How Lijit Plans to Make Money

Lijit, a two-year-old startup based in Boulder, Colo., recently raised $7.1 million, bringing the total venture capital it has raised so far to a shade above $10 million.

Whatever way you look at it, that is a lot of money for a company that, on face value, is nothing but a widget that allows bloggers to offer search on their blogs and their profiles on other social media sites such as Flickr.

Curious as to how it plans to build a business to justify the money it raised from VCs such as Brad Feld’s Foundry Group and Boulder Ventures, I jumped at the chance when company CEO Todd Vernon emailed last week to let me know that he was in town. Why not — after all it would give me a chance to grill him in person. While our chat was short, it was quite revealing (including their growth metrics!) and left me a lot less skeptical of the 22-person startup.

Vernon, who in his past life started Raindance Communications, turned out to be an affable fellow who not only answered my questions but also did a good job of convincing me that Lijit’s not just a widget company and indeed has a viable business model. At first blush, Lijit doesn’t look like anything more than just a cute widget using the Google Custom Search Engine. But Vernon said that in addition to Google Custom Search, Lijit has its own search infrastructure (running on about 200 servers), mostly because it needs to customize search results for some of its larger publishing partners, something that isn’t quite possible with Google’s custom search offering.

“Our search implementation is based on a customized version of the Lucene open source platform,” he said. “To date we have spent a little under a $1M on crawling and indexing infrastructure but we expect another $1.5M with this new investment.”

In other words, the cute widget is hiding a monster called “a white-label search solution,” which takes the topicality of blogs, their intertwined relationships with other blogs and web content and build their own more focused index. In order to make money off its search service, Lijit is going to offer an ad network for publishers, including some bespoke versions for larger publishers in their network.

The company’s widget is used by more than 4,500 publishers, mostly blogs, with 60 new ones joining every day. So far, they are seeing about 330,000 searches a day, and the company plans to build an opt-in ad-network around these searches.

Vernon explained that since the company has more contextual information -– such as the topic of a blog and the very content being created by the blog writers — it can target advertising at a more granular level and, as a result, get better click-throughs.

He promised to give more details when the ad network, currently in alpha testing, launches in about a month. The ads will be showed against the results of searches, based on matching keywords. There are plans to allow publishers to sell their own keyword inventory in addition to giving them an option to use Lijit to back-fill the advertising spots. While this ad network seems like a good idea, Lijit has a long way to go before it can start making major bucks.

At 330,000 searches a day or 9.6 million searches a month, Lijit doesn’t have enough search volume (and thus resultant clicks) to have meaningful revenues. For now, finding hyper growth remains a challenge for the company. Good thing it has money in the bank (and hence time) to keep it going.