MediaMemo » funding

Jeff Bezos, Spark Capital, Bet on Aviary, a Web-Based Would-Be Adobe

Peter Kafka — Mon, 26 Oct 2009 04:00:49 +0000

Last week, Jeff Bezos made $2 billion in one day, courtesy of a massive spike in Amazon shares. What will he do with the extra dough?

Perhaps plow it into more start-ups like Aviary, a Long Island-based design software company.

Bezos, via his Bezos Expeditions fund, has followed up an investment in the company earlier this year with another slug of cash. It’s part of a $7 million Series B round led by Spark Capital, best known in these parts as the guys who made a very big bet on Twitter, which Bezos also invested in.

If you’re sick of hearing about Web start-ups with just the vaguest sense of a business plan, Aviary may be a refreshing change. It is trying to make money by selling cheap, Web-based alternatives to popular, expensive design software, primarily the stuff that Adobe (ADBE) sells, like Photoshop and Illustrator. Granted, it doesn’t make much money yet: The company only began selling $24.95 subscriptions to its software suite earlier this year.

Down the line, Aviary also imagines it will be able to create an online marketplace where the creative types who use its software can bid on work assignments. Sort of like eBay (EBAY) meets Craigslist meets Etsy meets Amazon’s (AMZN) own Mechanical Turk.

Here’s the full press release:

Aviary Secures $7 Million in Series B Financing Led by Spark Capital

Provider of Creative Application Suite in the Cloud Makes Creation Accessible to All and Advances the Growing Digital Economy

LONG ISLAND, New York (October 26, 2009) – Aviary, Inc., a pioneer of a creative application suite in the cloud, today announced that it has received $7 million in Series B financing led by Spark Capital, with participation from existing investors, including Bezos Expeditions, a personal investment company of Jeff Bezos. With a suite of digital creation and editing software available as an online service, Aviary offers a simple and cost-effective solution for creators of all genres–from graphic design to audio editing – to express their creative talents and participate in the burgeoning market for digital goods. In conjunction with the investment, Mo Koyfman of Spark Capital will be joining Aviary’s board of directors.

“Aviary’s robust suite of online creative tools is fundamentally democratizing digital creation. Whereas the market for digital goods was once reserved exclusively for creators using proprietary desktop software, Aviary is delivering creative applications that allow anyone with a browser to participate,” said Koyfman. “And by doing so in the cloud, Aviary allows for seamless online creation, collaboration, distribution and ultimately monetization previously not possible. The Aviary model has the potential to exponentially increase the number of creators and collaborators contributing to the digital economy.”

Until now, the digital creation market has been largely dominated by desktop software solutions which are often cost prohibitive and involve complicated interfaces. By contrast, Aviary offers a powerful creative toolset in the cloud that enables professional and amateur creators alike to easily create their own digital works. The basic Aviary suite is available for free to users and includes an image editor, vector editor, audio editor and more. Users can also upgrade to the pro suite to gain commercial features such as unlimited private storage, as well as collaboration and community enhancements. For more information, visit http://aviary.com/.

“We are disrupting the status quo by eliminating the long-held barriers to digital creation and giving creators the tools they need to create, market and monetize their vision,” said Avi Muchnick, founder & CEO of Aviary, Inc. “We are extremely excited to have Spark Capital on board. Their broad-ranging internet, software and consumer experience will be a tremendous asset to us in furthering our mission to make creation accessible to creators of all genres.”

Investors Bet on Another Real-Time Start-Up. Next Up for Hot Potato: Product, Users.

Peter Kafka — Fri, 23 Oct 2009 19:16:34 +0000

Here’s a good way to get your hands on scarce venture capital money: Create a start-up geared around “real-time” sharing and conversations.

That’s the core of Twitter’s pitch, of course, and it has helped the microblogging service raise $155 million, a $1 billion valuation, and forge partnerships with Google (GOOG) and Microsoft (MSFT). Not surprisingly, investors are looking to place money on related bets, from search engines that parse real-time data to location-based social networks with real-time updates, and even real-time photo-sharing sites.

