By JULIAN E. BARNES

WASHINGTON—The Obama administration is weighing policy changes that would lift a tattered veil of secrecy from its controversial campaign of drone strikes, a recognition that the expanding program has become a regular part of U.S. global counterterrorism operations.

U.S. drone strikes are hardly a secret. Officials have spoken openly about them, even discussing the operations in formal speeches. But they are still classified, and unauthorized disclosures about details of individual missions could constitute a felony.

The policy changes under consideration could include specifying which extremist groups associated with al Qaeda can be targeted by the Pentagon under the 2001 congressional authorization for the use of military force against perpetrators of the Sept. 11 attacks, according to U.S. officials.

The debate has been given urgency by lawsuits seeking information on drone strikes; the government must formally respond with motions stating its position and why it will deny the requests, or fill them.

But many officials also believe that it is time to re-evaluate U.S. policies on secrecy about the targeted-killing program, saying that greater openness could defuse criticism of the practice.

Unmanned aerial strikes on terrorist suspects began after the Sept. 11 attacks, at first as a rare occurrence. Under the Obama administration, drone strikes by the Central Intelligence Agency and the military have become increasingly common as a primary tool in U.S. national-security strategy.

The Pentagon has a policy of disclosing traditional military operations once they are complete. But rules for counterterrorism strikes haven’t kept up with their expanded use. Pentagon officials still routinely decline to discuss details of operations in Yemen or Somalia at news conferences as a matter of policy, while more freely discussing counterterrorism operations in Afghanistan.

The changes considered most likely to win adoption would bring about greater openness regarding the military drone program, while keeping most or all details of CIA strikes classified, U.S. officials said. CIA officials are opposed to publicly acknowledging the details of drone programs under its control, for fear of setting precedents that could affect other covert programs.

Two lawsuits by the American Civil Liberties Union, in March 2010 and February 2011, sought CIA records on its program of targeted killing with drones. Separately, the New York Times sued for access to the administration’s legal justifications for the 2011 CIA drone strike that killed Anwar al-Awlaki, a U.S. citizen and top leader of al Qaeda in the Arabian Peninsula.

The Obama administration is due to answer the lawsuits in New York and Washington on Monday, after winning a series of extensions. In an extension request in April, the Justice Department said the government’s response “is being deliberated at the highest level of the executive branch.”

Some U.S. officials believe they will prevail in the courts if they choose to keep the drone program secret and refuse to provide any documents sought in the lawsuits.

But others think the government should voluntarily provide at least some information in response to the case. In the administration debate, some of those who advocate greater openness say it would help counter accusations that civilians are routinely killed.

Others, with one eye on the history books, believe it is important to show that strikes are carried out within the law. “If stories could be told, Americans and others would be persuaded these strikes are done in a careful way,” a U.S. official said.

Instead, information about strikes is inconsistent.Government officials speaking privately in many cases release more information about covert CIA drone strikes in Pakistan than defense officials are allowed to discuss about military drone strikes in Yemen.

Administration officials considered revealing more about U.S. military operations in Yemen and Somalia as part of a speech last month by John Brennan, the top White House counterterrorism adviser. The speech formally acknowledged that the U.S. uses drones to target terrorists, but officials couldn’t agree on how much more to say, administration officials said.

Since that speech, Pentagon public-affairs officials have continued to refuse to provide any details of strikes in Yemen.

Complicating the debate, the military and CIA conduct similar counterterrorism strikes against al Qaeda’s Yemen affiliate. Intelligence officials worry that if the Pentagon begins describing their operations more fully, details of the CIA’s concurrent strikes could be revealed.

Defense Secretary Leon Panetta already has publicly has acknowledged U.S. operations in Yemen. Mr. Panetta said recently that the military has been “very successful at going after the leadership” of al Qaeda in Yemen.

Some officials are also pressing the U.S. to more fully describe the terrorist groups the U.S. is at war with under Congress’s 2001 authorization for the use of military force, also called the AUMF.

While Mr. Brennan in his speech last month offered a list of al Qaeda affiliates that pose a danger, U.S. officials have never publicly listed which terrorist groups are considered associated forces of al Qaeda that can be targeted by the military.

Some legal scholars have asked for a fuller accounting of what terrorist groups the administration believes can be targeted under the congressional authorization. Robert Chesney, a professor at the University of Texas Law School, said it would be helpful for the administration to clarify which groups or individuals can be targeted under its definition of the congressional authorization.

“At the end of the day, the core concern some have with the ‘associated forces’ idea is that they don’t know where it stops,” said Prof. Chesney. “Explaining what the necessary or sufficient conditions for identifying such groups would do much to show that the government recognizes meaningful limits to its authority under the AUMF.”

—Siobhan Gorman and Evan Perez contributed to this article.

Write to Julian E. Barnes at julian.barnes@wsj.com

A version of this article appeared May 18, 2012, on page A7 in the U.S. edition of The Wall Street Journal, with the headline: U.S. Rethinks Secrecy About Drones.

BY JULIAN E. BARNES

WASHINGTON—The Pentagon hailed new cooperation with Beijing while reiterating concerns about Chinese military growth it says is aimed at keeping the U.S. out of the western Pacific, in an annual report on China’s military modernization.

