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The fund will fuel multiple stages of investments into Internet, mobile services, financial services, media and entertainment companies, and travel and leisure.

Waltham, Massachusetts-based Matrix had until now only invested in the United States. It joins an increasingly large group of investors in India, both domestic and foreign.

More than 40 new India-specific funds have been raised or are in the process of being raised, including those from Microsoft, Zephyr Peacock Ventures, Amaya Venture, Mentor Partners, Helion Ventures, Inventus, and Argonaut Private Equity (see India: All Aboard!, Argonaut Plans $250M for India).

Private equity firms invested nearly $2.1 billion in the second quarter, up from $407 million in the same period last year, according to Chennai-based Venture Intelligence India. This year, 18 percent of second-quarter investment in India went to IT and IT-enabled services.

In total, India raised $3.5 billion in private equity in the first half of 2006, up from $2.2 billion invested during the whole of 2005.

On the Ground

Matrix India, based in Mumbai, will be led by two new managing directors: Avnish Bajaj, co-founder of Indian online marketplace Baazee, which was acquired by eBay; and Rishi Navani, formerly of WestBridge Capital Partners, which is now known as Sequoia Capital India.

Starting in 2003, Matrix looked to invest in Indian startups, said general partner Shirish Sathaye, who is based in California and will serve as an advisor to Matrix India.

“We realized without people on the ground we would not be able to be active investors,” Mr. Sathaye said. Thus, Mssrs. Bajaj and Navani were recruited.

The interest in India, Mr. Sathaye added, came from Matrix’ 20-year history of investing in U.S. companies led by Indian entrepreneurs, including Cascade Communications, Sycamore Networks, Starent Networks, and Aruba Wireless Networks.

Mr. Sathaye said it was too early to say when the new fund would close its first investment.

US VCs in India

In a global survey of venture capitalists released recently by Deloitte, 53 percent of U.S. venture capitalists said they were interested in expanding their international focus. Of those, 30 percent said the country they are most interested in investing in is China and 25 percent said they were most interested in India (see International VCs Favor US).

However, investors said India came out ahead of China in terms of barriers to entry such as regulations, intellectual property, and political environment.

“U.S.-based venture capitalists are looking at China as a market and India as a place to fund entrepreneurs,” noted Mark Heesen, president of the Arlington, Virginia-based National Venture Capital Association.

Mr. Heesen pointed out that this emphasis makes India much more likely to produce the next Silicon Valley.

However, despite increased interest and willingness from limited partners, U.S. venture capitalists are still investing less than 20 percent of their money abroad, estimated Mr. Heesen. That includes internationally focused funds such as Matrix’.

Draper’s Take

With all the interest in investing in India, there’s concern that investment dollars will overpower the number of viable startups.

Bill Draper, one of the first venture capitalists in India, doesn’t think so.

“India has a lot of people and there are a lot of entrepreneurs among them, so I don’t think at this point that there is too much money chasing too few deals there,” Mr. Draper told RedHerring.com on Tuesday.

Mr. Draper’s Draper International, formed in 1994, was the first India-specific fund. After selling or otherwise distributing all its investments with the exception of Rediff, the fund earned a 16x return.

Mr. Draper said he would still be investing in India if personal reasons didn’t keep him from traveling there as often as investments require. “It’s easier to do business in India today than it was when we were there,” he said.

Contact the writer:LGannes@RedHerring.com

With tech companies large and small spending significant energies to lobby music, movie, and television executives, how are these kids getting a foot in the door? “Honestly, it hasn’t been hard to get meetings,” says Mr. Shahani, who is CEO because he’s “more diplomatic.” Mr. Jain is chief financial officer, though the two do most everything together. They’ve also used the help of former general counsel of the Recording Industry Association of America (RIAA) David Liebowitz and former RCA chairman Bob Jamison, both of whom began advising the company early on.

Contact the Writer: LGannes@RedHerring.com

Limelight, which runs a network of thousands of servers and switches across the world, counts more than 600 customers, including Disney, Microsoft’s Xbox Live, DreamWorks, MySpace, YouTube, and Facebook.

The Tempe, Arizona-based company said last week its second-quarter revenue was $14 million, an approximately 35 percent increase from the first quarter of this year and 200 percent year-over-year. It has been profitable for nearly three years.

More than $100 million of the investment announced Wednesday came from Goldman Sachs Capital Partners, but other venture capital firms were involved, according to Mike Gordon, Limelight’s chief strategist. Their names were not disclosed.

Limelight, which has about 100 employees, has raised a total of $150 million, including a 2005 debt round from Silicon Valley Bank and Partners for Growth. It has offices in London, Singapore, and San Carlos, California.

“With a network designed from the start for bandwidth-intensive rich media applications, Limelight is uniquely positioned to help customers deliver new broadband media services,” Pete Perrone, a vice president at Goldman Sachs, said in a statement.

Web Barometer

Limelight plans to apply the new funding to growing its infrastructure. Some of that will go into new markets. The company will try to grow its Asian presence outside of Japan and Hong Kong by adding hardware in China, Korea, and India by the end of the year.

