Yesterday I wrote about the need for new forms of startup financing and what one interesting fund called Founders Co-op is doing about it. There’s a lot to like about both Founders Co-op and its much more established counterpart Y Combinator, but neither is perfect. Which got me to thinking: from an entrepreneur’s point of view, what would the perfect funding source look like? Here are some thoughts:

Open to all. Access to venture capital and angel investors depends almost entirely on who you know. This shuts out lots of innovative startups who don’t happen to know the right people or who are not located near sources of capital like the Bay Area. One of the most attractive aspects of programs like Y Combinator is that it’s open to any startup who wants to apply. Lowering the barriers to accessing capital dramatically increases the pool of great startups.

Risk-taking. Much has been written about how the typical VC is risk-averse and only funds companies that other VCs are interested in. While this is not entirely true (I know plenty of VCs who are open to new ideas), in general the oddball companies with wacky ideas never get VC money. Some of these wacky ideas turn into the most lucrative ones. The ideal funding source would not have to justify their investment to a bunch of limited partners.

Visionary. The perfect funding source would be able to see the potential in the idea and the founding team behind the startup. This doesn’t mean every startup has potential, but it does mean that investors need to step out of their comfort zone from time to time and see the possibilities. It also means investors need to look beyond the Bay Area for startups. There are plenty of interesting companies being formed around the world.

Flexible funding. One of the biggest drawbacks of Y Combinator is the small amount of funding each startup receives. The idea behind Y Combinator is to get the founding team from idea to product as quickly as possible and for this the small funding is fine. But other startups have different needs. Some have already launched and maybe have one or two employees. For these companies, access to capital in the range of $200,000-$500,000 gets them to the next step of development. So an ideal funding source would be able to offer just the right amount of funding, depending on where the startup is in its life cycle.

More than just money. The ideal funding source not only provides the necessary capital, but also gives hands-on advice, sources potential business development deals, and helps the company to attract great employees.

What else would you look for in an ideal funding source?

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Paul Graham, founder of Y Combinator, recently wrote about how the traditional venture capital model is broken, at least when it comes to Internet startups. Eight to ten years ago, it often tok millions of dollars to launch an Internet company. Now that same company can often be launched for just hundreds of thousands of dollars. Typical VCs shun this level of investment and there are not enough Angel investors, so there’s a need for new organizations to spring up and take chances on earlier stage companies.

One interesting fund to do just that is the recently launched Founder’s Co-op in Seattle. Started by Andy Sack and Chris DeVore, serial entrepreneurs whose most recent venture was Judy’s Book, Founder’s Co-op has a new twist on Angel investing. Like other funds like Y Combinator, Founder’s Co-op invests anywhere from $10,000 up to $250,000 in a startup. But here’s the new idea: every founder contributes 5% of the equity in their company to the Founders Pool. In exchange, the founders receive an ownership stake in every other company funded by the Co-op in that calendar year.

This pooled equity interest creates a financial incentive for each company to share information and support each other. Founder’s Co-op also provides mentorship and networking opportunities as well as drop-in desk space. Much more than an investment fund, this could turn into a tight community of entrepreneurs. If you’re thinking about starting an Internet company in Seattle, this is something you should definitely consider.

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Yesterday TechCrunch reported that FatDoor, originally envisioned as a social network for neighbors, was abandoning its business model. FatDoor is another in an increasingly long line of well funded Internet startups focused on the local market that have gone out of business or changed their focus over the last few years. Why is the local market so hard to crack, even for a company like FatDoor that raised $7M in venture capital?

As the founder of YourStreet, an Internet company focusing on the local market, I can sympathize with FatDoor and try to relate some of the lessons I’ve learned along the way:

Create a foundation of content. FatDoor was essentially a blank slate - neighbors came to the site, figured out who else might have signed up, and then did - what? Talk to each other? Not really. Learn about what’s going on in their neighborhood? There wasn’t much information on that.