The newest entrant: Hot Potato, a buzzy start-up that’s supposed to let users converse about a particular event, whether they’re attending it in person or watching from afar. When it’s up and running, that is. The five-man crew doesn’t have users or a product just yet.

But that hasn’t prevented the Brooklyn, N.Y-based company from raising about $1 million, sources say, in a round led by First Round Capital and RRE Ventures. A group of smaller investors, including Betaworks, the incubator that specializes in real-time companies, and Ron Conway, the angel investor best known for his Google bet, are also backing the company.

Hot Potato is led by Justin Shaffer, an eight-year veteran of Major League Baseball Advanced Media, pro baseball’s well-regarded Web unit. Shaffer has recruited three other MLB.com employees (one of whom subsequently left to get an MBA at MIT) to join him.

Shaffer wouldn’t comment about his funding round, but was willing to discuss his start-up’s general plans. They are finishing an iPhone app and plan to submit it to Apple (AAPL) in the next few weeks, he said, and will open their doors once that’s approved.

The big idea is an interesting one. People are already using Facebook and Twitter to converse about events in real time–think about Barack Obama’s inauguration, or Balloon Boy, or last night’s Yankees-Angels game.

Shaffer’s critique of those platforms, though is that “they break at scale–there’s no good way to filter the chatter so that you, your friends, and a group of strangers with something relevant to say can all connect. Hot Potato, he says, will offer a “curated stream” in real time of all the data coming out of the event in real time. What we’re really focused on doing is bringing together the entire audience of an event, whether they’re at the event or watching at home.”

Business model? TBD, of course. But there are a couple of obvious ways to go. For instance, Shaffer thinks people who opt-in to a particular conversation–say, about an NFL game or a U2 concert–would be okay with seeing “in-stream” ads, as long as they were relevant.

But that’s a problem that’s best tackled once the service is up and running. We’ll check back then.

Early Twitter Backer Union Square Sits This One Out

Peter Kafka — Fri, 25 Sep 2009 21:56:05 +0000

Twitter CEO Evan Williams thanked a long list of investors in his blog post today formally announcing his newest funding round. Not included: New York’s Union Square Ventures, which has been one of the messaging service’s most prominent backers, but which didn’t reinvest in the company this time.

Union Square was the lead investor in Twitter’s first funding round in July 2007, and participated in subsequent rounds in May 2008 and February of this year. In that last round, Union Square said it was re-upping “to maintain our ownership position.”

What happened this round?

Union Square partner Fred Wilson, who is a Twitter board member and a tireless Twitter advocate (and Twitterer) declined to comment. So I’ll hazard an Occam’s Razor guess: The $1 billion valuation that Twitter achieved in this round priced out Wilson’s fund.

If that’s the case, it’s a high-class problem to have. Union Square is a relatively small venture player (the two funds it manages have a total commitment of $281 million). It specializes in early-round investing in which the bets are comparatively low stakes–a few million dollars here and there. If things go well, those bets are enough to get the company to an exit–in the old days, that meant an IPO, these days, a sale to Microsoft (MSFT), Yahoo (YHOO) or Google (GOOG).

But as the valuations increase, so do the amounts a start-up’s investors need to pay to keep their ownership stake, which is why angels and other early investors usually drop away. A player Union Square’s size can play up to a point, but then has to step aside or it would end up with most of its portfolio invested in a single company.

In order to re-up at this level, Union Square would have needed to make a much larger bet than it is used to making, and perhaps more than it is able to make. The new round, which raised $100 million, is nearly twice as much as the $55 million Twitter had raised to date. Which means Union Square’s bet would likely have to double as well.

[Image credit: Steve Jurvetson]

News Aggregator Daylife Ties Up With Getty: $4 Million Investment

Peter Kafka — Wed, 16 Sep 2009 14:32:21 +0000

Daylife, a news aggregator that launched a few years ago with a good deal of hype but has since retreated to the back pages, has landed another investor: Getty Images has bet $4 million on the company, which has raised some $15 million to date.