The firm sits in an interesting place, as it focuses on delivering content for online media companies. Limelight can literally watch the traffic go by.

“We get asked a lot, ‘Is this another bubble?’ and our view has been this is absolutely for real,” said Mr. Gordon, who has a vested interest in the continued success of digital media.

“Demand is driven by user behavior, and it’s all monetizable from our customers,” he added. “We’re not hearing from any of our customers, ‘Oh gosh, I can’t monetize this traffic.’”

Potential Troubles

Akamai, the largest content delivery network, sued Limelight last month for patent infringement. Limelight has not yet responded in court.

“The lawsuit has no merit,” said Mr. Gordon. “We do not infringe Akamai’s patents.”

Contact the writer: LGannes@RedHerring.com

Many trace the recent swarm of interest around online real estate to Zillow’s last huge funding round, $32 million from Benchmark Capital and Technology Crossover Ventures (TCV). Zillow has raised a total of $57 million, which includes funding from its founders.

In February, the Seattle-based company soft-launched its first product: a free, algorithmic home-value estimate tool. The company lists values for nearly 67 million U.S. homes.

Rather than taking an antagonistic approach toward realtors by getting involved with home-buying transactions, Zillow makes its money from advertising.

Unusual Deal

The deal is somewhat unusual in that Boston-based Par Capital is a hedge fund that primarily invests in public companies.

“We weren’t looking to raise money,” Zillow CFO Spencer Rascoff said.

Mr. Rascoff, along with much of the company’s leadership, including CEO Rich Barton, came from online travel site Expedia. They were familiar with Par Capital and in particular Brad Gerstner, who leads the firm’s investment, through mutual involvement in the online travel sector.

Previous investors Benchmark and TCV also participated in the round. The proceeds, said Mr. Rascoff, are intended to be used for hiring, growing Zillow’s staff from 118 to 150 by the end of the year.

Zillow recently tied up an arrangement with Yahoo to power part of the portal’s real estate site as well as Yahoo searches that are related to home valuation.

“We’ll be launching new and exciting things before end of year, but we’re not ready to talk about them yet,” Mr. Rascoff said. Though many have speculated that Zillow wants to get into transactions, Mr. Rascoff insisted the company would stick with its advertising revenue model.

Chasing Ad Dollars

In a recent interview, analyst Peter Conti of Borrell Associates praised Zillow for avoiding approaches to online real estate that depend on lead generation. “It really throws a monkey wrench into the works because you don’t have to fill out any information to have access to the data,” he said.

Borrell estimates real estate advertising spending will drop to $9.6 billion in 2010 from $11.7 billion in 2005. But that’s an overall figure, with traditional outlets like newspapers taking a hard hit. Online real estate advertising, by contrast, is set to reach $3.1 billion in 2010, up from $1.7 billion in 2005.

“The same promotional reach simply costs less money today than it did just a few years ago,” said Mr. Conti, who attributes the Internet.

Contact the writer: LGannes@RedHerring.com

NextMedium has raised a total of $9.5 million from Ascend Venture Group, Globespan Capital Partners, and now Bessemer.

Advertisers and entertainment companies pay membership and transaction fees to participate in NextMedium’s “brand integration” marketplace, called Embed, which launched in May. The company is also working closely with networks, as well as with Nielsen Media Research to measure the success of product placement.

Embed has been a long time in the making. In contrast to the aggressive release schedules of many of today’s startups, 17-employee NextMedium spent six years on the product, first laying out the technology and then securing industry cooperation.

In an interview last week, NextMedium CEO Hamet Watt said his company had not yet run through its funding, but he wanted to bring on Bessemer in order to capitalize on today’s hot market and hire top talent.

NextMedium runs its business from Los Angeles, but its product development effort is in Mountain View, California.

No More Commercials?

Though some television watchers feel that product placement cheapens and alters the high art of TV, the age of Tivo and iTunes is forcing business models to change.

“The industry has operated in a certain way and been reliant on a certain kind of revenue—30-second commercials—for 50 years,” said Mr. Watt. “People are fearful of the changing landscape, and I think that combination of greed and fear is making them look at a new way of doing things.”

Product placement across all media categories was projected to be worth $4.2 billion in 2005, up from $3.5 billion in 2004, with the vast majority on television and in films, according to research firm PQ Media.

Mr. Watt said adjusting campaigns based on customer responses would help regulate overuse of product placement. “It’s not like NASCAR,” he joked.

“Everyone wants to see an alternative business model arise so that the brand advertisers can continue to fund content,” said David Cowan, a general partner at Bessemer who has joined the NextMedium board.

Mr. Cowan, whose firm is investing heavily in what he calls the “Television 2.0” space, said he thinks entertainment companies are finally ready for the ’90s-era promise of bringing e-commerce and television to TV.

Bessemer’s other investments include mobile video startup GoTV, ad analytics firm IAG Research, mobile television chip company Siano Mobile Silicon, and online video-sharing play Revver.

