Naming That Tune

Company: Gracenote

HQ: Emeryville, CA

Founded: 1995 (previously named CDDB)

Management: President and CEO Craig Palmer was previously chairman and CEO of eWanted. That company had raised $33 million, before going bankrupt in 2001. Prior to that adventure, Palmer was a vice president at Aspect Development, which had an IPO, and was later acquired by i2. 

Investors: In August 2005, Gracenote raised a $10.9 million series E round, yielding a post-money valuation of about $121 million. Gracenote Founder Scott Jones and Sequoia Capital are the two principal investors, together owning about half of the company. Bessemer Ventures owns around 10%, and the latest investor is Philips Electronic.

Business Model: Gracenote licenses a suite of products to consumer software and hardware makers that helps users identify and label multimedia content. If you’ve used Apple’s iTunes, AOL’s Winamp, or another digital music manager, you’ve probably seen the “CDDB” icon searching for CD information – that’s Gracenote’s flagship database at work. CDDB provides CD information via the Internet when users are burning CDs or storing music on their hard drives. The company provides text-based information, such as the song title, length of play, and artist’s name. It can recognize about 3.5 million CDs. Since most commercial music CDs do not contain any such information, CDDB is accessed by the millions of users. The service is free to consumers and licensed by developers of consumer electronic devices and applications.

In August 2005, Gracenote also acquired the rights to technology from Philips Electronics that can identify song files by their audio “fingerprints.” Although Gracenote has hinted at some products this acquisition might lead to, it has not yet launched any that marry CDDB with it. (Note: Philips’ fingerprinting technology is currently also at the heart of new legal peer-to-peer services, such as Snocap – the new legal music file-sharing service founded by Shawn Fawning, who had previously founded Napster. Fingerprinting recognizes in five seconds or less what song is playing by matching audio waves against a database of music. By identifying songs as they are downloaded, the fingerprinting tool blocks unauthorized trades. This is a critical requirement in legal file sharing, as Snocap and others are vouching that only legal file-sharing takes place with their software – and if they don’t know which songs are being swapped between computers, they cannot permit or block sharing.)

The Philips fingerprinting technology is also the foundation of Gracenote’s service that allows users in Europe and Japan to identify music by simply holding a cell phone up to the radio; they can then order the song through their phones. Gracenote has also gained access to Philips technology that identifies video files from DVDs. This service may become valuable, as consumer electronics companies roll out devices that store DVDs on hard drives, letting users search for, say, “all Bill Murray movies from the 1970s.”

Competitors: Allmusic, as well as several open-source music-identification services: MusicBrainz, freedb, and ThreeTix

Dirt: Gracenote had a sullied reputation early on: it converted an open-source business, which had grown as volunteers around the world built its database, into a commercial service that profited from that all-volunteer work. The company now has a clear lead over all its competitors…but open-sourcers are nipping at its heels.

Coping with Catastrophe
The disaster in the Gulf Coast is a gut-check for VCs – and other alarm:clock news from the land of private venture funding.

Last week was a somber one, as the situation in the storm-ravaged Gulf Coast went from bad, to worse, to apocalyptic. The markets did seem to hold their own despite the immediate worries over the oil supply. But there were some heightened concerns in private venture funding.

Venture capital businesses had actually been making steady progress since the dot-com bust, and investors have been hoping for some big pay-outs via IPOs. But cataclysmic events like those surrounding Hurricane Katrina inevitably dampen investor enthusiasm. That situation means VCs will probably continue waiting, and possibly dumping more cash into their portfolio companies.

While the tech IPO market is cool, and will probably remain so, given market jitters, M&A is still a viable option for startups. The recent rumors that News Corp. offered $3 billion for Skype sent a buzz through the market. But ask any VC and they’ll tell you that the real prize – the easy money –  is in an IPO.

And what about the levels of VC investment? The most recent available numbers indicate a slowdown. According to figures from Dow Jones VentureOne and Ernst & Young, there were 474 VC deals in the first quarter of 2005 – the lowest number in more than three years. The total amount of money invested in startups in first-quarter 2005 also fell to $4.6 billion, the lowest amount since second-quarter 2003.

We don’t think all the news is bad, though. On the IPO front, the Internet telephone startup Vonage announced it was hoping to raise $600 million through a public offering. The news was met with mixed reviews – many observers find Vonage’s expense-to-revenue ratio unacceptably high. But sometimes markets thrive on controversial offerings.

We were also surprised to see that Science Applications International Corp (SAIC), a privately held research and engineering company, founded in 1969, plans to go public, with an initial offering worth up to $1.73 billion. SAIC has 42,000 employees and revenues of $7.2 billion in fiscal 2005. Those are impressive numbers, and we don’t think SAIC would be going public, after 35 years as a private company, unless it was confident it could convince the public markets to pony up. SAIC says that after the IPO, insiders will still own 80-90 percent of the company, and that its rationale for the IPO is to use the markets to compensate employees stock option programs.