Link shortening services are so common you can't throw a stone online without hitting one, but TinyURL is the undisputed champ. It's one of the oldest, its name says what it does and despite repeated outages - its downtime is small enough that millions of people keep using it.

TinyURL has also allowed incomprehensible amounts of value, both in terms of technology and in terms of money, to sit on the table unclaimed. For years. Now a group of some of the web's hottest investors are betting a few million dollars that a smart TinyURL competitor called Bit.ly can take advantage of being the conduit through which millions of people visit sites of interest to them.

Today Bit.ly announced that it has raised about $2 million in its first round of funding. The round was led by Tim O'Reilly's venture fund and included money from Mitch Kapor (the inventor of Lotus), Jeff Clavier (portfolio), Ron Conway (early Google investor), the Accelerator Group and Howard Lindzon's new fund Social Leverage. All of those names are some of the hottest in the startup scene and all the companies in those various portfolios will now have a close business connection to Bit.ly.

We reviewed Bit.ly when the project launched last July and urged readers to use this service to shorten their long links instead of other services like TinyURL. Why do we care what service people use? Because we're fans of innovation and Bit.ly is aiming to be a platform for innovation like TinyURL should have been. If web 2.0 is about democratizing publishing, the next step is machine leveraging all the resulting data.

The Bit.ly Magic

What does Bit.ly do that's so special? They use all the data they see and make it available to third party developers who want to build on top of it. They keep track of the clickthrough numbers and can tell you what the hottest links on the web are at any time. See this @bitlynow Twitter account for one display of that information. Bit.ly says it resolved 20 million distinct URLs last week. That's the beginning of a really large database.

Bit.ly also uses Reuters Calais to extract semantic terms out of the pages that shortcuts are created to. That's valuable information. Want to see the most popular web pages that talk about Dancing With The Stars, or the Federal Stimulus Package, or some other topic, in the last 30 minutes? Somebody wants to, you'd better believe, and that's the kind of real-time information that the Bit.ly API aims to make available. (Disclosure: Calais is an RWW sponsor.)

We've had some concerns about the clickthrough numbers that Bit.ly has reported but the company says they are going through a list of reporting sources that give them problems and eliminating them one at a time. The company says it is now reporting real-time traffic stats that are within 10% of what Google Analytics reports much later. We've been watching the numbers improve in accuracy when it comes to our numbers and can confirm that they are getting much better.

A number of people have looked at today's news and thought it was ridiculous that a link shortening business could raise $2 million in funding. We don't think it's ridiculous at all. Show us a service that can report in real time how many people are visiting millions of pages around the web and what those pages are about, that exposes that data in an API, and we'll show you a platform we're very excited to see work.