Three Questions on Hyperlocal Advertising with Satbir Khanuja, CEO of DataSphere

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In the world of news media these days, there’s no getting away from two things: online advertising, and hyperlocal sites. Where they meet is a company called DataSphere in Bellevue, WA.

On Tuesday, we reported that DataSphere had raised $10.8 million in Series B funding. The investors in the new round are Ignition Partners, also based in Bellevue, and two unnamed publicly traded companies, which are strategic investors. Ignition and one of the public companies previously invested in DataSphere’s $6.5 million Series A round back in July 2006.

DataSphere, which was called SecondSpace until last year, has been collaborating with media companies like Fisher Communications and Cowles California Media to help them roll out hyperlocal (neighborhood) websites, about 150 of them across five states: Washington (including 46 sites based in and around Seattle), Oregon, Idaho, California, and Rhode Island. DataSphere’s technology platform organizes website information, makes it searchable, and connects local advertisers with local sites and consumers. (You can check out the DataSphere-powered search capabilities and hyperlocal sites and ads at KOMOnews.com, for example.)

One outside observer thinks DataSphere is pretty interesting, but wonders about the size of the market from a VC’s perspective. “It’s a smart group of guys and investors,” says Lucinda Stewart, a managing director at OVP Venture Partners who focuses on online advertising, among other sectors. “They need to prove out the business model a bit more.”

The company currently has more than 70 employees and is led by chief executive Satbir Khanuja, a seven-year Amazon.com veteran who holds a PhD in ceramics engineering from MIT. (He has been in the business world long enough that he doesn’t sound like a PhD—probably a good thing.)

I had a good chat with Khanuja earlier this week about his company’s technology and business strategy. Here are some edited highlights:

Xconomy: Can you explain how DataSphere is new and different, in a nutshell?

Satbir Khanuja: The overall idea for us is to create a compelling hyperlocal experience for users and advertisers. We are collaborating with local media companies and leveraging their brand equity they’ve built, and applying our technology platform. In a traditional site, the [ad] inventory is accessible only to medium and large advertisers.

What we do is, let’s take all your news and show it in a contextually relevant way to all of the user base. You choose your neighborhood as a default site. We show that user a specific user experience. Now we have the ability for local advertisers from that neighborhood to show ads to only those users.

X: How does your platform and revenue model work? And how are these hyperlocal sites doing?

SK: If you work with one of the media companies, they already have the resources. We’ve created a forum and platform with them to have a conversation with their user base throughout the day. Local communities are pitching in content about local events and news. We’ve launched 46 sites in Seattle. They’re getting great traffic. In less than five months, more than 20 percent of the Seattle population is visiting one of these community sites.

Search and discovery is on our platform. What we’re trying to do is organize the content and make it very easy for [news sites and retailers] to connect with users. We’re giving them semantic search, and better organization of information. The revenue model is akin to what Google has done with AdSense. Publishers can go in and drop in a code, and Google cuts them a check. We also have an ad sales force. We’re able to generate 10 times what they’re able to make on their remnant inventory [through traditional, untargeted ads].

These sites are doing very well. In order for any of these things to be sustainable, you need traffic at minimal cost. Starting from scratch—that’s what kills hyperlocal. For us, it’s repackaging what’s already there. Our platform is [search engine optimized], so we’re getting a lot of traffic from search engines. You can see how many local advertisers are on Bellevue.com, Ballard.com, and so on.

X: Ultimately, how do you plan to succeed in such a crowded and competitive field?

SK: The uber-vision for us is to create a general-purpose content discovery platform and make it available to different verticals. The big opportunity for us is hyperlocal websites. We take the same platform and create a compelling, personalized site—on par with the Amazons of the world. It’s a journey for us. We’re going to use this as a platform and become a necessary place people will visit.

Our primary focus is to scale out what we’ve already built. We’ve launched 150 sites in five states. We will announce new relationships, and apply what we’ve built to a broader set of neighborhoods, and continue to launch new products. It will be a combination of a rollout of what we’ve built across communities in the U.S., and beefing up our sales team. We’ve been aggressively hiring, and will continue to do so.

No one’s doing the integrated turnkey solution approach we’re doing. Hyperlocal is extremely competitive, and was doing just fine before we arrived. Think about the audience we’re going after. Anyone who’s got a competitive site—it could be a newspaper or website—people have a finite amount of time. Anyone else in that pie chart will be competitive or complementary—advertisers, media companies.

Our approach has been, you get the technology, and your experience on the site looks like Amazon discoverability, and you get better-looking ads and more money. That approach nobody else is taking. We’re in talks with a lot of media conglomerates who want to use this. Our intention is to have a national footprint in 2010.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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