Three of Flagship's portfolio companies that specialize in Internet search technology were highlighted prominently in two articles in The Boston Globe's Sunday Business section on Monday, January 17, 2005. All three represent investments made by Flagship when other venture capital firms were retrenching and cautious about supporting search technologies. We continued to believe that there was money to be made in this area, and today all three companies (EasyAsk, Eliyon Technologies, and TripAdvisor) are in revenue phases, near or well beyond break-even. One company (TripAdvisor) was acquired last year at a significant return (18X) for our investors. Flagship has played key roles in all three companies. Steve Ricci, Senior Partner, serves on the boards of Easy-Ask and Eliyon. Langley Steinert, Venture Partner, was cofounder and chairman of TripAdvisor, and Ed Kania played a major role in the launch and nurturing of the company.
Full text of articles follows:
In the shadow of Google
Although Google dominates the market in Internet search, a number of companies are hoping that profitable niches remain
By Robert Weisman, Globe Staff | January 17, 2005
Google Inc., the reigning king of Web search, cast a long shadow in the high-technology world last summer when it raised $1.67 billion in an initial public offering and saw its share price quickly double.
But for those who missed out on the riches, a small sector of search companies has sprung up on both sides of the country. Many are venture-backed start-ups that, rather than competing with Google head to head, are focusing on smaller business or consumer niches.
The attractiveness of these companies was underscored in November, when Microsoft Corp. cofounder Paul G. Allen made a venture investment in Eliyon Technologies Corp. of Cambridge, creator of a business search engine using natural language processing.
Eliyon is one of a cluster of Boston-area companies -- with names like Dotomi, EasyAsk, Endeca, FAST, iPhrase, Northern Light, and TripAdvisor -- engaged in search-related activity. As they scramble for a foothold, high-tech giants like Microsoft and Yahoo Inc. are readying frontal assaults on Google, and researchers at IBM Corp. and Sun Microsystems Inc. are developing new search technologies. Much of the activity is based on the premise that search is emerging as a new technology platform, not only on the Web, but on corporate intranets, computer desktops, and across software applications.
"There's a lot of business to be had in search in the next few years, and it's not all going to Google," said Susan Aldrich, senior vice president at Patricia Seybold Group, a technology research and consulting firm in Boston. "I think several of the local companies have the potential to become wildly successful and get very big."
In the burgeoning search field, there's room for more than one business model.
Google makes the bulk of its money through advertising, selling sponsored links alongside its search results, while companies in enterprise search license their technology to businesses.
"Some of the things that Google does so well, like page rankings, are irrelevant in the enterprise," said Sue Feldman, vice president and search analyst at International Data Corp., a research firm in Framingham.
Microsoft's delay in rolling out the next version of its Windows operating system, code-named Longhorn, which is expected to include advanced search features, creates a window of opportunity for smaller players over the next year or two, Aldrich said. Those that can solve problems for consumers or businesses will have plenty of customers.
"People are struggling with the issue of findability," Aldrich said.
"Over the next five years, you're going to see many niche players surviving, some will disappear, and new niches will be created."
Here's a look at three niche players in the Boston area:
Go to a clothing website powered by EasyAsk Inc.'s natural language technology, and you can get precise and meaningful results from a search for "ladies footwear under $75," a query that would yield no matches or a confusing jumble of listings from e-commerce sites using searches for key words.
Over the past four years, EasyAsk's e-commerce search tools have attracted 100 customers, from Lands' End to Talbots to Coldwater Creek. Now the Marlborough company, backed by Sigma Partners of Boston and Flagship Ventures of Cambridge, is branching into the field of enterprise search -- helping employees to locate corporate data.
Bob Alperin, the president and chief executive of EasyAsk, has refined his elevator pitch to reflect the company's move behind the firewall and its targeting of a new class of customers: "We make it easier for corporate constituents to find corporate information and accelerate a path toward more fully informed decisions."