Contact the writer: LGannes@RedHerring.com

Last week, attorneys for music labels EMI and Universal Music Group claimed Ann Winblad, co-founder and partner of Hummer Winblad Venture Partners, ordered her staff to destroy Napster-related emails in order to hinder the long-running Napster copyright infringement litigation (see Napster VCs on Hook for Email).

Attorneys for San Francisco-based Hummer Winblad responded in a court filing Friday that the firm had made “a good faith effort to preserve and produce relevant documents, including emails.”

Hummer Winblad declined to comment for this story, and attorneys for the venture firm as well as the music labels did not immediately respond to requests for comment. The case is proceeding in the U.S. District Court in the Northern District of California.

Winblad’s Email

EMI and Universal had quoted a June 2000 email from Ms. Winblad saying, “As we have all been required to surrender Napster e-mails, this should reinforce compliance with our long-standing policies. (1) We do not retain e-mails, it is your responsibility to delete your handled e-mails immediately.”

Following this missive, the firm’s submitted emails regarding Napster dropped dramatically.

Hummer Winblad contended Friday the email in question was excerpted improperly. Though Ms. Winblad did write the quoted portion, her comments were preceded by a forwarded email from Hummer Winblad partner Hank Barry.

Mr. Barry’s portion of the email informed Hummer Winblad employees to copy Napster’s lawyers on Napster-related emails and minimize the number of emails they sent about Napster.

Email Policy Unknown

Mr. Barry, along with Hummer Winblad partner and co-founder John Hummer, led the firm’s Napster investment, but Ms. Winblad was not directly involved. Preceding the company’s sale to Bertelsmann, Mr. Barry served as chief executive of Napster, and the records of his Napster email account have been saved.

His order to minimize Hummer Winblad emails about Napster was apparently in keeping with the firm’s email policies regarding its portfolio companies. This would ostensibly account for the drop in emails following the Hummer Winblad investment.

Attorneys for Hummer Winblad attempted to resolve conflicts in various partners’ testimony and emails by claiming an email policy that would require partners to retain documents was not communicated to senior members of the firm.

Another partner, Todd Forrest, testified that the firm’s policy as of 2000 was to retain emails, but Hummer Winblad claims Mr. Barry and Mr. Hummer did not know of the policy until 2003.

No Anticipation?

Hummer Winblad also attempted to show that the firm did not expect to be implicated in Napster lawsuits, though the company was already in court when Hummer Winblad stepped in.

“Had we anticipated litigation, we never would have invested in Napster,” Mr. Hummer wrote in a declaration to the court.

The filing also pointed out that the music labels had failed to submit some relevant emails, including one in which Mr. Barry apparently proposed an “industry supported model” for licensing EMI content to Napster.

Contact the writer:LGannes@RedHerring.com

The idea is to let consumers who have downloaded movies through Movielink be able to burn them to DVD for use with other computers and media devices. However, Movielink still needs to sign up Hollywood, so burnable downloads may not be available until late this year or early next.

“Today if you want a DVD, you have to buy a physical DVD from Amazon or Best Buy,” Mark Ely, Sonic’s executive vice president of corporate strategy, said in a recent interview. “If you want it on demand, you can rent it over a set-top box or use a PC to order the title. But you can’t burn it, you can’t take it on the road.”

Business and Tech Challenges

Novato, California-based Sonic hopes to cut deals for enterprise printing on demand, retail kiosks, as well as home video services. Movielink is its first such customer.

Sonic, maker of the popular Roxio DVD burning software, has spent the last three years solving the technical problems of writing digital rights management (DRM) onto DVDs and lobbying studios to change legal licenses to include DVD burning.

Santa Monica, California-based Movielink, of all online video companies, may be the most likely to get Hollywood onboard with DVD burning. It is a joint venture of five major studios, and the studio representatives on the company’s board of directors have signed off on the deal, according to Elana Altshuler, a public relations representative for Movielink.

Direct competitor CinemaNow, which is also rooted in the studios, is another likely customer for Sonic.

Movielink and CinemaNow in April announced they had won deals to sell major Hollywood releases for download on the same day as they come out on DVD (see Studios OK Movie Downloads). Last week CinemaNow said it had raised an additional $20 million and secured distribution with satellite TV provider EchoStar (see CinemaNow Reels in $20M).

‘A Breakthrough’

But really, any online video company, including those such as Guba, BitTorrent, and Wurld Media, who have signed deals to sell studio content, would be happy to progress toward on-demand DVDs (see Guba Sells Sony Films, Guba Goes Hollywood, Warner Takes P2P Leap).

“Hollywood has been very reluctant for its movies to be burned, which really limits the attractiveness to consumers of downloading movies from the Internet,” noted Cynthia Brumfield, president of research firm Emerging Media Dynamics.

Ms. Brumfield called the Movielink-Sonic deal “a breakthrough.” Until movie downloads can “break free of the PC,” they will remain a novelty, she said.

Being able to burn downloads is likely to make legal online stores a stronger alternative to peer-to-peer file-sharing.