We realized this same problem with the first incarnation of YourStreet. We originally envisioned YourStreet as a site where people could go to talk about real estate and what was going on in their neighborhoods. We expected users to flock to the site, adding their invaluable inside information. One problem: people didn’t do it. There was no motivation for them to do so and not enough content for them to stick around or ever come back.

With the current incarnation of YourStreet we realized there had to be a strong core of content to bring people onto the site and keep them coming back long enough so that they would start commenting and discussing things in their neighborhood. We decided this core of content should be constantly updated hyper-local news articles that are aggregated from around the web and plotted on an interactive map. This becomes the foundation upon which social features can be built.

The need for SEO. Almost all social media sites rely to some degree (especially in the early phases) on search engine optimization (SEO). This isn’t a bad thing, as long as you can convert some percentage of the search engine visitors into users who come back on a regular basis. One of the challenges for many local sites - especially ones that rely solely on user generated content - is the lack of content that can be indexed by search engines.

This sets up a cycle where no one finds out about the website, so no one visits it, and no content is created. One of my favorite ways of figuring out whether a local startup has a shot is by looking at the number of pages it has indexed in Google. Unless you are a super-specialized website, if you’ve got less than 100,000 pages indexed you’re facing an uphill climb to get users.

The users are dispersed. When you create a social media site about, say, sports cars, it doesn’t matter where the user is located. Users from around the world can get together and talk about sports cars - it doesn’t matter if you’re in San Francisco or Beijing. With local sites, however, it matters very much where you’re located. If you’re coming to a site to meet your neighbors, there has to be a critical mass of users in each neighborhood to make it work. This is hard.

What keeps users coming back? This is a question that all websites have to answer, but especially local sites. For a sports car site, those enthusiasts will naturally return on a regular basis because they are passionate about the subject. On the local level, however, the range of interests is so varied that there has to be some other reason for users to return to the site. This could be constantly updated information, or some kind of gaming element where users try to out-do each other. FatDoor had none of these elements.

FatDoor has a large capital base which allows them to try a new direction - a local planning site. Less fortunate startups have learned the lessons of local the hard way.

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YourStreet, the startup I run, has been fortunate to get a good amount of press coverage since we launched last November. TechCrunch, PBS, PC World, Mashable, MIT Technology Review, Presstime magazine, the Wall Street Journal, and even the Kim Komando radio show have all written about YourStreet. I am regularly asked how other startups can get publicity for themselves and while I’m certainly no expert, here’s a few tips.

TechCrunch is important, but it’s not the only game in town. By this point, almost everyone knows how important TechCrunch is to startups. A review in this influential blog puts your company in front of venture capitalists, potential strategic partners, and dozens of journalists who read TechCrunch to figure out who they should cover. But don’t overestimate how much traffic you’ll get from TechCrunch. It’s an important venue to get your startup exposed, but it doesn’t take the place of a real marketing plan

Have a cool product. While this seems beyond obvious, without a cool, cutting-edge site you have little hope of getting press coverage. Take a cold, hard look at your website: is it really doing something new and interesting?

Clearly and simply define how you are new and different. One of the best ways to do this is by relating what you’re doing to something else that already exists. Our pitch to the press was simple: News + Maps = YourStreet (in fact, this was incorporated into the TechCrunch headline when they covered YourStreet). Journalists are busy - if they can’t understand how spiffy your new site is within 30 seconds of reading your email, they’ll move on to the next one.

Get to know the journalist you are pitching. Don’t send out mass emails to every blogger - this just wastes everyone’s time. Take the time to read the blogs you think would be most interested in your site. Get to know what they are interested in and write a personalized note.

Network, network, network. Conferences are great venues for meeting journalists and bloggers. I highly recommend applying for the upcoming TechCrunch50 conference. Even if you don’t get picked, you’ll at least get on someone’s radar screen there. Whenever you can talk to a journalist in person it helps to separate you from the dozens of other pitches that person receives every day.

What’s the peg? Every news story needs a peg, or a reason to be written. So time your press coverage to coincide with a product launch or financing or other major event.