Getty’s involvement with Daylife is actually several months old. The amount of the investment, but not the investor, was previously disclosed in a Securities and Exchange Commission filing. Daylife announced the deal today in conjunction with another Getty tie-up–a deal to create photo-curating tools for online publishers.

Daylife formally launched in January 2007 with a good deal of buzz, due primarily to its high-profile investors, which included the New York Times (NYT), Craigslist founder Craig Newmark and Techcrunch’s Michael Arrington. The initial plan was to create both content-aggregation tools for publishers as well as a destination site, but the latter never took off and is now just a demo site for customers.

CEO Upendra Shardanand says the company has found traction as a white-label aggregation engine, though he won’t disclose revenue for the 26-person company. Clients include Gannett’s (GCI) USA Today, GE’s (GE) USA Networks and News Corp.’s (NWS) Sky News.

[Image credit: Tallest man in the world visits London, via Getty]

Another Bet on Video: How-To Start-Up 5min Raises $7.5 Million

Peter Kafka — Thu, 23 Jul 2009 13:43:19 +0000

Web video companies that wanted to take on Google’s (GOOG) YouTube are having a very hard time. But Web video isn’t going away, either, and there has to be some way to make it work for users, publishers and investors. Right?

Hence, another round of funding for 5min, a video start-up that just raised a $7.5 million B round. New investor Globespan Capital Partners led the round, and Spark Capital, the VC shop that has made several video bets (along with a big one in Twitter) made a second investment.

5min has now raised $12.5 million since 2007. Co-founder Ran Harnevo won’t discuss valuation, though I’m told it’s up from its A round, which is an accomplishment in and of itself.

“People do understand that video is the next thing. They just don’t see reasonable business models,” Harnevo says. “That’s the next thing that you have to do. You have to go into VCs and say, “I know how to do this.”

The company, which is based in New York City but has its roots in Israel, takes a different tack toward video than the would-be YouTubes: Rather than serving as a portal for user-generated clips or movies and TV shows, it cobbles together a library of how-to videos and distributes them to sites that don’t have any videos of their own. It now claims to reach 14 million video views across 200 sites.

There’s plenty of competition for how-to sites and videos, too, of course. But Harnevo claims that he’s been able to sell all of his inventory so far, and predicts he’ll be profitable in the next 18 months.

He was similarly optimistic six months ago, when he let me try my hand at conducting an interview with a Flip Mino. I never ended up publishing the clip, but now seems like a good time to do so–as long as you’re willing to put up with crummy sound, shaky camerawork and a stretched image. As I said, I was trying this stuff out.

Just about every thing we discussed in this interview still holds up, except that 5min now boasts 100,000 videos, up from 50,000 in December.

[ See post to watch video ]

Happy Chat: Paltalk Buys Back Its Shares From Softbank, at a Premium

Peter Kafka — Wed, 15 Jul 2009 10:35:59 +0000

Here’s a funding story you don’t see often, recession or no: A start-up buying back its shares from its venture capitalist, at a premium.

But that’s the transaction video-chat firm Paltalk and Softbank have completed. Paltalk, which sold off 20 percent of its equity to Softbank for $6 million in 2004, has bought the shares back. No one has spelled out a purchase price, but I’m told the deal will be considered a “single” for Softbank–it gets its capital back, plus a return, which in this economy ought to be a home run.

This is different from the “baby buybacks” we’re seeing as the economy sputters, in which founders reclaim all or part of their companies at distressed prices after their investors give up–think eBay (EBAY) and StumbleUpon (and perhaps Skype) or more recently, ManiaTV.

Paltalk can afford to buy its shares back because it’s an Internet video company that actually makes money, which it does via a “freemium” model. Most users can hop on the service for free, but about five percent pay for some extra features, like virtual conference rooms. People familiar with the company tell me it should be on track to throw off $4 million in cash this year from revenue of $20 million. It also has extra cash on hand these days as a result of a settlement it extracted from Microsoft (MSFT) in a patent lawsuit in March.

