Demand Media Grabs Nimble Pluck

By Staff Reporters     VentureWire     March 05, 2008

When investing in start-ups, venture capitalists say, invest in the founders, not the product or service.

Web media syndication company Pluck Corp. proved that maxim when it was acquired by Demand Media Inc. on Tuesday for more than $67 million, according to people close to the company. The company started out selling a completely different service than it does now.

"Not slightly different. Orthogonal," said Chris Pacitti, general partner at Austin Ventures, which incubated Pluck. "Version 1.0 didn't work very well. Thankfully they recognized it early on and used the balance of the funds to come with version 2.0, and that was a very successful offering to the marketplace."

The original offering was a downloadable desktop application and browser-based service for users to collect and share information. While that didn't work, the founders realized while pitching to media companies that such companies needed an enterprise-strength platform to collect and distribute user-generated content.

Because Pluck's original product was built to scale for millions of users, it was not too difficult to rebuild the product for media companies. Pluck now provides tools for large Web publishers that allow their users to add blogs, photos, ratings, comments and other social-media features to Web sites. Clients include Gannett Corp.'s USA Today, Guardian Unlimited, Hearst Corp., the Washington Post Co. and Circuit City Stores Inc.

"It proves the fundamental rules of being successful in venture capital, which is you invest in teams," said Allen Morgan, managing director at Mayfield, which led a Series B round for Pluck.

The company's chief is veteran executive Dave Panos, who co-founded Pluck while a venture partner at Austin Ventures. Panos previously co-founded Question Technologies Inc., which sold to Motive Inc. in 2001, and has served in executive roles for several other start-ups.

Since it was founded in 2003, Pluck raised $17 million in three venture capital rounds, including a $7 million investment from Reuters Group PLC in 2006.

Demand Media, which has raised $350 million in venture capital and private equity and is headed by former MySpace Chairman Richard Rosenblatt, says it reaches 64 million users through its network of domain name holdings. Demand Media's investors include Goldman Sachs, 3i Group, Generation Partners, Oak Investment Partners and Spectrum Equity Investors.

Pluck, Demand and its investors declined to state the acquisition price, but people close to the company said news reports of a $67 million deal were too low.

The Pluck acquisition occurs as a slew of companies providing social networking services to business clients have emerged in the last few years. A recent list by Forrester analyst Jeremiah Owyang showed about 70 companies in the broad white-label social networking space.

Two other companies in the space were recently acquired. Earlier this month Mzinga Inc. acquired Prospero Technologies LLC and last month ONEsite Inc. acquired Social Platform LLC.

"The landscape is pretty cluttered in our view," Pacitti said, acknowledging competitive landscape is a factor in exit strategy.

Another way to say that is that ramping up the size of your business is necessary to compete in a crowded space.

"The overriding reason [for this deal] is we believe the market is hitting a tipping point in the adoption of social media outside of Facebook [and similar sites]," Pluck CEO Panos said. "Scale is really important and timing is really important."