Think about the timing. Print journalists need weeks and in some cases months of lead time. Bloggers, on the other hand, usually need no lead time at all. One mistake I made during our initial press coverage was sending out press releases with an embargo date (a date before which coverage shouldn’t start). Inevitably, some blogger will not abide by the embargo date and will write up their review on the spot, which then ticks off other bloggers who were respecting the embargo. Send out emails with press releases to bloggers the night before your launch with no embargoes or restrictions.

Prepare for interviews. If a journalist wants to interview you, prepare yourself ahead of time. Think about what you want to say (and don’t want to say!). Try to talk in quotable sentences. It isn’t easy, but practicing ahead of time helps.

So there you have it - your road map to getting famous on the Internet. What else has worked for people? Please share in the comments.

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Google’s launch of its Google Apps Engine web hosting service on Monday puts it in direct competition with Amazon’s web services offerings. But Google’s step goes beyond hosting web applications for startups - the company is now directly vying with Amazon to become the foundation upon which to build new Internet companies.

Here are the services from each company that start-ups can’t live without:

Google Apps Engine: while brand new, this looks to be an excellent, scalable platform upon which to build and host web-based applications. Google needs to roll-out support for PHP and Ruby as soon as possible, as so many startups are now using these languages. Given its resources, one can only assume that Google will offer a significantly lower price for its web services than Amazon.

Google AdSense: almost every ad-based Internet company starts with running Google’s AdSense ads. It’s quick and easy to set-up and can start generating revenue from day one. The only problem: ridiculously low ad rates. Google now needs to do a better job of capturing companies when they start to outgrow AdSense. Hopefully the DoubleClick aquisition will come in handy for that.

Google APIs (Application Programming Interface). From Android to the Maps API to Open Social, Google has been a leader in opening up its applications for outside companies to use. Startups have built entire websites around these open APIs.

Google Analytics: this free website tracking program is awesome and used by almost every startup I know. Google just introduced benchmarking, allowing you to compare your site traffic to other similar sites in an anonymous way.

Amazon web services. Before Google Apps Engine came along, Amazon’s AWS offering was the leading “cloud” computing offering. The beauty of AWS is the scalable pay rate: you only pay for the traffic you get. Many start-ups host websites on AWS and pay the hosting fees from Google AdSense ads running on their site. Amazon wisely priced AWS low enough for even low yielding ads to offset the hosting fee.

Amazon Mechanical Turk. Mechanical Turk hasn’t gotten a lot of press, but lots of start-ups turn to it to get big menial tasks done fast. MTurk allows companies to post small jobs (like find the RSS feed for a particular publication) at a specific price and then worker bees from around the world complete the job with Amazon as the middleman.

The next step for either Google or Amazon to become an even more vital resource for startups is to play matchmaker between companies and developers. Elance.com is a major player in connecting companies with offshore engineers, developers and designers.

Imagine if Google got into this space and had a list of approved developers from around the world who knew how to build on the App Engine platform, and then changed a fee to connect these developers with interested companies. Google could then offer startups a closed-loop process: build your site using our developers, host it on our servers, and make money running our ads. It’s called printing money.

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Yesterday I reviewed the three best Internet acquisitions of last year. Today, an easier list to compile: the worst Internet acquisitions of 2007. Some of these acquisitions were too expensive, some were not a good strategic fit, and some were just plain dumb.

eBay acquires StumbleUpon for $45M. This is a case of two great companies that just aren’t matched well. StumbleUpon allows users to discover new web sites based on their interests - a very simple, well executed idea. StumbleUpon has an active, loyal user base and, as many sites have found, it can generate a ton of referral traffic. But what is eBay going to do with this? EBay’s statement of the time suggested they would use StumbleUpon to expose eBay’s users to new, random auctions they might be interested in. Yeah, and everyone will use Skype to call an auction seller to complete a transaction. Not gonna happen.

American Greetings buys WebShots for $45M. CNET bought WebShots awhile ago, couldn’t make it work, and wisely sold it to American Greetings. Flickr is far and away the leader in photo sharing and WebShots is a distant second or third. The problem with photo sharing sites is they are notoriously hard to monetize. If CNET with their huge online ad sales force couldn’t monetize WebShots, American Greetings stands no chance. This is just good money chasing after bad.