There are lots of Web companies–let alone Web video or Web chat companies–that would like those financials. But Paltalk is a steady grower, not a rocket ship. And while the company has supposedly gone down the road with potential acquirers in the past, it’s unlikely to get acquired at a huge premium.

So, it makes sense for Softbank to take money off the table; I’m told Paltalk was its last open investment from an Internet fund it raised way back in 1999. Paltalk CEO Jason Katz says he now owns 80 percent of his company.

A Google Lawyer Waves Goodbye, Lands at Twitter

Peter Kafka — Sun, 12 Jul 2009 14:38:01 +0000

We’re used to seeing Google vets leave for Facebook. Now they’re headed to Twitter.

The buzzy microblogging service has just grabbed its highest-profile Google (GOOG) exec to date: Alexander Macgillivray, a deputy general counsel at the search firm, is coming aboard as Twitter’s top lawyer.

Macgillivray is best known as the lead Google attorney on high-profile intellectual property cases like its fights with book publishers, the Associated Press and Viacom (VIA). Twitter has yet to find itself mired in that sort of thing, but give it time.

Macgillivray is just the latest Googler to land at Twitter. Earlier this year, the start-up nabbed Doug Bowman, the search giant’s lead designer, to join the ranks of several other Googleplex veterans, including, of course, co-founders Ev Williams and Biz Stone.

There are lots of reasons to leave a big company for a scrappy start-up, but just to spell out one obvious one: If you’re into risk, there is a whole lot more upside at Twitter these days.

The company’s last funding round pegged its value at $240 million, and if it ends up being acquired in the next few years, that number could be much higher. But Google shares stalled long before last fall’s stock market collapse (click chart to enlarge):

[Image credit: Doc Searls]

Exclusive: Warner Music Group Gets Back Together–Very Cautiously–With Imeem

Peter Kafka — Mon, 15 Jun 2009 18:58:01 +0000

Just a few weeks after a very public breakup, Warner Music Group and Imeem are getting back together again.

Warner, which told investors last month that it had written off the $16 million it had invested in the Web music start-up, plus another $4 million in debt, has made a new deal with the company and will get another slug of equity. The big difference: This time, Warner isn’t cutting Imeem a check.

Instead, Warner will get more equity in Imeem in exchange for a renegotiated licensing deal that is supposed to 1) give Imeem a better chance of being able to pay Warner for use of its music and 2) reduce the amount of cash Imeem does pay out to Warner every quarter.

Both companies declined to comment. But multiple sources familiar with the transaction say it was tied to a funding round that Imeem just closed, a follow-up to the emergency money it took on earlier this spring. In total, I’m told, Imeem will have raised an additional $6.5 million this spring. No word on which investors ponied up cash.

But I do know that it wasn’t Warner Music Group (WMG), which already had to tell investors that the $20 million it put into the company previously was worthless. Warner still holds the shares it has written off, but it wasn’t going to pony up any more cash in the recapitalization.

So why make another deal with Imeem at all? The positive spin is that Warner’s earlier write-down was simply an accounting requirement, and that Warner really does like the streaming music company. I’m not sure how much enthusiasm Warner really has for Imeem, but at this point, taking a flier on the company is a no-risk bet: Instead of throwing good money after bad, Warner only has to give it access to its digital music catalog, which doesn’t cost the company a cent, and won’t show up on its books.

Best case scenario: Imeem survives and Warner’s stake is worth something again some day.

And if you want to be optimistic, the really good news here could be for the battered online music business in general, which has struggled to figure a model that works. Up to now, no one except Apple (AAPL) and Amazon (AMZN) has been able to figure out how to make a business out of providing music over the Web–in large part because of the music labels’ insistence on unworkable payment structures.

You could argue that this isn’t the labels’ problem, it’s the start-ups’ problem, and they shouldn’t have gotten into the business in the first place. But now that they’re in it, the labels can try to keep them alive or pull the plug entirely. Looks like they think they’re better off keeping them around.

