companies that aren’t venture-backed dot the search landscape. That group includes Clusty, a search engine launched by Pittsburgh, Penn.-based Vivisimo Inc. that categorizes search findings into folders, and Blinkx, a London-based company that has released a search tool that facilitates desktop searches and rates search findings.

Despite all the activity in the search arena, it isn’t likely that any one of these new offerings will one day topple Google. It’s more likely that one or several of these niche companies will be scooped up and acquired by the leaders in search in the months ahead and used to diversify their offerings.

Indeed, VCs and entrepreneurs involved in the new wave of search startups say they are encouraged by the level of M&A activity they have seen of late on the part of the search leaders, with Google’s acquisition of digital photo management service Picasa for an undisclosed amount in July, Yahoo’s purchase of e-mail service provider OddPost for an undisclosed sum this summer, and Yahoo’s acquisition of digital music firm Musicmatch in September for $160 million.

The biggest deal in the market happened last year, when Yahoo paid $1.8 billion in cash and stock for Overture Inc., a search company created by Internet incubator IdeaLab. (Overture developed Snap, a search tool that allows users to customize how their search results are ranked and mixes advertising with search results.)

It is also important to note that recent venture capital financings in search have occurred at the same time that more established players continue to innovate and diversify their search offerings: Google launched its own form of desktop search to great fanfare earlier this year, Amazon introduced A9, a customizable search tool that can store search histories in password protected files, and Microsoft launched its new search offering in November.

Supporting the thesis that search is more an add-on technology than a grand play is Dan Nova, a partner with Highland Venture Partners. Nova says he does not believe that any of the next-generation search firms will supplant Google’s lead. “The new offerings we see in search today are too nichey, so we question the ability to build an entire business around a new search feature,” he says.

Instead of pure search plays, Nova prefers companies that use search functionality as part of a direct customer acquisition effort. Last month his firm participated in the $75 million funding for FastClick, a provider of search-related advertising services. (Note: The FastClick deal wasn’t counted in the MoneyTree survey for Q3 because it’s listed as an Internet advertising company.) JupiterResearch predicts that that market will grow from $2.6 billion this year to $3.2 billion next year.

Other investors are hopeful about the ability of next-generation search startups to grow their business and scale up. Ryan McIntyre, a principal at Mobius Venture Capital and a co-founder of search company Excite, explains that the risk factors have changed dramatically for search startups, with the costs of running such a business far lower than they were in the past. That’s primarily due to the availability of lower-cost hardware and open source software. In addition, viral marketing techniques that can advance such businesses in a far more economic manner are better understood, as are the revenue models for search. “It is orders of magnitude cheaper to run a business like this today,” McIntyre says.

Andreas Stavropoulos, a managing director at DFJ, says that as long as there are unsolved problems in the field of navigation, search and syndication on the Web, there will be opportunities for new companies to succeed in a major way. “Search is not done,” Stavropoulos says. “The reality is that the Web is changing, and I have never failed to be amazed at how difficult it is for large companies to move fast toward a new direction.”

Witness how behemoth Microsoft ignored the search market, leaving the door wide open for a little private company named Google to turn into a search powerhouse and competitor to the world’s largest software maker. Of course, if Google gets fat and happy, plenty of hungry startups will be waiting in line to knock it off its perch.

Katherine Heires is a freelance editor and writer based in New York who tracks VC and technology trends. She can be reached at