Cisco acquires Five Across for an undisclosed sum. Five Across is the parent company of the popular, but third-tier social networking site Tribe.net. Cisco supposedly acquired Five Across so that their corporate clients can build their own social networks. I don’t see it happening. At least Cisco didn’t pay much for this.

Disclosure: I own CNET stock, had a company bought by CNET, and have worked at the company as an executive.  I neglected to post this disclosure when I first wrote this article and should have done so.

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Now that a few months have passed since the start of the year, it’s time to look back and assess the best and worst acquisitions in the Internet space for 2007. Sure, you can say it’s way too early to make any definitive judgments about such recent deals, but I’m going to do it anyway. Today: the 3 best Internet deals of 2007. Tomorrow: the worst.

Google acquires Feedburner. This one was a natural for Google. Acquiring Feedburner gets Google direct access to monetize millions of RSS feeds a day, a logical extension of its AdSense/AdWords program and Blogger. $100M may have been a bit much to pay, but Google can afford it.

Citysearch/IAC acquires InsiderPages. InsiderPages has millions of user-generated business reviews, which fits perfectly into Citysearch. IAC’s local salesforce should be able to sell the heck out of this property. Best of all, IAC picked up InsiderPages for just $13M.

Yahoo acquires MyBlogLog. Unlike Google, which acquired Blogger awhile back, Yahoo has been largely shut out of the blogging phenomenon. By acquiring MyBlogLog, which essentially creates mini social networks around blogs, Yahoo got into the blogging game for just $10M. Smart move by Yahoo, although I think they need to get deeper into blogging by making more acquisitions in this area.

Thanks to PartnerUp.com for their comprehensive list of Internet acquisitions: http://startup.partnerup.com/2008/01/02/2007-acquisitions-web-internet-technology/.

What do you think? Did I miss any good ones?

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With the acquisition of Yahoo by Microsoft looking ever more likely, it’s time for the future combined entity (yes, that’s right - MicroHoo) to face reality. If the purpose of the merger is to beat Google at search, then it will fail. Google has won the search wars - get over it. Google is now the web’s default home page and every potential competitor needs to accept this and figure out how to co-exist.

Does this mean MicroHoo is doomed to failure? No - not if they focus their resources in the right areas. If MicroHoo lets Google own search, it opens up the rest of the web to compete in and dominate. Here are the three most important steps MicroHoo needs to take:

• Stop producing content. As CNET has learned, producing content is expensive and the margins are horrible. Google does not have writers, editors and producers on staff. Google seeks to organize the web’s content, not produce it. Both Microsoft and Yahoo have lots of people generating content and as long as resources are going into this area, MicroHoo’s margins will never get close to Google’s. Instead of producing the content internally, focus on becoming the platform on which users generate their own content. Both Microsoft and Yahoo have jumped on the user generated content bandwagon to a certain extent already, but to compete with Google they need to focus on this.

• Buy a social network. The notion that social networking is just a passing fad, or that social networking users will show no loyalty and jump from network to network, just isn’t true. The biggest social networks have large, growing user bases that MicroHoo needs to tap into. Social networking users spend huge amount of time everyday on their network of choice and MicroHoo must be part of it. So who to buy? Facebook is off the table and now Bebo is gone. But that leaves at least Hi5 and Piczo. While these are second tier networks in terms of users, the marketing might of Microsoft and Yahoo could easily propel either of them to the top three, right up there with Facebook and MySpace.

• Become the center of the blogging universe. At their core, blogs are mini-social networks. They attract engaged readers on a regular basis around thousands of topics. Yahoo recognized this with their purchase of MyBlogLog, but it needs to go further. Instead of playing around the edges, MicroHoo needs to own this space. Step 1: buy a blogging platform like Automattic (the company behind WordPress) or MovableType. Imagine all the services MicroHoo could offer to the hundreds of thousands of bloggers on either platform: ad revenues via the Yahoo Publisher’s Network, automatic MyBlogLog integration, integration with the social network they need to buy, preferential search services on Yahoo. Bundle all these services into the blogging platform itself and watch the usage (and revenue!) take off. Step 2: buy Technorati. Blog content is just not easy to find, especially for newbies. Buying Technorati starts MicroHoo along the path of becoming the central place where people go to find relevant and interesting blog content.

