Kontera, a startup that’s putting text ads right into the text, said Monday it has raised $7 million in venture funding from Sequoia Capital and Lehman Brothers Venture Partners.

The year-old company, which has offices in San Francisco and Israel, is focused on in-text advertising, in which words in the body of the text on a page are turned into links to contextual ads.

The Kontera deal reflects heavy investor interest in the online advertising space, which Forrester estimates will be worth $26 billion by 2010, and an increasing willingness to explore advertising methods that some consumers may find invasive or annoying.

Online ads had trended toward simple text boxes like Google’s enormously successful AdWords product, with many sites choosing contextual ads over banners and pop-ups.

Now, however, desire for stronger ties to consumers, more lucrative deals, as well as better reporting are driving even Google to explore things like video ads, click-to-call, and its recently unveiled payment system, which will confirm when a transaction on an advertiser’s site is completed.

How It Works

Kontera offers web site owners a JavaScript tag to include in the code of their pages, allowing it to analyze content in real time and pick out links judged to be the most appropriate keywords for advertising. That means ads are no longer relegated outside the main content of the page; when users hover their mouse over the links, ads appear.

Calling the ads “non-obtrusive and informational,” Kontera founder and vice president of business development Henit Vitos said her company recommends no more than five in-text ads per page.

Kontera’s target customers are the proprietors’ online forums, social networks, product reviews, and blogs, where it can match ads to the gamut of user-generated content with its relevancy engine. Currently 1,100 sites use its product, according to the company.

Ms. Vitos said Kontera supplements existing advertising rather than replacing it. “Five percent of users’ time is spent on search, and that’s the best way to advertise,” she noted, “but what about the other time they spend online?”

Kontera distributes its ads through individual deals and channel partners, the largest of which is Yahoo. The company is running trials on an automated bidding system for in-text ads similar to those used by Google and Yahoo for pay-per-click ads. It makes money through revenue sharing with its customers.

The company has a close competitor in Vibrant Media, whose IntelliTXT in-text advertising system has been on the market since 2004.

Supply-Side Investment

Kontera, which has 40 employees, previously disclosed that Sequoia had invested in its first round, but did not specify terms of the deal. Sequoia’s Israel office invested $4 million about a year ago, and Lehman Brothers joined that round by adding $3 million in June, the company and its investors told RedHerring.com.

Sequoia’s other advertising and marketing investments include AdBrite and PopularMedia.

Lehman, on the other hand, wanted to do its first deal in the advertising space and looked to frequent partner Sequoia to get in on a deal, said Tom Banahan, managing director of Lehman.

“Advertising demand is increasing dramatically and to fill in the supply side there’s only so many places to do it,” he said.

Mr. Banahan said the investment does not reflect a shift to international investments by Lehman, which focuses on U.S.-based companies. Despite its offices in Israel, Kontera is targeting the U.S. and U.K. markets.

Kontera emerged from a seven-year-old company called eZula, which had raised angel funding to produce a client-side in-text adware product. The application, which Ms. Vitos said was profitable, has now been discontinued in favor of the online service model.

Contact the writer: LGannes@RedHerring.com