It's not hard to understand EasyAsk's motive for diversification. While Alperin estimates the market for e-commerce search software at less than $100 million a year, Alperin thinks the market for enterprise search tools is closer to $1 billion annually, and growing. IDC estimates knowledge workers spend 15 to 30 percent of their office hours seeking information.
"Companies are realizing they're leaking money because employees can't find the information they need," Feldman said.
"I like to think of this market as the Super Bowl of search," suggested EasyAsk founder and chairman Larry R. Harris, a Dartmouth College computer science professor turned technology entrepreneur.
"When there's real money involved, it really matters," he said.
EasyAsk, which employs about 50 people, offers navigation technologies to help employees of companies and other organizations surmount the problems of not knowing where to look or how to ask for data.
Its searches extend beyond the World Wide Web to relational databases, reports, documents, information warehouses, and e-mail logs within enterprises, enabling their employees to rapidly answer questions like "What color sweaters have total sales in excess of $100,000?" or "What employees speak Russian and know Oracle databases?"
After a dozen quarters of revenue growth, EasyAsk expects to be profitable midway through 2005, Alperin said.
But as it ventures into the enterprise market, it faces tough competition from a pair of larger California rivals, Verity Inc. and Autonomy Inc.
Then there's Google itself, which has been moving into enterprise search with what EasyAsk officials say is a less robust, though cheaper, offering.
Framed on a wall outside the executive offices at Dotomi Inc., on the edge of Boston's Financial District, are colorful arrangements of Post-it notes bearing motivational slogans offered up by employees during a company workshop: "Relevancy, Retention, Relationship," "Give Consumers Control," "Shaping the Future of Advertising."
At a time of resurgence for online advertising, Dotomi offers advertisers the ability to customize messages to consumers on banner spaces of the various websites they visit, from about.com to nytimes.com. Advertisements on Google, by contrast, are driven primarily by search terms. Through partnerships with big advertising networks, Dotomi claims to have coverage of about 8,000 US websites.
"The days of blasting your message all over the Web are over," said John Federman, president and chief executive of two-year-old Dotomi, which is backed by U.S. Venture Partners of Menlo Park, Calif., Investor Growth Capital of New York, and Velocity Equity Partners of Boston. "We're going toward a much more targeted experience. When you have a little kid in the house, you don't mind seeing an ad for Pampers. If you don't have a kid, you'd rather see something else."
Dotomi -- the name is an acronym for "direct one-to-one marketing inc." -- uses permission-based marketing to connect consumers with the marketers they want to hear from.
When a consumer books a flight to Florida from a site on travelcompany.com, for instance, the site will ask her if she wants to receive direct messages. If she does, Dotomi will drop a cookie on her browser. Then, when she goes to a website in the future, the banner ad she sees will contain a customized pitch for the best rates on upcoming flights to Florida. (Neither Dotomi nor the websites to which it delivers custom ads keep personally identifiable information on consumers.)
The technology was developed by Israeli computer scientist Yair Goldfinger, the Dotomi cofounder and chief technology officer. Goldfinger, who is based in Tel Aviv but travels frequently to Boston, was the creator of instant messaging. He turned his attention to Internet advertising after his former company, ICQ, was sold to America Online.
Dotomi, which employs 52 people worldwide, seeks to capitalize on the shift to "retention marketing" by advertisers looking for repeat business. "Retention marketers are just starting to discover the Web as a vehicle to reach consumers," said David Vogel, managing director of Velocity, which invested $1 million in Dotomi in October. Retention marketers now try to reach customers through e-mail that often gets caught in filters or lost in spam-clogged inboxes. In the future, Vogel believes, they will migrate toward customized ads.
Eliyon Technologies Corp.
In early 2000, when he was running Corex Technologies Corp., a maker of hardware and software that scan business cards, chief executive Jonathan Stern had a realization: "If I could collect information about every company in America -- what they do, what products they sell, who works there, and who used to work there -- it would be worth a lot of money," he recalled thinking.