Ouch! HBO's Vampire Show Bites Business Blog

Peter Kafka — Sun, 24 May 2009 00:13:42 +0000

Here’s a scoop from Silicon Alley Insider, published Saturday morning: “Gawker Media announced last night that it acquired BloodCopy.com. It’s a blog about vampires. Really.”

No, not really.

While an earlier version of the story went on to include a graph depicting BloodCopy’s Web traffic and several theories that might explain Gawker Media’s purchase of a vampire-themed blog, the Alley Insider post has since been revised. It now explains that the news site was snookered by a “PR firm contracted by Gawker [that] sent us a release with the news.”

Said news is actually part of a promotional campaign for “True Blood,” the vampire show entering its second season on Time Warner’s (TWX) HBO .

More details about BloodCopy, the fake blog that HBO runs to promote the show, as well as other marketing stunts the cable network has rolled out, are available here. But if you don’t have time to read a whole blog post, do be aware that this anti-vampire rights group is a fake. So is this pro-vampire rights group. And so is this synthetic blood beverage.

Disclosures! I used to work for Alley Insider, whose parent company just raised a bunch of money, which makes me happy.

Will Facebook Say "Da" to Russian Investors?

Peter Kafka — Sat, 23 May 2009 00:46:07 +0000

Here’s the newest twist in the Facebook valuation/funding saga: Russian investors have reportedly offered to sink up to $350 million in Mark Zuckerberg’s social network–at two different valuations. The Wall Street Journal says investment group Digital Sky Technologies has offered to spend $200 million on a chunk of the company’s preferred stock at a $10 billion valuation and to buy up to $150 million worth of the company’s common stock at a $6.5 billion valuation.

Reached for comment, Facebook spokesperson Brandee Barker offered up the boilerplate no comment: “Facebook is a private company, so as a matter of policy, we don’t typically share details about our financial plans or comment on rumor and speculation.”

But everyone else has been speculating about the value that Facebook and outside investors place on the company, and whether Facebook needs to raise any money at all.

We do know that in 2007, Microsoft (MSFT) beat out Google (GOOG) for the right to invest some $250 million in the Facebook, placing a $15 billion valuation on the company’s preferred stock. Preferred stock is typically more expensive than common stock because it gives owners the ability to recoup their money before other investors. Facebook later raised another $60 million from Hong Kong billionaire Li Ka-shing and $10 million or so from the Samwer brothers of Germany.

And various reports have suggested that employees and others who own Facebook common stock have been recently selling it on the private market for prices that value the company in the $4 billion range.

Facebook has repeatedly said that it doesn’t need additional cash to keep going and that it expects to generate $500 million in revenue this year and begin breaking even in 2010. Last year, the company felt flush enough to offer to buy Twitter for $500 million–$100 million of which would have been in cash.

Twitter App Investors Still Writing Checks: StockTwits Raises a Round

Peter Kafka — Mon, 18 May 2009 10:00:51 +0000

Nope, Twitter still hasn’t trotted out a business model yet–a couple of sponsorships from the likes of an AT&T (T) don’t cut it. And that may or may not be a problem for potential acquirers like Google (GOOG) or Microsoft (MSFT). But it’s a nonissue for a growing number of start-ups hoping to succeed simply by positioning themselves in Twitter’s general vicinity.

Today’s example: StockTwits, a day trader-meets-Twitter site that just raised $800,000 from venture capital firm True Ventures. It’s not a ton of money, but StockTwits doesn’t need a ton of money. The site, which launched last fall with an $800,000 angel round, employs all of four people.

And it’s yet another bet that investor Howard Lindzon has made in Twitter: He’s also put money into bit.ly, a Twitter-centric url-shortner, and Tweetdeck, a useful Twitter client, alongside incubator Betaworks, which in turn invested in the StockTwits angel round. Cozy! (Cozier: Lindzon was an early investor in Silicon Alley Insider, my former employer).

Like all of those companies and just about every other company that’s trying to make money from Twitter, StockTwits doesn’t have any kind of formal relationship with Twitter. It doesn’t need one: If you want to take advantage of Twitter’s data and users, you can just plug right in for free via its open API.