Microsoft and Yahoo have awe-inspiring resources. As long as they don’t try to take Google head-on in search, the new MicroHoo can continue to be a major player on the Internet and give Google a run for its money.

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The wily Michael Arrington caused quite the fuss a few days ago by criticizing blog networks that take venture capital and suggesting that TechCrunch and other leading technology blogs instead band together to create a “dream team” blog network that would, in Arrington’s words, “kill CNET.” Henry Blodget, founder of the Silicon Valley Insider blog seemed to agree with Arrington that banding together might not be such a bad idea.

I think rolling up a mega technology blog network makes a lot of sense. Creating a focused group of top-tier tech blogs would give the network enough reach and inventory to go grab big, lucrative advertising deals. You see all those start-ups advertising in the upper right corner of TechCrunch? Imagine if Microsoft or HP took over that slot and imagine how much more they would pay to be there.

But will a dream team tech blog network in the mold of TechCrunch really kill off CNET? No - because most people don’t understand what CNET’s really about and what makes the company the most money. When bloggers talk about taking on CNET, they’re really talking about taking on News.com, one of CNET’s premier properties. An influential blog network could certainly steal users from News.com, but this wouldn’t be the worst thing to happen to CNET. News.com, while an undeniably great brand and service, is also amazingly heavy on the overhead. All those pesky reporters and editors cost money.

In fact, the best thing CNET could do would be to sell off News.com to this yet-to-be-formed blog network. The network could use the News.com name as its central brand (doesn’t get any better than that domain!), and spin off all of News.com’s great reporters into their own blogs (many of whom are active bloggers already).

Jettisoning News.com would impact CNET’s short-term revenues, but it would undeniably boost the company’s sagging profit margins. What drives CNET’s profits is its technology product reviews and the Shopper.com product search engine. This is an area that CNET still dominates and it would be largely unaffected by competition from a tech news blog network. In recent years CNET’s reviews have been behind the curve in evaluating new technology products, mainly because the company has been spread thin going into a variety of areas, many of which have had significantly lower margins than its review/shopping core. CNET’s biggest blog competition is not from TechCrunch, but from Engadget and Gizmodo - these are the blogs breaking the tech product news that CNET should be breaking.

Selling off News.com would free up CNET to re-focus on its core competency which, as it turns out, also makes them the most money. So c’mon Michael - get this super mega tech blog network going. You wouldn’t be killing CNET, you’d actually be helping it.

Disclosure: I used to work at CNET and I currently own CNET stock.

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When NBC and News Corp announced two years ago that they were creating a new online destination to compete with YouTube, the web elites scoffed at the idea. Google reportedly privately referred to the new venture as “ClownCo.” Now that Hulu has officially opened to the public, it looks like the clowns will be having the last laugh.

Hulu has done a lot of things right - the interface is clean, it’s easy to find content you’re interested in, and embedding and sharing videos could not be easier. But the smartest thing Hulu did was what it didn’t do: try to compete head-on with YouTube. YouTube dominates user-generated videos and Hulu wisely stayed away from this. Hulu’s assets are the thousands of television shows and movies that are owned by NBC and News Corp. This is what will start to really give YouTube problems in the long run. Would you rather watch yet another grainy video of some cute kitties on YouTube or full-length episodes of 24?

Hulu isn’t perfect. It needs to have more content, especially full-length TV shows and movies. Hulu too often feels like a promotional vehicle for NBC and News Corp’s content, rather than a destination to actually consume that content. But I think that will happen over time. When Hulu’s owners see the traffic surge and start to realize the enormous revenue potential, my guess is that they will pour on the content - and they’ve got lots of it.

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