Searching for Google Junior

Sarah Lacy

For at least a year leading up to the Google IPO, the valley was a buzz with speculation of what the impact would be. Would it open a floodgate for new tech IPOs? Would it lift the valley from past doldrums? Would it revitalize the Nasdaq as we know it?

The answer to all of those questions was no. Google was just too different from the other venture-backed companies out there to spark any kind of substantial trend. But the IPO has clearly had an effect on early stage investors.

If you ever ask an early stage guy how the Nasdaq or IPO markets are impacting his business, he'll recline back in his conference room chair and very nonchalantly say, "We don't care what the IPO market is doing today. We do early stage investing. By the time these companies are mature enough for an IPO, the market will have totally changed."

True, but investors are human. It's hard to watch the runaway success of Google and not remember back when it was first out raising money. A lot of very smart investors said no, thinking it was overvalued, there was no business model, and it was too late to the search game-- all prudent reasons to turn down a deal. But guess what? It did search fundamentally better and found a business model along the way. A darn good one, at that.

So today, when you ask an investor tough questions about, say, a social networking or file sharing company you get a lot of, "No one thought Google could make money either."

I'm all for VCs taking these kinds of risks-- that's what they are there for right? That's where the homeruns come from. But I have to wonder about all the search companies being funded now. What are the smart business models and what's just dumb herd mentality? Is it the same kind of risk that Google's investors took or is it just that Internet advertising- particularly paid search- is the new hot market?

It's not something you can answer in a few graphs, so I plan on blogging more about some of the specific young search companies I've been thinking about on Tuesday (we're off for President's day Monday-- thank you Founding Fathers!) But in the mean time, write to Deal Flow and let us know what you think. Search startups: tons of opportunity, select opportunities or no opportunity to build the next Google? (Note: write to deal flow through the submission box to your right or by clicking on my name below)

Before it's here, it's on the Bloomberg Terminal.