As a wise man once said: “All of [these companies] are part of the burgeoning ecosystem that revolves around Twitter, which powers all of their companies by letting them plug into its data stream. In exchange, all of these companies make Twitter more successful, by bolting on frills and features to its bare-bones service.”

Name aside, StockTwits may be less dependent on Twitter than any of the other Twittery start-ups. StockTwits users employ Twitter to pass along investment ideas, but beyond that, it’s a fairly straightforward stock message board, the kind we’ve seen since the first Web boom.

Lindzon and co-founder Soren Macbeth plan to make money via ads and by publishing newsletters/blogs on behalf of some StockTwits users, (two of whom are already selling their investment advice for $60 a month). Basically, Twitter is a lead-generator for the site.

Come to think of it, that could be a business for the Twitter team. Right?

Here’s a video interview I shot with Lindzon last week in which he declined to hand out any stock tips of his own. Presumably he’ll rectify that today.

[ See post to watch video ]

"DoubleClick for Web Video" Start-up FreeWheel Raises $12 Million

Peter Kafka — Wed, 29 Apr 2009 22:01:55 +0000

Yes, investors are still betting on Web video. Just not in the way they used to: FreeWheel, one of the buzzier online video start-ups you’ve never heard of, has raised a $12 million C round from Battery Ventures, which had provided financing for the company’s first two rounds, and Foundation Capital.

No word on valuation for the company, or the total amount raised to date. If anyone wants to weigh in, you can reach me at peter@allthingsd.com.

FreeWheel is essentially an online ad video network operating behind the scenes and connecting Web video advertisers and publishers. If that sounds a bit like DoubleClick, the display ad infrastructure company that Google (GOOG) acquired last year, that’s not a coincidence. Co-founders Doug Knopper and Jon Heller are both DoubleClick vets.

FreeWheel won’t disclose most of its customers, but it’s been watched widely by Web video players to see if can make good on its promise to make the fractured market more efficient. That’d be an important problem to solve for the Web video industry, which has yet to deliver on its huge promise.

Twitter's Astonishing Hockey Stick

Peter Kafka — Wed, 15 Apr 2009 20:27:36 +0000

Earlier this year I talked to someone who was an early investor in Twitter and asked him whether the company’s lack of revenue had bothered him when he made the bet.

“No,” he said. “I bet on the hockey stick.”

That is, he was looking at Twitter’s staggering month-over-month growth–which looks like a hockey stick when you plot it on a graph–and assuming that any company that moved that fast had to be worth something, eventually.

That kind of thinking is common during bubbles, and much less so after they burst. But in this case, betting on Twitter’s hockey stick looks like a good wager–especially if you made your bet prior to this year. Because this is what the hockey stick looks like now (click to enlarge):

And note that the chart just illustrates U.S. traffic to Twitter, which comScore (SCOR) pegs at 9.3 million unique visitors in March, up 131 percent from February. Factor in international users, and those who use Twitter but never visit the site, and you get to 20 million easily.

I’m going to write many more stories about Twitter (a phenomenon that is itself part of the Twitter story) so we can try to assess exactly what that growth means, whether it makes sense for Google (GOOG) or Microsoft (MSFT) to do a search deal and what Twitter is really worth, later. But unless the Twitter guys really make a hash out of this, my anonymous investor is going to be right: That hockey stick is going to be worth something to someone.

Side note: As popular as Twitter is, most people are still new to it. So here’s a tip: If you don’t want the general public to know that you and many of your coworkers got laid off today, don’t Twitter about it.

[Image credit: Mykel Roventine]

Seeqpod Offers Free Music, but Its Lawyers Don't Come Cheap

Peter Kafka — Wed, 01 Apr 2009 11:26:12 +0000

No one wants to pay for music on the Internet. But running a free music service on the Web takes a whole lot of cash. Just ask the folks at Seeqpod, which filed for Chapter 11 bankruptcy protection last week.