Emerging Media Dynamics does not yet compile market shares for online download stores because the sector is too small, said Ms. Brumfield.

Sonic, which was formed by a group from Lucasfilm in 1986, sells the software used to create much of the world’s DVDs, from professionally produced Hollywood titles to home-burned flicks.

Sonic had net income of $19.9 million in 2005 on $148.7 in revenue, up from about half that the prior year. Its shares were down $0.35 to $14.55 in recent trading.

As a sort of bonus to Movielink for being the first to sign with it, Sonic will include the Movielink service in its Roxio CinePlayer and other software.

Contact the writer:LGannes@RedHerring.com

All involve early-stage funding rounds of about $6 million for U.S. companies outside of Silicon Valley, and the startups, venture capitalists, and strategic investors involved aren’t particularly high profile. But it does indicate this second wave of excitement about consumer Internet startups could be reaching the pile-on stage.

Even venture capitalists are starting to say that things feel bubbly. “I do think a minor bubble has emerged due to the high level of venture capital and the high level of interest,” Matrix Partners general partner Nick Beim said Friday.

HotGigs

HotGigs has received a $5.3-million first round of financing from Updata Partners.

The Minneapolis-based company, formed in 2003, runs a “staffing exchange” that, unlike most jobs sites, lets companies advertise to candidates for free. It requires staffing firms and independent contractors to pay to get access to job listings.

HotGigs adds a layer of social networking for the job seekers involved, allowing users to build out profiles and connections. It follows a portfolio company of Mr. Beim’s called TheLadders, which does the same thing for $100K-plus salaried positions.

“For companies, it’s a real pain in the butt [to advertise jobs],” HotGigs CEO Doug Berg said on Friday. “They get an avalanche of responses back, mostly not good.”

HotGigs also provides on-demand software. A contract management system is currently available and a customer relationship management system for staffing firms is set to launch at the end of the month.

Updata had previously invested in CareerBuilder and through its investment bank arm been involved in online jobs-related mergers and acquisitions. Mr. Berg had led Techies.com, a tech-oriented job board that raised about $100 million in venture capital and eventually shut down in 2001.

UnWired Buyer

Austin, Texas-based UnWired Buyer announced Monday it secured a $6.1-million second round of financing from Gefinor Ventures, Access Texas Fund I, Aegis Texas Venture Fund, DFJ Mercury, and others. That puts its total funding at $8.8 million.

The company offers a free product that allows people to engage in the frenzied last minutes of eBay auctions via mobile phones. The system was also recently made available through a web browser.

UnWired Buyer’s greatest success has been signing eBay as a partner, with a co-branded version of its phone alert system set to be released by eBay this week (see “eBay 2.0” in the June 26 Red Herring Internet Report). It gets affiliate fees from eBay.

The idea is to “bring non-addressable users back to the table,” UnWired Buyer founder Eric Smith said.

UnWired Buyer is examining businesses that are not entirely dependent on eBay.

Mr. Smith said the company would use its funding to build its business and explore other opportunities that hinge on the “marriage of scarcity and time sensitivity” and “getting perishable inventory to market to the widest possible group of users.” That might include concert and event tickets as well as travel.

Multiply

Also Monday, social-networking company Multiply said it raised a $6-million first round from Transcosmos Investments, a subsidiary of the Japanese marketing company Transcosmos, as well as the company’s founders.

Boca Raton, Florida-based Multiply operates a closed social network, focused on communication and sharing with friends and family. It is ad-supported, though the company had previously experimented with premium subscriptions.

The company, which has about 3 million users, would like to get the recognition others have received. “If you read about the MySpaces and the Facebooks, and the YouTubes and the Revvers,

you don’t see Multiply listed as often as we’d like,” CEO Peter Pezaris said last week.

The investment comes along with the launch of a Japanese localization of Multiply, as the American arm of Transcosmos specializes in bringing U.S. technology companies to Japan.

“From the Japanese perspective, we like a very clean and organized way—MySpace doesn’t work,” said Shin Nagakura, executive vice president of Transcosmos, which also has investments in Become.com, Pheedo, Edgeio, and Hipcast.

Mr. Nagakura said his focus for the next six months would be on doubling Multiply’s traffic and adding localizations for China and Korea.

The founders of Multiply had previously run Commissioner.com, a bootstrapped fantasy sports portal that was sold to CBS SportsLine in 1999 for $48 million.

FeedBurner

Also Monday, Chicago-based FeedBurner, a company that is not much further along than HotGigs, UnWired Buyer, and Multiply, said it had acquired Blogbeat.

FeedBurner specializes in feed management and analytics, with 200,000 publishers of blogs, podcasts, and established media signed up to route their 19 million subscribers to their sites’ 350,000 feeds through the company. Blogbeat, which is about a year old, does real-time blog analytics.

Terms of the acquisition were not disclosed, but since Blogbeat was a one-man show, the deal can’t have been too large. Blogbeat founder Jeff Turner will be FeedBurner’s lead engineer of web statistics, remaining in Raleigh-Durham, North Carolina.

