Just like their ancestors Boo.com and pets.com during the dot com boom times companies like Geosign and Capazoo have also spent huge amounts of money in no time and reached nothing but grand failures. But unlike those dot com stars from the past, which at least had serious business models, their modern equivalents from the web 2.0 times can barely be called real businesses.

Under no doubt the most prominent case from the past days is the $160M funding GeoSign took last year and spent in less than a year going belly up. The major lesson learned here is that the click/search arbitrage is dead. If you don’t believe us take a look at GeoSign today. Let’s put it that way Google killed them, and for reason. Given the amount of money flowing to Google, most in Geosign thought the search engine would turn a blind eye, but as it turned out Google is more concerned for its legitimate advertisers and that users would lose interest and faith in the online ad system, if more practices like the one GeoSign kept on exploiting spread across the web than earning several millions of companies like GeoSign.

The media and the bloggers called it that way: “A record $160-million VC investment. A rich Web strategy. A quirky founder. For a few weeks last spring, Guelph, Ont.’s Geosign had it all. Then mighty Google stirred. And it was over.” Now one understands why this company was so quiet over the past year despite the fact it took what is called the biggest ever venture capital funding for a technology company based in Canada.

What is anyway click/search arbitrage?

Essentially, search arbitrage involves an individual or company buying Internet traffic through the acquisition of keywords from Google, then sending viewers who click on the ad links to a site (“landing page” in Google terminology) that appears to have content, but is actually just full of online advertising linked to the original search term. Anyone clicking an ad link there makes money for the keyword holder. For example, a company might bid for the Google rights to the phrase “small town car sales” and send traffic to a website it controls, filled with more car advertisements, called “Alltheautomotive.com.” The keyword cost only 20¢, while a click on the advertising on the website might yield $1.50 return. According to Niki Scevak, an analyst at Jupiter Research in New York, the majority of those initially involved in search arbitrage were small players. “These were guys running search arbitrage out of their basements, making maybe $20,000 a month,” he says.

One of them, it seems, was Geosign. Former Geosign insiders who spoke on the condition of anonymity confirm that the possibility of a big payoff in search arbitrage caught Nye’s attention after he created Geosign. What’s more, he envisioned a network of thousands of websites all automated by software linking keywords to pages filled with ads, returning millions in cash in the process.

By 2005 that was exactly what was happening. Nye crafted a maze of Internet sites that included tens of thousands of Web pages and bought up even more keywords from Google. By connecting the keywords and the websites, Geosign was indeed generating more than $100 million in annual revenue and was extremely profitable. To put a value on the company at this time, analyst Scevak points to Marchex Inc., a publicly traded company in Seattle, Wash., with a comparable business model. At its peak in 2006, Marchex had a market capitalization of US$500 million.

The change in atmosphere had everything to do with measures that Google was taking to rein in those doing search arbitrage. This action was a response to two main concerns. First, that the practice was becoming so widespread, it was hurting legitimate advertisers by artificially inflating keyword prices. And second, that if too many keyword-targeted ad links only took users to pages filled with other ads, that users would lose interest and faith in the online ad system. Obviously, with advertising revenue being the key to Google’s finances, it had to respond. It did so by expanding the terms of service for its AdSense program (published on its website) to place greater restrictions on the way links could be used and by spelling out detailed landing page and site quality guidelines. A top priority there: relevant and original content. By these standards, a landing page full of ads is inadequate – as this text in its current guideline explains: “Provide substantial information. If your ad does link to a page consisting mostly of ads or general search results (such as a directory or catalog page), provide additional, unique content.” Since most companies doing search arbitrage bought both their keywords and landing page ads through Google, it was easy for the company to isolate and monitor them. Non-compliant parties risked being banned from the AdSense program. A simpler tactic, however, saw Google target those abusing the process, raising their fees and making it too costly to continue.