Seeqpod, founded in 2005, has raised either $5 million or $7 million since then (I can’t vouch for either number). But its Chapter 11 filing lists assets of just $2 million, and debts of $1.6 million.

I’m used to seeing bankruptcy filings where the debt number is much bigger than the asset number. But as Seeqpod bankruptcy attorney Scott L. Goodsell patiently explained to me last night, companies frequently seek Chapter 11 specifically so they can stay pending litigation.

In this case, Seeqpod is trying to get a breather from lawsuits filed by Warner Music Group (WMG), and, more recently, EMI Music Group. Both music labels say the search engine violates their copyright by offering users streaming music it hasn’t licensed.

Seeqpod says it’s protected by the Digital Millennium Copyright Act, but at this point, Seeqpod’s legal arguments don’t matter nearly as much as its bank account.

It already owes Farella Braun + Martel, its lawyers in the copyright cases, $424,235.06, according to the filing. That’s four times more than what it owes Level 3 Communications (LVLT), its bandwidth provider.

Meanwhile, as battered as the big music companies are, they can certainly afford to keep paying their lawyers. Warner’s stock price is hovering in the $2 range, but it threw off $160 million in free cash flow in the last quarter.

Even in the good old bubble days, it would be hard for a site like Seeqpod to find investors willing to back it in a legal fight where it was that badly outgunned. Seems unlikely that it will find a champion willing to pick up the tab now.

Is a Shorter Web Address Worth Big Money? bit.ly Raises $2 Million

Peter Kafka — Mon, 30 Mar 2009 18:30:36 +0000

Here’s another Web 2.0 riddle that seems particularly hard to solve post-Lehman: What’s the value of a service that takes a long Web address and makes it shorter?

One answer: Several million dollars.

Oh, and did I mention there’s no business model attached to said Web service?

Still with me?

OK. Here are the details: Betaworks, the incubator/start-up platform best known for selling Twitter a search engine for $15 million last year, is taking in-house project bit.ly and spinning it out as a separate company. A group of new investors, led by O’Reilly AlphaTech Ventures, has poured about $2 million into the company, which implies a valuation in the midseven figure range.

Other investors include Howard Lindzon’s Social Leverage group, Jeff Clavier’s SoftTech VC, and uber-angel Ron Conway. O’Reilly’s Bryce Roberts will join the board of the four-man company.

bit.ly is one of roughly a gazillion url-shorteners, all of which do the same thing. They take an unwieldy Web address like, say, this one: “http://mediamemo.allthingsd.com/20090330/huffington-post-pays-for-content-after-all-via-175-million-investigative-fund/” and turn it into something concise like this: “http://bit.ly/14WdlB.”

If you spend much time on Facebook, Twitter or any other Web service where brevity is useful, you’ve encountered a shortened URL, and you’re likely seeing more and more of them all the time. The bit.ly guys say people clicked on 20 million of their shortened Web addresses last week, and that the number is increasing by about 10 percent a week.

Great. So where’s the money? Many of bit.ly’s competitors, like the aptly named tinyurl.com, generate modest revenue by running Google (GOOG) ads against the many eyeballs that come to the site to use the service. But bit.ly won’t sell ads, and it plans on distinguishing itself by tracking all the clicks and streams that come through the service and using the data to provide interesting analytics and insights into who’s looking at what on the Web, in real time.

The logic: If you’re impressed with the possibilities of Twitter’s real-time search capabilities (see above), you’ll love bit.ly.

Great. So where’s the money? bit.ly is free to users, and the company says it doesn’t plan on selling its analytics or other tools to publishers. Team bit.ly says revenue will come sometime down the road, from something else–when they figure out what that is.

That kind of shrugging was par for the course during Boom 2.0 days. But in the dark days of last fall, even the sunniest Web optimists, including Betaworks founder John Borthwick himself, were telling start-ups that they had to face reality and start making money.

So either things have gotten much better than we realized or the bit.ly investors think it’s still worth betting on fast-growing, revenue-free start-ups. It’d be nice if both things are true.