FeedBurner, a 2006 Red Herring North America winner, has raised $10 million in two rounds of financing.

Contact the writer: LGannes@RedHerring.com

Lyrics have until now not been legally available for inclusion in download stores, search engines, and devices. That hasn’t stopped non-licensed sites from filling users’ desires to find out what artists are singing, much to the chagrin of music publishers, who don’t like other people selling ads against their copyrights.

Emeryville, California-based Gracenote, which has been working to acquire rights to lyrics for the last three years, said this week it will launch a lyrics service in 2006.

The company will be able to sell the product through partners, with the lyrics information either stored locally or streamed online. That could be on a PC, a portable device, on a home server, or included in a search engine.

Gracenote, which has raised $36 million in venture capital, hopes to sign on existing customers, including Apple, Yahoo, Samsung, and Sony.

The company has acquired rights to use lyrics of BMG Music Publishing, Universal Music Publishing Group, Sony/ATV Music Publishing, Peermusic, and Famous Music, among others. It still lacks deals with major players such as EMI and Warner.

Unmet Demand

The demand for lyrics is quite strong. “Lyrics” was the twelfth-most searched term across all engines for the last four weeks, with only variations on the terms MySpace, eBay, MapQuest, and Yahoo above it, according to U.S. research firm Hitwise.

Though music publishers weren’t happy with the proliferation of unlicensed lyrics sites, they had not yet banded together to make lyrics readily available.

“We’ve been in a real catch-22 situation,” noted Nick Firth, chairman and chief executive of BMG Music Publishing, which has signed with Gracenote. “It’s kind of difficult to go after the illegal sites when you haven’t got a legal alternative.”

Gracenote, which has relationships with nearly everyone in digital music, emerged as the player to bring everyone together. The company quietly rose to prominence over the last decade with its media database, which allows media software and devices to recognize the titles of CDs and DVDs.

Gracenote’s other products and projects, which are all produced through partners, include voice-controlled music devices, music recommendations, and audio recognition software. The latter could allow a cell phone held up to a speaker to use such audio recognition software to retrieve the title of a song playing.

Gartner analyst Van Baker had kind words for Gracenote’s efforts, saying they should increase music discovery and purchases.

“If people can go to Napster or Rhapsody and type in the lyrics to the song they heard a minute ago, they’re probably going to buy it,” he said.

Previous Tussles

Despite a flare-up last December over a piece of software called pearLyrics (see Labels Target Lyrics Sites, Warner Changes Tune on Lyrics), music publishers say they aren’t going after unlicensed lyrics sites.

Lauren Keiser, president of the U.S. Music Publishers’ Association, said he knew of a couple of other organizations besides Gracenote who were trying to tie up lyrics-licensing deals. “We understand the need for lyrics,” he said. “We do want to make lyrics available legally as an industry.”

“For lyrics, we are looking at legal alternatives,” said Mr. Keiser. “As far as guitar tab and sheet music sites, both the National Music Publishers’ Association and my group have started sending take-down notices to certain sites and they are going down.”

Challenges Ahead

Meanwhile, all those lyrics aren’t being freed from a locked box. Rather, publishers are providing what they have available and Gracenote is using editors to check accuracy and fill in the blanks.

“This content doesn’t exist in a library,” said Jim Hollingsworth, Gracenote’s senior vice president of sales and marketing. “This is a painstaking process.”

“A lot of the assets of media companies, especially back-catalog assets, are still sitting around on 3-by-5 cards somewhere,” Mr. Baker said.

Gracenote said it hopes to sign on hundreds more publishers, large and small. Mr. Hollingsworth would not say how what portion of the company’s resources or revenues were expected to be involved with lyrics, though he called the effort a “multiyear, multimillion-dollar project.”

Contact the writer:LGannes@RedHerring.com

The disconnection between the two sites was an extreme example of strained relations between the online and print arms of many of today’s publications.

Though they have never fully been in sync, since a sale split up the two Wireds in 1999, their separation has led to much confusion for readers. In that time, Wired News operated as a daily tech and science news site, but it also featured Wired magazine content and archives.

The parenthood of the two Wireds has become quite complicated over the years. Lycos, which is owned by Daum Communications, had acquired Wired News and its domain Wired.com when it paid about $83 million in stock for Wired Digital in June 1999, according to reports.

Wired has been owned by Condé Nast (which is part of Advance Publications) since 1998, when the publishing giant bought the magazine’s parent Wired Ventures for a reported $85 million.

A Logical Deal

“It would make sense to undo the deal they did way back when,” commented Paul Grabowicz, New Media Program director at the U.C. Berkeley School of Journalism.

Noting tensions and territoriality about advertising, scoops, and experimentation, Mr. Grabowicz said on Wednesday, “The print culture sometimes can be a drag on the online publication.”

However, he added, “In this case, given the nature of Wired magazine, I don’t think the traditional obstacles will be there.”

