Search engine startups vie for users

Venture capitalists are funneling money into search startups in the hopes that novel approaches to mining the Web will eat into the mammoth market share currently controlled by Google, Yahoo and Microsoft.

Since the beginning of the year, VCs have collectively invested more than $40 million in search related startups developing general purpose search engines and creating specialized tools geared for mobile users, video queries and product information. The funding announcements come as search query volumes and revenue from keyword advertising continue to grow year-over-year, especially for the brand-name search engines that capture the majority of the market.

Google currently dominates the space, registering more than 3 billion search queries—51% of the U.S. total—in January, according to Nielsen/NetRatings. The site saw 23% growth in year-over-year search volume. Yahoo ranks second, with 1.4 billion search queries, during the same period, and a 30% year-over-year growth. Third-ranked MSN saw a decline, with 500,000 search queries, a 10% decline from January 2006.

“Search is a large market, and certainly venture capitalists love large markets,” says Charles Moldow, a general partner at Foundation Capital and board member at search startup Powerset. “But you also have a formidable competitor in Google.”

To draw users, search startups market their uniqueness over the industry leaders. For example, Snap, a two-year-old search engine backed by Idealab, boasts that it offers a faster way to search for relevant sites. The Pasadena, Calif.-based search engine provides a preview image of a site next to its results—a feature that CEO Tom McGovern says appeals to people who don’t want to waste time clicking and opening multiple links.

“The market was $13.5 billion last year in revenue for the sponsored search segment—it’s a big industry,” McGovern says.

Generating traffic also requires delivering better search results, which is easier said than done. And for keyword advertising revenue to grow across the board, search engines must provide significantly more relevant results, according to a report this month by Lehman Brothers. The report says that local, personalized and mobile searches are the most significant growth drivers going forward.

Moldow of Foundation is optimistic about natural language search, which involves making queries in the same vernacular as chatting with a live person. San Francisco-based Powerset, which raised about $14 million in a Series A in November from Foundation and The Founders Fund, is working to make the technology feasible for complex queries. Whoever manages to accomplish this, Moldow says, stands to be richly rewarded.

“In today’s world, if you create good search, people will us it,” Moldow says. “But it has to be demonstrably better. It can’t be just a little bit better.”

Of course, not everyone’s looking to topple the industry giants. VCs are also funding companies focused on vertical search niches such as travel and consumer electronics, and on startups that piggyback on Google’s keyword advertising model and ranking algorithms:

• New York City-based Magnify Networks, which operates a site for searching and sorting user-generated videos, announced this month that it raised $1.2 million in a funding round led by NextStage Capital and New York Angels.

Farecast, which searches airline fares and predicts whether their costs wise rise or fall, raised $12 million in a Series C round in January from Greylock Partners, Madrona Venture Group, Pinnacle Ventures and Sutter Hill Ventures.

Mobile Content Networks, which operates a search platform for mobile users, earlier this year raised a third round of $4 million from seven backers, including Meritage Private Equity and Netage Capital Partners.

Oak Investment Partners, RRE Ventures and StarVest Partners backed an $18 million fourth round for ICrossing (f.k.a. Internet Crossing). The Scottsdale, Ariz.-based company—which raised $58 million over three previous funding rounds since 2000—works with clients to improve their rankings in search results and to bolster their online presence.

• General purpose search engines provider ChaCha Search, which incorporates sites picked by human guides in query results, announced at the beginning of the year that it raised $6 million from private backers, including the investment firm of Amazon.com CEO Jeff Bezos.

Other closely-watched startups are also muscling into the search space. In January, San Jose, Calif.-based TextDigger—funded in part by CNET—launched a public test of its semantic search service Digger.com, which infers the probable meanings of query words and uses the information to guide future searches.

Hakia, another startup which finds results for queries phrased as questions, sentences or keywords, is also conducting beta tests.

Spock Networks, which bills itself as a “people search engine,” raised $7 million in Series A funding last year from Clearstone Venture Partners and Opus Capital to expand its offerings.