Thus was born the idea that grew into Eliyon Technologies Corp., a Corex spinoff that provides power searches of companies and people. Eliyon, located in Corex's office building on Memorial Drive in Cambridge, has amassed a database of over 1.5 million companies and more than 23.6 million business people. "Currently we believe we have the largest database of people in business anywhere," Stern said.
Convinced of the limitations of Google-style cataloging of words on Web pages, his company developed its own Web crawlers, based on algorithms that analyze websites and correlate information. "There's a lot of relevant information that's scattered," Stern said.
Eliyon's business search engine enables customers to develop detailed corporate and personal profiles that quickly yield information such as the names of everyone at Microsoft Corp. who works on the Xbox or all vice presidents for manufacturing in the Boston area.
The technology is licensed to corporate recruiters, sales people, business development executives, investment bankers, and hedge fund managers.
Unlike many other venture-backed start-ups, Eliyon has been profitable for the past 2 years. The 60-employee company is backed by venture investors, including Venrock Associates and Vulcan Capital, Paul G. Allen's investment group.
Robert Weisman can be reached at firstname.lastname@example.org.
© 2005 The New York Times Company
TripAdvisor shows small firms the way to success
By Robert Weisman, Globe Staff | January 17, 2005
NEEDHAM -- What will become of Greater Boston's cluster of venture-backed search companies? Few will get big enough for a Google-style initial public offering, but that doesn't mean their founders and investors won't find another way to cash out.
The most likely path for those that succeed in carving out a genuine niche is the one that was taken by TripAdvisor Inc., a five-year-old Needham company that was purchased for $210 million by Barry Diller's Interactive Corp. of New York in March. InterActive, which owns a batch of consumer-related websites such as Expedia, Ticketmaster, Citysearch, and Match.com, has retained the brand of TripAdvisor as well as its two cofounders, Langley Steinert and Stephen Kaufer.
Steinert said the backing of InterActive will enable TripAdvisor, already one of the top 10 travel websites, to launch an advertising campaign and expand its reach overseas this year.
"Our goal is to become the place where people start their travel research," he said.
TripAdvisor uses custom crawlers to search the Web for travel-related articles, and employs a staff of 15 editors to post the best content from such diverse sources as Fodor's, Frommer's, and the Economist magazine. By far its most popular features are "user reviews" of hotels or attractions.
"They tend to be brutally honest," Steinert said. "They'll give you the pros and cons of people's experiences."
While it initially planned to be an application service provider, licensing its content to third parties, TripAdvisor switched its business model in late 2001 to "contextual commerce," selling travel, lodging, or entertainment providers sponsored links on pages with related content. Such paid sponsorships mirror Google's business model, only in a narrower niche that Steinert says Google's technology can't duplicate.
"There's a fundamental flaw in key word search technology" such as Google's, he said. "They have to be all things to all people. There are millions of listings for Paris on Google.
"But if I'm looking for Paris, I'm really interested in Paris as a destination. I'm not interested in the official city of Paris site or sites about the history of Paris."
Sue Feldman, vice president and search analyst for International Data Corp. of Framingham, said the search market today is marked by almost continual disruption from new products and new companies seeking to plant a flag.
"The whole market is growing fast," she said. "Some companies have been snapped up, and more will be."
Steinert, the TripAdvisor chairman, counsels venture-backed companies to be flexible in their business models, conservative in their spending, and careful in their hiring. He said TripAdvisor, which employs 40 workers, interviews 10 or 11 candidates for a single engineering job.
For TripAdvisor's founders, who ponied up their own money and raised $4 million from Flagship Ventures of Cambridge and some private investors, the InterActive acquisition was a welcome outcome that leaves the company well positioned for further growth.
"Our profit margins are almost obscene -- certainly north of 40 percent," Steinert said. "It's a highly scalable business."
Robert Weisman can be reached at email@example.com.
© 2005 The New York Times Company