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37signals founder Jason Fried probably had the post of the day today mocking Twitter’s $1 billion valuation on its latest rumored round of funding. The post, titled “PRESS RELEASE: 37SIGNALS VALUATION TOPS $100 BILLION AFTER BOLD VC INVESTMENT” is very funny. But it’s also disingenuous.

By way of sarcasm, Fried raises a number of points. But the key ones he hits on are valuations, revenues (or lack thereof), business models, and hype. And he chose an easy target in Twitter, which has no shortage of naysayers who simply cannot believe the amount of funding and valuation the service keeps getting. But Fried undoubtedly knows how the game is played, and by picking on the current “it” company, a few people noted that his post looked more like a case of sour grapes. But his points are still definitely worth talking about.

Valuations

Fried jokes that 37signals is valued $100 billion based on a group of people who are paying $1 for 0.000000001% of the company. His point is that valuations based on investments are ridiculous. But that’s not entirely true.

Certainly some are — Microsoft’s investment in Facebook that pumped its valuation to $15 billion is a great example. But the key point there is that Microsoft wasn’t making an investment in Facebook hoping to get rich when the company eventually has an exit. Rather, it was making a small (1.6%) strategic investment mainly to keep Google away. At the time, everyone went mad over the $15 billion number, but it was never realistic to begin with. Since then, Facebook (which has grown a lot in size) has raised real money at valuations that are much less. So did Microsoft get screwed? No, because it was never about the money.

But in Fried’s example, lets assume that the $1 investors are putting money in hoping to eventually get it back. If they really are paying $1 for 0.000000001% of the company, putting the valuation at $100 billion, those investors are going to want an exit of more than $100 billion (leaving out the various types of deals and options they could have surrounding an exit). So that $100 billion number does have meaning.

And likewise, without knowing the details of its latest round, the $1 billion number probably does have meaning for Twitter. If an when it closes this latest $100 million round, those investors are going to be looking for an exit of more than $1 billion. You can bet that T. Rowe Price wants to make money on this deal, as do the firms involved. And they clearly think Twitter is worth more than $1 billion dollars. And they’re hardly alone.

Revenues & Business Models

Fried jokes, “In order to increase the value of the company, 37signals has decided to stop generating revenues.” And continues, “Once you have profits, it’s impossible to just make stuff up.” That is absolutely true, and Mike wrote a great post recently about that very dilemma Twitter could well face shortly.

But this is Fried pulling out the tired “Twitter makes no money” card. Let’s be clear: If Twitter wanted to right now, it could make money. (Well at least revenue, if not profits.) They would simply have to turn on advertising (which they can now do thanks to a recent change in their TOS) and some amount of money, and probably not an insignificant amount, would start rolling in.

At the same time, if it did that, investors would have a better idea of their business potential and that could make some wary of sky-high valuations if the numbers weren’t stellar — which both Fried and Mike rightly note.

But as Twitter has stated numerous times, its real intention for making money (at least right now) is not to go the way of ads, but instead to do professional accounts and tools. It would seem that Twitter is getting closer to rolling that out, and they’ve said the plan is to start making money before the end of this year. We’re closing in on that, so it seems safe to assume that new investors have a pretty good idea of Twitter’s strategy here. And if that’s the case, they clearly like what they see enough to pour in $100 million (again, assuming that round closes).

With this rumored new round, Twitter would have some $130 million in the bank. Like Facebook before it, that would give the company plenty of time before they had to start making any meaningful amount of money. Actually, Facebook just this past quarter went cash flow positive for the first time — after taking over $700 million in funding throughout the years. Twitter seems downright svelte by comparison.

The point is, they will have plenty of cash, and as such, plenty of time to worry about getting the right business model in place. And these investors would not be investing if they didn’t think that would happen, obviously.

Hype

“Bhatnagar admits the math [for valuations] is mostly a guess but points out that ‘the press eats it up.‘,” Fried writes. That’s undoubtedly true, we the press do eat this stuff up. Big numbers are sexy, and lead to interesting, or at least lively, discussions. But again, this is Fried suggesting that valuations based on investments are crazy. In some cases, they are, but not always. And provided that both the writer and reader understands how they work (which, admittedly, is quite often not the case), they can be a useful point of reference.

“37signals will lead the new global movement filled with imaginary assumptions on growth and monetization potential,” he continued. “We’re excited to roll out a list of unconfirmed revenue possibilities that involve crowdsourcing, a robust set of widget creation tools, 3G, augmented reality, social stuff, and an app store. Also, everything we make will include a compass,” Fried concludes.