The move came as a relief to Wired editor-in-chief Chris Anderson, a digital content evangelist whose book on the topic, The Long Tail, came out yesterday.

“Aside from being somewhat ironic that Wired magazine wasn’t really wired, it was frustrating for us to be unable to walk the talk, since we didn’t control the site,” Mr. Anderson wrote on his blog.

Changing Focus

Though online news and Internet advertising are quicker-growing areas than the magazine business, it hasn’t been smooth sailing for Wired News. In July 2005, Wired News trimmed its staff, laying off and reassigning all staff reporters and writers (see Wired.com Lays Off Writers). Since then, much of its content has come from blogging and freelance pieces.

The site’s readership has hovered around 1 million unique visitors per month, hitting a low of 785,000 in February of this year, according to comScore Media Metrix. comScore could not immediately provide older numbers, but relative traffic history on Alexa shows the site holding steady since 2002, with a slight upturn over the last year.

In 2004, Lycos was bought by the South Korean company Daum Communications (disclosure: Red Herring publisher Alex Vieux is on the Daum Board).

Under new CEO Alfred Tolle’s leadership, Lycos, formerly a dot-com search engine, is reshaping itself as a broadband content portal. Since being purchased by Daum, Lycos has also sold Quote.com, though it retains Hotbot, Hotwired, and Webmonkey.

Saying the Lycos brand still has worldwide recognition, Mr. Tolle explained in a statement, “This deal allows us to focus entirely on building out Lycos as an entertainment broadband destination.”

Growth Not in Sync

Though the numbers aren’t direct comparisons, projections for growth in online advertising, which is how Wired News makes money, far outpace spending on magazine advertising and subscriptions.

U.S. spending on consumer magazine advertising is forecast to increase at a compound annual growth rate (CAGR) of 6.2 percent, hitting $16.37 billion in 2009, according to research compiled for the Veronis Suhler Stevenson Communications Industry Forecast. Meanwhile, circulation spending is supposed to grow at a CAGR of just 2.3 percent, reaching $11.56 billion in 2009.

Research firm Forrester has put forth one of the most aggressive forecasts for online advertising. The firm said last year it saw online advertising spending rising to $26 billion by 2010, up from an estimated $14.7 billion in 2005, for a 12 percent CAGR.

Contact the writer:LGannes@RedHerring.com

The round, led by Advanced Technology Ventures, included seed investors Revolution Ventures, The Founders Fund, and Josh Kopelman, and brought Engage’s total funding to about $6 million.

Engage hopes to spark slowing growth in the online dating sector by adding a twist to the personals formula. The idea is to “bring social networking into dating, more closely mimicking how the world actually works,” said Steve Baloff, a general partner at ATV who has joined Engage’s board.

Social networking sites such as MySpace do serve as dating services for many users, but San Francisco-based Engage, which soft-launched last summer, is a bit more explicit. The company facilitates personal introductions to start relationships.

Fully 18 percent of users are signed up only to play matchmaker, rather than to find a date of their own, Engage CEO Suneet Wadhwa said Monday.

Serious Daters

JupiterResearch said the online dating market was estimated to be worth $516 million in 2005, up just 9 percent year-on-year after years of over 70 percent growth. In the year since that forecast, the research firm reports that some categories, such as the percentage of U.S. online users who posted personals ads and subscribed to dating sites, have actually fallen.

Engage, which would not disclose user numbers except to say they are growing approximately 200 percent month-over-month, says it caters to a less commitment-phobic crowd than sites with younger or more casual target demographics.

The average Engage user is aged “well into the 30s,” said Mr. Wadhwa, who was previously successful with another late entrant to a well-developed Internet sector; his Snapfish sold to Hewlett-Packard.

“This is not Adult FriendFinder; this is for people who are looking for romance and serious relationships,” said Mr. Baloff, who noted he is married and has not participated in any dating sites.

Jupiter makes note that serious daters are 63 percent more likely than average online daters to convert from browsers to paid subscribers.

No Revenue

The Engage service is currently free. Mr. Wadhwa said the company would not sell advertising or charge matchmakers, but that other business models including subscriptions would be rolled out in 2007. Engage would not disclose potential payment specifics, but a six-month promo membership is currently being advertised as “a $200 value.”

Engage, which has fewer than 10 employees, said it plans to stay lean, though it will spend the new funding on hiring, marketing, and developing.

The Engage site did not figure in with the top 15 online dating sites reported by comScore in May. That category was led by Yahoo Personals, Match.com, and True, in that order.

Contact the writer: LGannes@RedHerring.com

Until now, Culver City, California-based Sony Pictures Home Entertainment only made its videos available online for à la carte downloads through its Movielink service and the similar CinemaNow service, two studio-led efforts that have not gained much traction.

San Francisco-based Guba announced its first studio deal just weeks ago, to distribute a larger slate of movies and television shows owned by Warner Brothers (see Guba Goes Hollywood).

Guba CEO Tom McInerney said the Warner Brothers deal had sped along the Sony deal, along with others in the pipeline.