The end came suddenly, well before GeoSign to change the direction of its business. Google had started to look more closely at companies like Geosign, which were buying keywords from Google and ad links from Yahoo! or another provider. And soon Geosign got word that Google would now begin penalizing its Web pages that had “a low landing page quality score” – that is, lots of ads and little or no original content. While Google won’t comment specifically about Geosign, sources say it raised the prices it charged Geosign for keywords overnight. “When Google ‘shuts you down,’ that isn’t exactly what they do,” explains Jupiter’s Scevak. “Instead, what they do is start charging you $50 for what they were charging 10¢ for previously. They make the model financially unfeasible.”

GeoSign’s website is already taken down and is no longer publicly accessible.

The second popular crash down case from the last week is the one of Capazoo.

Capazoo is also based in Canada and is labeled a social networking site. The site has taken $25M in several rounds to date, which as it seems, have also been spent over the past 12 months before the company’s failure. But this is not the only interesting thing  in the story. After firing most of its staff leaving only one sysadmin to keep the site alive and put its offices up for rent some more horrible stories from ex-employees appeared publicly.

It seems that the brothers Michel Verville and Luc Verville (the company’s founders) have had fighting in court for control over the company. Another rumor goes that that the brothers embezzled money from the company. Simply put the guys were taking commissions in the 10% range from all money invested in their company. Capazoo’s $25 million was initially listed as only being “private funding” but more recently National Lampoon became an investor.

Techcrunch has some insider information as listed below:

They did the first round ($8 million) at $72 million pre-money from a bunch of athletes and non-sophisticated angels at $100k-$200k chunks. Most of them didn’t know that management was taking 10% commission themselves (despite owning all the common shares) for all funds raised.

They then raised another $5-10 million (conflicting rumors) at a $132 million pre-money, while still taking commissions. The two brothers took almost $2 million out of the company before reaching more then 10K users and ballooned the staff to 130 staff before starting to do layoffs.

Capazoo’s site is still alive as we last checked it out but for how long one sysadmin can keep it that way?

Well, compared to the 2 cases from above the next one seems relatively small, yet it worth mentioning due to the fact that it seems the founder of that company Lee Wilkins did not pay his employees from Bulgarian, Romania and Russia.

The company name is MyKinda and was a blog network focused on the Eastern European market covering various topics like politics, entertainment, business, among other topics. 

The network is said to have launched just last September and today they are already out of business. Lee Wilkins said the shutdown is temporary to ensure that money due to writers doesn’t continue to add up. The sites will remain down until, he says, “we redefine a more profitable sustainable business model.” The company had total expenses of about €319,000, with no advertising revenue to offset it. Lee Wilkins capitalized the company with €175,000, leaving €144,000 or so in unpaid debts.

Today was the first day in several years where the failure stories were more than the funding deals. In fact we bookmarked 3 funding deals for today so it appears the number is equal.

More

http://www.geosign.com/
http://www.capazoo.com/
http://www.mykinda.com/
http://www.techcrunch.com/2008/03/18/how-geosign-blew-160-million/
http://www.financialpost.com/magazine/story.html?id=324817
http://seoblackhat.com/2008/03/18/they-were-flyin-high-then-google-stirred/
http://www.techcrunch.com/2008/03/19/capazoo-blows-25-million-heading-to-the-deadpool/
http://www.techcrunch.com/2008/02/29/blog-network-mykinda-to-shut-down-today/
http://www.techcrunch.com/2007/12/18/national-lampoon-takes-stake-in-capazoo/
http://www.techcrunch.com/2007/12/10/capazoo-wants-to-pay-you-for-your-social-networking-time/
http://www.canada.com/montrealgazette/news/business/story.html?id=474dae19-551c-4460-9359-328c570fc36c
http://montrealtechwatch.com/2008/03/19/capazoo-lays-off-60-shops-itself/
http://communities.canada.com/MONTREALGAZETTE/blogs/tech/archive/2008/03/18/r-i-p-capazoo.aspx
http://www.techcrunch.com/2007/11/05/mykinda-blog-network-for-eastern-europe-launches-amid-serious-drama/