Though he later backtracked from it, it seems pretty clear that Fried is suggesting that Twitter is pretty much all hype. We touched on this a bit yesterday, but ultimately, this still remains to be seen. But what’s humorous is that on the sidebar of his very post, Fried himself has a Twitter widget, and it’s actually above his list of 37signal products. This isn’t quite as bad as the people who loudly proclaim that Twitter is all hype — on Twitter.

But regardless of where you fall on the hype debate, all that really matters is that the investors obviously don’t think it’s hype. And they’re apparently still pouring money into it with the belief that it will be the next big thing. How big? Big enough to have an exit north of a billion dollars. How do I know? The valuation told me.

[photo and video: New Line Cinemas]

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For the last 18 months Google Sites has given businesses a way to quickly build their own websites with no HTML knowledge required, making for an easy way to help coordinate efforts internally and to also build consumer facing sites. But there’s been one fairly major complaint about the service: there was no easy way to export your data if you wanted to take it elsewhere. Today that changes, as Google introduces its new Sites API.

For those that aren’t familiar with it, Sites is the reincarnation of Jotspot, which Google acquired back in 2006 (though the two products look totally different). The product is Google’s easy-to-use website and wiki builder that’s widely used by businesses, though there’s a consumer option available.

The new API is part of Google’s recently launched Data Liberation Front, which consists of a team at Google with the “singular goal is to make it easier for users to move their data in and out of Google products”. In other words, it’s Google’s attempt to ensure that if you’re no longer pleased with one of its services, it should be fairly easy to pick up and go somewhere else without losing any of your data. It also gives businesses a chance to create their own local backups — something that Google says has been among Sites’ most requested features. But there’s plenty you can do with the new API beyond just data export.

Businesses will now be able to update their Sites pages from third party apps (Google offers the example of updating a Sites page when a new lead is added to your CRM). You can also use the API to download your entire Google Sites account to your desktop, which would be helpful if you were in a region with minimal Internet connectivity.

You can get an idea for what the API is capable of by checking out the open source import/export project and Sharepoint Move for Google Apps, both of which use the Sites API.

Crunch Network: CrunchBase the free database of technology companies, people, and investors

(Transcript Edited By Abhishek Kapoor)

We met up with Deep Nishar, Vice President of Products, LinkedIn at IIT Mumbai yesterday and queried him about Linkedin and its plans for India.

Deep Nishar, who recently took over as Vice President of Products, LinkedIn and was earlier with Google where he worked on products like Google Maps and Orkut.

Q 1) How can technology play an incremental role in building a corporate network? What are the benefits that can be derived from technology?

The technology cycle is already occupied at least from my vantage point over the last two decades. A lot of back office operation that used to happen on pieces of paper like the old Khatavahis that people used to have started moving to corporate packages. Initially they were built in an ad hoc manner for some of the large corporates and then the large enterprise software companies came into existence. Now, they are moving towards cloud computing, where you don’t need to own any software or hardware. All we do is look for the application that you want and you find them on the web. In that way, an interesting cycle for entrepreneurs as well because if i had to start my company today, It would cost a lot less money and lot less time to do it. A lot of things like data center, storage, processing power, etc are just available. I can go to companies like Amazon-easy service, give them my credit card details and I’m good to go. These technologies have become open source, they’re freely available while the engineers can start leveraging them which avoids reinventing them. So what its doing is, reducing the development cycle, reducing the cost, reducing the no. of resources it needs in order to accomplish things.

Q 2) LinkedIn is one of the largest professional networks in India. What are your plans from a product perspective and from a scale up perspective in India?

One of the reasons we are here in India is because we have seen tremendous growth in this market. India has grown faster than any other market for LinkedIn. We have seen over 180% Y-o-Y growth. We are here in India now to understand what users are looking forward from LinkedIn. We are here to better understand our advertisers and to talk to corporates about how we can better serve. So, to summarize we are very bullish in this market and we are committed to investing in it.

Q 3) How is the response to revenues from India? What percentage of global revenue comes from India?

Its very good. Not just the usage, even the statistics are very well. But, as a private company we cannot share the exact numbers. (Laughs)

Q 4) How different are Indian users from international users are there certain behavioral patterns in your opinion?

I earlier spoke about the 3 ‘C’s. Create. Connect and Collaborate. In my opinion, Indian users are very good at Creating and Connecting. But, when it comes to Collaboration we don’t find it necessary that professionals over here are taking advantage from their overseas networks. As a part of this education, we need to educate our users better. And as a part of the web, users are becoming savvier. People want to use the power of their network which will only get better with time.