Startups Rush Ahead

The recent moves signal a lost opportunity for video pioneer Netflix, and to some extent Apple Computer’s iTunes. Netflix said last year it would postpone its own video download service due to dissatisfaction with Hollywood’s proposed terms.

While Apple sells many television shows and a smattering of feature-length films, the company has yet to offer a full slate of studio movies.

Startups like Guba and BitTorrent, which has struck a similar deal with Warner Brothers, may have been more flexible, and thus successful, in their negotiations (see Warner Takes P2P Leap).

“A lot of times big players want things their way, and we’re taking a more evolutionary approach,” said Mr. McInerney.

Saying they did not anticipate the recent rise of user-generated content, Sony executives explained they’re adjusting and reorganizing to accommodate digital distribution.

“At the end of the day, we’re competing for eyeballs with a finite seven-day-a-week, 24-hour possibility,” said Ben Feingold, Sony’s president of worldwide home entertainment, digital distribution, and acquisitions. “We broadened our look to see how people are spending their time.”

Still Many Limits

Sony acknowledged that its distribution offerings through vendors such as Guba, Movielink, and Starz’s Vongo lack many key functions.

“What we’ve done today is baby steps toward what the consumer needs in terms of distribution,” said Sean Carey, Sony’s executive vice president of digital distribution.

Mr. Carey named burning, portability, and connections to home televisions as key future features.

Sony plans to offer more than 100 titles as of Tuesday for download on Guba.com, with 500 titles expected within a year. New releases will sell for $19.99 and back catalog titles will go for $9.99. Some titles apparently will be available for rent, but the terms have not been spelled out.

Guba’s Sony downloads will require Windows Media Player. They can be burned, but only for use on the computer they were downloaded to and burned from.

Leaping Hurdles

While studios have often been faulted for letting their self-interest trump offerings of services and products that consumers would be willing to pay for, Sony blamed the unavailability of appropriate DRM (digital rights management) technology, especially DRM interoperability with its competitors.

“We want to make it easy to use content, and technology makes it really hard, because not all these big companies believe in or play in the interoperable world,” said Mr. Feingold.

Mr. Feingold said the Guba deal was the first of many it would make with user-generated content companies, as well as major distributors.

Guba, formed in 1998, has made a profitable business of selling subscriptions to video scraped from Usenet, with no outside investment. Adjusting to the recent upwelling of interest in online video, the company added an advertising-supported, user-generated portion of its site, allowing users to upload video directly.

Guba also recently stepped up efforts to clean up copyrighted content, using a homegrown artificial-intelligence system for fingerprinting video, and spun out its adult content into a separate business.

Contact the writer:LGannes@RedHerring.com

Acacia Research is often labeled a “patent troll,” because it spends most of its efforts licensing technology it did not develop. But many argue that the world, especially the United States, benefits when intellectual property is treated like any other piece of property.

RedHerring.com spoke with long-time Acacia CEO Paul Ryan this week to get his side of the story.

Newport Beach, California-based Acacia, which has been publicly traded since 1995, started out as a public venture capital company, an incubator of sorts. It changed tack in 2001 after making more than $26 million from licensing television filtering and video-on-demand technology.

The company now has 47 technologies in its patent portfolio—with 17 of them generating revenue—and maintains it retains partnerships with the inventors of all of them.

Acacia has been on a licensing warpath lately, closing 25 new deals this quarter. They include names bigger than it had dealt with in the past, such as Hewlett-Packard, Intel, and Philips Electronics. It plays in lucrative markets; Ernst & Young has said revenue from patent licensing is to reach $500 billion by 2015, up from $110 billion in 2000.

Shares of Acacia have soared with the increased activity. They closed Friday at $14.36, more than tripling from a 52-week low of $4.38 last July. The company had a net loss of $6.28 million last year on revenue of $19.57 million. During the last year, the company bought competitor Global Patent Holdings and raised about $20 million in additional capital from some of its largest shareholders, including Apex Capital.

Below, Mr. Ryan dismisses criticism of his company’s bullying tactics, suggests ways IT can learn from biotech, and predicts China will become the world’s next patent powerhouse.

Q: Much of your company’s business has been shaped by market conditions. How does it change if things pick up again and there’s more technology being developed and less excess intellectual property?

A: There’s 300,000-plus new patents issued each year. To some degree there was an inordinate amount of intellectual property without a home after the tech bust, but that was a short-term phenomena. Many of the discussions we’re in currently with future companies are very sustainable public companies, but with only one or two patent portfolios it does not make sense for them to build an entire licensing infrastructure. As a result of our success in the last year, we have a huge pipeline of deals.

Q: How do you think the tech industry’s current obsession with monetizing IP will play out?

A: Given the capital required, and given the fact that you now have developed a mature tech industry, you no longer have to build an independent freestanding company for every single new product that comes along. More and more companies realize that their expertise is in inventing and innovating and then partnering and licensing it out to do the marketing and distribution—not unlike what goes on in the pharmaceutical and biotech industry.

