You can say many things about Top 100 lists, but a couple of truths stand out. They never get easier to put together, and once they’re published, the complaints never stop flying.

The other feature of Top 100 lists is they can always be better, which is the one thing both compilers and readers usually agree on. This year’s list started with about 450 submissions; then another 150 companies were nominated by Red Herring journalists who had encountered promising candidates on their beats, be that Internet, Software, Wireless, or something else.

The full list came to 600 before everyone started weeding. First, the big tufts of elephant grass were pulled out: That eliminated perhaps 200 companies, many of them judged to be long past the point of qualifying as startups, or inappropriate candidates in some other way. One example was Ingres, the open-source database company bought out of CA by Garnett & Helfrich.

The new owners think the spin-out is solid enough to offer corporations an alternative to Oracle or SQL Server, but we couldn’t classify it as a startup. As the brave soul tasked with managing the Top 100 project was later to remark, “This isn’t the Hall of Fame—we were looking for Rookie of the Year.”

New Criteria

Then came the much more difficult job of applying new criteria—which tested nominees against a set of five values:

1) New is better than old
2) Potential is more important than proof
3) Revolutionary is better than evolutionary
4) Underdogs are better than big dogs
5) Risky is better than safe

Shifting to this qualitative and slightly bendy yardstick was a big change from earlier efforts—when Red Herring editors made the selections largely on the basis of applications that touted the quality of investors, experience of the management team, uniqueness of the technology, and logic of the business model. One complaint about such lists was that there were few risks, few wildcards, and fewer surprises. The criteria were more simplistic by this year’s standard, but they made for an ironclad defense when complaints came in.

After all of this year’s nearly 400 surviving candidates were measured against the new criteria, the shortlist shrunk to 225. Whittling that down to 100 was the truly agonizing part of the exercise, as journalists with the relevant expertise were summoned to a windowless conference room to defend their choices before the editors—both their recommendations from company submissions and their own nominations.

At the end of the process, we had a rough cut of the Top 100, which then had to be put through final fact-checking and verification. That exercise pushed a couple of candidates out of the winners’ circle, and gave the best runner-ups a second chance.

Challenging as these projects are, this year’s Top 100 makes a much closer fit with what Red Herring is all about. That’s delivering informed coverage not on what’s hot and already widely reported, but on what is new and promising, on what’s risky and potentially rewarding. In short, Red Herring reports on what’s new and worth getting in a sweat about—the thrill of innovation and the courage to finance it. It’s the difference between being ahead of the curve and riding it.

California dominates this year’s North America Top 100 with 56 entries, followed by Massachusetts with 11. New York weighs in with only four, the same number as all of Canada, which is still better than Mexico, which produced none.

Results are lopsided, all right, but readers, especially from lower-scoring places, should be mindful of one key detail: As Red Herring has reported before, California is where the venture capital overwhelmingly is—in 2005, California piled up nearly $10 billion in venture funds, four times second-place Massachusetts—and as a consequence, Silicon Valley is a natural destination for innovators from Canada or states like New Jersey, Florida, Illinois, and others. Like Mexicans crossing the Rio Grande for better opportunities north of the border, entrepreneurs know where the best odds on raising money are.

Backyard Investors

Despite surging cross-border capital flows—as evidenced by ever-rising foreign direct investment (FDI) flowing into China and India and other developing economies—venture capital still leaves the neighborhood only cautiously. As our venture overview (see p. 32) points out, VCs are beginning to make more forays abroad to look for opportunities that have grown scarce at home, but these hardly represent a groundswell.

Nothing illustrates this stay-at-home aspect of venture better than this year’s list; none of the seven startups backed by Menlo Park, California-based Sequoia Capital is located outside the state of California. As much can be said of Menlo Park’s Benchmark Capital—it is invested in four on the list, all of them locals.

Menlo Park-based Draper Fisher Jurvetson (DFJ), with affiliates in Boston and New York, provides the exception to the rule: all three of its entries on this year’s Top 100 are located in different states—California, New York, and Massachusetts.

Ironically, Benchmark and Sequoia, like DFJ, have strong international operations. But their stateside portfolios have a decidedly California feel to them so it shouldn’t be surprising to see this reflected in this year’s RH100 North America.

Biosciences yielded the biggest number of startups on this year’s Top 100, with 16. Internet/Services came next with 15, and Security/Defense followed with 14. Then came Entertainment/Media with 13. At first glance, the results might be considered surprising in some cases, and almost predictable in others. Biosciences, you might say, came in surprisingly high compared to years past, and Computing, with only eight companies on the list, predictably low. In both cases, the data reflects this year’s stronger emphasis on risk in the selection process.

The startup with the smallest payroll in this year’s Top 100 is Mountain View-based Multiverse (Entertainment/Media) with nine. The company with the biggest is Internet/Services entry Infinera in Sunnyvale, California, with a very un-startup-sounding 400 employees. The former raised $1.3 million privately, the latter $202 million (in five rounds) from such blue-chip firms as Kleiner Perkins, Benchmark, Juniper Networks, Sutter Hill, Agilent, Mobius, Argonaut, not to mention the Government of Singapore.

Some companies in this year’s Top 100 may fail; some undoubtedly will be the stuff of some big IPOs and M&A deals. In fact, several of our selections have become the target of trade sales and mergers since we started the selection process four months ago. Our pick PassMark Security was gobbled up by RSA Security. Microsoft acquired Top 100 winner Massive. And Merck nabbed another in our list, GlycoFi. Venture, like life, yields winners and losers.

But to end with a caveat: We set out to find new faces and new winners, not to re-nominate companies that made an earlier Top 100. Again, this isn’t the Hall of Fame. Speaking of which, it’s time to meet some of the people and companies that will one day be famous.