Q 5) Your view on app economy. What are the various revenue streams that LinkedIn looks at going forward?

We are fairly diverse revenue streams right now. Advertising is just one of them. Corporates pay us for talent recruitment solutions for very high-end talent on a SaaS model. This is different from the job posting model that we had on LinkedIn and its more of a solution for corporates to search and hire talents. This works for us as 46% of linkedin’s user base falls in the high end talent category. So we have VCs looking for partners, corporates looking for top management via this model.

Q 6) Can you give us the break up between the various revenue models?

I can’t give you a break up but all three – Corporate solutions, advertising and subscriptions are failry robust revenue models for us. We believe that diversity in revenue streams is very important for consumer internet companies. This is because as a consumer internet company you rely on only one revenue stream and look to expand in newer markets, and then your cost structure goes up but revenue doesn’t scale at the same time. Hence sole reliance on advertising is not preferable.

Q 7) What kind of team would be hired in India? When?

There is no specific time line, but we are looking to hire the best people. The first person that we’re looking to hire is a Country Manager for LinkedIn in India.

Our Analysis

We believe Linkedin is making a smart move in not cluttering users with too many apps and building the only form of serious and credible business networking available online. They are also making sure they move ahead with company profiles and we here at WATBlog believe that Linkedin’s ultimate aim would be the most comprehensive search engine for people and companies in the business world and given the global world we are in India seems like an important market.

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A recent Comscore report about the state of the search engines in India states the obvious – Google is an undisputed leader in the space with close to 88.4% market share. The remaining dozen is shared by big names like Yahoo and Microsoft along with local search engines like Guruji, AskLaila and JustDial.

So statistically speaking, despite remaining in the space for close to 3-4 years and in spite of having offered more local search services, the Indian companies have hardly given Google a fight. Is that how we need to interpret the results and will the Indian search engines will ever be able to catch up?

To answer the questions, we need to relook at the definition of “search” in the first place. ‘Search’ did not essentially start with Google. While we search for ‘How to lose weight‘ on Google today, it was basically done with library books. While we might use Burrp to look for the daily events in our city today, we used the newspapers earlier. So, while Comscore reports the online market share of the various search engines in India, it is inconsequential until we realize what the core business model of each of the various engines is.

For example, thanks to the extensive TV promotion, more people should be aware of JustDial’s telephone search than the search through its website. A lot of search happens on Guruji over the mobile, which possibly is not tracked. If ‘online search’ was the segment Comscore tracked, then their report make sense. If ’search’ as an activity was tracked, then in all probability the results do not reveal the real picture.

All this is not to say that the Indian search engines have been given a raw deal. My point is simply that search as an activity is not confined to the online space alone in India and so while the reports do give an idea of the emerging players in the industry, it does not necessarily mean Company A is definitely bigger than Company B because of the higher market share.

Having said that, it is also important to see how well are Indian companies placed in tackling the Google threat in the online space. It is important to note that Google is bigger than the rest of the search engines, not because of a superior search algorithm, but because of a superior brand positioning. Indian local search engines like Onyomo, AskLaila all have pretty similar offering (movies, shopping, restaurants,etc.).

Assuming movie search contributes a significant volume of searches on these websites, how are the websites going to cope if Google decides to integrate Google Movies into their search results? Would these services remain relevant if Google were to similarly launch services for local restaurants, music, etc. assuming they are not available already?

There comes an important factor in countering Google. Let’s face it – Google cannot be broken by one big Indian search giant, but hundreds of small search engines focusing on only aspect of search – like JustDial for telephone based search, Burrp for events, etc. That will help each of these search engines carve a niche search audience and can stand the Google threat as an authority in the space.

An alternative to this strategy would be aggressive advertising to create an alternate search engine brand. But then, despite a $100 million promo budget, Bing was only able to garner a 10% odd market share!

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Google CEO Eric Schmidt is back in the news predicting a resurgence in M&A activity for the search giant now that the worst of the recession is over. Speaking in Pittsburgh ahead of the G20 Summit, Schmidt told Reuters that Google could buy one small company a month.

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Since the launch of the contextual link advertising product on ReadWriteWeb, we at Hakia have been anxious to see the results and evaluate the success of our contextual advertising product, Contexa. The Contexa system matches the semantic context of a blog post with a sponsor’s criteria on the fly to deliver relevant ads to the reader. Participating ReadWriteWeb sponsors have provided the contextual engine with up to three “trigger phrases” that define their business. As a reader of the blog, you may have seen the product’s implementation at the bottom of certain blog entries, as shown below. You can see another example here.