For a biotech startup, you have a feeder system—you can partner that compound with Genentech or Pfizer or Amgen or Lilly, you can generate returns for your shareholders without having to go into the multihundred-million-dollar business of trying to distribute drugs worldwide. I think that same model’s beginning to play out in the tech sector.

Q: Many people have trouble defining who fits into the category “patent troll,” but Acacia’s name usually comes up. Is all that name-calling and negativity having an adverse effect on making deals?

A: None whatsoever. The term is a little disingenuous. If you’re really concerned that the party has the patents, it means that you probably infringe. The definition of a patent troll [is becoming] a group of lawyers who just go out to bankruptcies, buy a patent, and try to enforce it.

Q: So you don’t have anything in your portfolio that you bought when a company went out of business?

A: We’ve actually helped some companies get back into business. Veritec is a good example; they’re a Minneapolis-based company that developed the new 2-D bar code technology, the new multidimensional bar code technology. They spent a ton of money developing it, but weren’t successful initially as an operating company. We licensed Nokia and AMD and enough companies that we were able to convince the bankruptcy court to allow us to negotiate with their creditors. One of their creditors was Hitachi, and we negotiated a license for them and they basically dropped their demands. Now Veritec is out of bankruptcy and back to a full operating company again.

Q: But at some point you’re sending companies a letter they don’t want to get.

A: I would agree no one’s ever thrilled when they’re notified by the owner of intellectual property, but I think what they do like about us is we do incredible due diligence. We’re all cards up and we give that to them on day one and say here it is—warts and all. We have very reasonable expectations of royalty rates—less than 1 percent most of the time. What they do know is we will file litigation and if we do we will ratchet up those royalty rates.

Q: So who gets it? Who’s on board with your idea of the IP economy?

A. Nathan Myhrvold [CEO of Intellectual Ventures, the well-funded Bellevue, Washington-based startup that is developing a massive patent portfolio] gets it big time—he understands it’s going to be a new industry of invention and innovation. Microsoft gets it big time. When you see Microsoft go from the point of saying ‘we don’t believe in patents’ to being IP-centric and hiring Marshall Phelps, the guy who’s the grandfather of building the $1.5-billion-a-year licensing model at IBM, that’s a complete 180 from the biggest tech company in the world.

Even China—everyone’s been fearing that they’re going to steal the world’s IP, but I think they’re making such an investment and partnering in basic technology innovation that they’re going to wind up a strong advocate of intellectual property. They’re going to surprise everyone in the world and come out with a very strong patent system in China.

Contact the writer:LGannes@RedHerring.com

Or Ellen Siminoff, who left her senior vice president role at Yahoo in 2002 and two years later was recruited to head up search engine marketing firm Efficient Frontier. Or Susan Choe, who, through 2004, held various international management roles at Yahoo before becoming founder and CEO of StrayFish, a Sunnyvale, California-based online game distributor (still in stealth). Or Jim Brock, who was Yahoo’s senior vice president, communications and consumer services before becoming founder and CEO of online publisher Attributor in Redwood City, California (also in stealth).

eBay has taken hits, too. Gil Penchina, a vice president of eBay International before he jumped in January, moved to Menlo Park, California-based Wikia, where he is CEO of the for-profit community wiki site (from the founders of Wikipedia). Jordan Glazier, now CEO at San Diego, California-based EVDB, an event database and platform, used to be eBay’s general manager of computers, consumer electronics, and business & industrial sales.

There’s Krishna Motukuri, who was associate director of engineering in India for Amazon before moving on to become founder and CEO of Ugenie, a Bangalore-based online shopping engine (also in stealth).

For many of these people, executive experience at an Internet stalwart is the winning line of their resumes, rather than previous startup success. They weathered the downturn, vested their options, and got the itch. Saying it’s a cyclical thing, they argue the same phenomenon will happen to cultish Google soon enough.

But the startup CEOs may end up back at their former employers, and in some cases that’s the unspoken subtext; exit opportunities for Internet startups these days are all about acquisitions.

Jeff HoldenFounder and CEO, Pelago; Seattle, Washington	Consumer mobile applications builder (in stealth)	Formerly senior vice president of worldwide discovery, Amazon	"When I joined Amazon it made $60 million in revenue and was a cash ininerator. When I left it was a cash printing press," says first-time entrepreneur Jeff Holden, an advisor to Amazon CEO Jeff Bezos before leaving in January.
Toni SchneiderCEO, Automattic; San Francisco, California	Open-source blog software and hosting	Formerly vice president of Yahoo Developer Network, Yahoo	"The one thing that drove me crazy about Yahoo is the commute," says Toni Schneider, a serial entrepreneur who came to Yahoo when it bought his Oddpost email startup, and says he started fending off headhunters as soon as he got to the company.
Rob SolomonCEO Sidestep; Santa Clara, California	Travel search	Formerly vice president and general manager of Yahoo Shopping, Yahoo	"At a big company, you can't control your destiny," says Rob Solomon, who was employee No. 2,100 or so at Yahoo, and says maybe 300 of 400 of those hired before him are still with the company.

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