Sponsor

As we began this exciting journey, the ReadWriteWeb team defined its objective as follows:

1. “To offer value to our readers by providing advertising links in the context of what they are reading, links that would therefore more likely be of interest to them, and
2. To offer a higher level of engagement to our advertisers, resulting in both more branding impressions and more click-throughs.”

The preliminary aggregated statistics of the six participating sponsors (excluding Hakia), covering a 40-day period, demonstrate that the Contexa system has met ReadWriteWeb’s objectives:

• The Contexa system increased ad clicks by 14% (i.e. advertiser received, on average, 14% more ad clicks).
• The click-through rate (CTR) for Contexa was more than twice that of ReadWriteWeb’s 125 x 125 banner ads.

We decided to turn the tables and interview Bernard Lunn, ReadWriteWeb’s COO and Feature Writer for his feedback! Hakia’s own COO, Melek Pulatkonak, poses the questions.

Melek: Bernard, we have been working together on the ReadWriteWeb contextual link advertising system for a while. Has the system met your expectations?

Bernard: Yes, it has. We wanted to see if it would generate a meaningful uplift in CTR, and it has.

Melek: What feedback have you received from advertisers? And what would you recommend to participating advertisers going forward?

Bernard: Advertisers have to get the traffic–relevance balance right. You can drive a lot of clicks with a hot term – something we are writing about a lot – but if the relevance is low, the advertiser won’t get good conversions. As with any new type of advertising, an art and science emerges over time. People know how to buy search terms on Google, but this is a bit different. I think we need to get better at creating more of a feedback loop (e.g. stats on how different terms have performed) so that advertisers can tune their keyword selection accordingly. Each advertiser has different needs and knows its market intimately, so it is best positioned to decide what works and how to tune its selection.

Melek: What’s next? What is your vision?

Bernard: For this first phase, we provided Contexa to our long-term sponsors. In the next phase, we want to offer Contexa as a standalone offering, so that advertisers can purchase keywords (or trigger phrases) directly on ReadWriteWeb. This will be an entry-level self-service advertising option that many smaller startups have requested.

Melek: Anything else you would like to add?

Bernard: Context matters to engagement. That is an obvious statement, but doing it right has been hard, and the opportunities for bloggers to offer ads that engage readers well and offer them value have been limited. Contexa is a good step in this important journey.

We thank the ReadWriteWeb team for working with us closely to create a new contextual ad system for blogs and other publishers. To learn more about Contexa, please contact us at bdev@hakia.com.

HAMSTER: Using Search Clicklogs for Schema and Taxonomy Matching

Learn That Name’s iPhone app wins approval from Apple

John Cook on Monday, September 21, 2009, 11:40am PDT

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iPhone  Startup Weekend  Startups

At last month’s Startup Weekend, Learn That Name won over the crowd with a new iPhone application designed to help people remember the names of their LinkedIn contacts by flashing photos in a multiple-choice-style game. The idea is now moving forward, with Apple approving the 99 cent app last week and The Wall Street Journal featuring it today in its App Watch column.

I caught up with Learn That Name founder Eric Koester — an attorney at Cooley Godward Kronish — to ask how he’s running the project now that it has graduated from Startup Weekend. With 14 contributors — and thefore 14 potential owners — Koester said the entire process has been a “pretty interesting experiment in group dynamics and business-building.”

“As a lawyer, I spent quite a bit of time thinking creatively about how to manage a business like this since it is a very odd scenario here,” he said. “We ultimately set up an LLC and decided to split any proceeds evenly among the group (so 14 ways).”

That means on every iPhone app sale — taking into account Apple’s 30 percent cut — each Learn That Name contributor will earn five cents. Obviously, it doesn’t look like anyone is going to be getting rich on a nickle a pop.

But what’s interesting is how they plan to spur development going forward beyond the iPhone and Palm Pre apps created last month.

That’s a natural challenge, given that some people will lose interest while others will want to keep innovating. To solve that issue, Koester said the LLC will negotiate a license with those who want to keep working on the project, say developing a version for Facebook or MySpace.

“That means that if a subset of our original 14 wants to build the Facebook version — which will be next, it looks like — that team will keep the bulk of the royalties but a smaller portion will remain with the original team,” explains Koester. “Seems mostly fair from everyone I’ve spoken with, but incentivizes people to build the next versions.”

At this point, Koester said the entire team continues to work on the project. He said they’re hoping to have Learn That Name introduced in Palm’s app store when that goes live.