China said this year that it would spend $106 billion on its military budget, an 11.2% increase. That public disclosure probably undercounts its total expenditures, said Dave Helvey, acting assistant secretary of defense for East Asia. U.S. officials say China’s actual military spending is almost double the public budget. The U.S. defense budget, by comparison, is $646 billion this year.

The increase in China has …

BY ARIAN CAMPO-FLORES AND CAMERON MCWHIRTER

Prosecutors released evidence Thursday in the case of George Zimmerman, the neighborhood-watch volunteer charged with murder in the shooting death of an unarmed teenager, including a photograph from the night of their altercation showing Mr. Zimmerman with a swollen and bloody nose.

The evidence was part of a voluminous package of discovery evidence that offers new details of the Feb. 26 confrontation in Sanford, Fla., between Mr. Zimmerman and 17-year-old Trayvon Martin.

Among the reports, which are heavily redacted in parts: statements from numerous investigators, recordings of witness interviews and emergency calls, and an autopsy report for the shooting victim.

BY JIM FUSILLI AND STEPHEN MILLER

Donna Summer was disco music’s first superstar and one of pop’s premier acts of the 1970s and early 80s.

Crowned the “Queen of Disco” by critics, Ms. Summer died of cancer Thursday in Naples, Fla., her family said. She was 63 years old.

Ms. Summer’s first international hit was 1975′s “Love to Love You Baby,” which featured her moaning and whispering over an insistent beat. The song helped to transform disco, then associated primarily with club culture, into a dominant full-blown musical genre.

In subsequent years, she transcended disco and brought …

BY MICHAEL CORKERY

A representative of former baseball star Curt Schilling’s video game firm hand-delivered to the Rhode Island Economic Development Corp. a $1.1 million check Thursday in an attempt to cure the company’s default on a state loan-guarantee payment. But the firm, 38 Studios, had insufficient funds to cover the check, according Governor Lincoln Chafee’s office.

The Economic Development Corp., a quasi-state agency, had enticed 38 Studios, …

By SARAH E. NEEDLEMAN And EMILY MALTBY

Google Inc.

recently tweaked the way its search engine ranks websites, seeking to downplay sites it suspects of artificially boosting their rankings. Now some small businesses say they are scrambling to avoid being relegated to the Internet’s junk bin.

Among them is Andrew Strauss, the 47-year-old co-owner of San Francisco-based Oh My Dog Supplies LLC.

In the past, about 70% of his customers found his company from the results of Google searches, often for terms such as “dog beds” or “dog clothes.”

Ever since Google’s algorithm change at the end of last month, he says his website isn’t showing up in Google rankings—at least not where most people would see it.

Traffic through Google has plunged by 96%, he says. Mr. Strauss expects his six-year-old business to generate sales of $25,000 this month, down from $68,000 in March, the month before the changes. “We’re completely crippled now,” he says.

Mr. Strauss thinks it’s possible his site’s rankings nosedived because he had paid for hundreds of inbound links in response to a traffic drop of more than 50% following one of Google’s 2011 algorithm changes. He says he abandoned that strategy because it didn’t work.

His business also contributes posts about dog-related topics to websites like EzineArticles.com and Squidoo.com, with links to his site in each. Still, he doesn’t believe his site should be punished for that. “It’s just a regular marketing activity,” Mr. Strauss says.

Google declines to divulge specifics of its search-ranking algorithm, but it discourages paid links and low-quality website links. According to Google, the recent shifts in its algorithm, known as “Penguin,” will enhance the user experience and don’t punish businesses that follow its guidelines.

“The Penguin algorithm update was designed to reduce Web spam, which is when websites try to get a higher search ranking than they deserve by deceiving or manipulating search engines,” says Matt Cutts, a Google engineer. “In many cases, the affected sites had been spamming for a long time,” Mr. Cutts adds.

Among the tactics Google dislikes are “keyword stuffing,” or overloading Web pages with keywords, and paying for inbound links as a way to artificially boost search rankings.

Google makes about 500 changes to its algorithm annually. Penguin, the most recent update, affects only 3.1% of U.S.-based Google search queries, Mr. Cutts says.

Ralph Slate, 43, of Springfield, Mass., also says he’s getting pushed way down in the rankings as a result of the recent changes.

In the past, his database of hockey players often appeared in the first page of rankings when users searched for hockey players such as Evander Kane, or Jonathan Toews, for instance. But now, HockeyDB.com appears several pages deep into the ranking—an area where Mr. Slate worries few Google users would bother to go.

Traffic to HockeyDB.com is down by roughly 30% from the 50,000 daily visitors it was averaging prior to Google’s update, he says.

Mr. Slate suspects the reason is that thousands of other websites, including hockey forums, link to his HockeyDB.com. He doesn’t know which of those other websites Google might view favorably or unfavorably.

“I have never paid for a link, and I don’t do link-sharing sites,” says Mr. Slate. “I don’t do keyword stuffing. That’s why this is so frustrating.”

Google provides free tools, exposure and advice for webmasters and small businesses around the world, Google’s Mr. Cutts says. “We’re trying to level the playing field for those focused on building useful sites with compelling content for their users,” he says.

Because Google makes so many changes to its algorithm, it’s often difficult for small-business owners with limited resources to stay on top of all of its tweaks, says Barry Schwartz, a search-engine analyst in New York. ‪

Still, those whose business models rely mainly on Google to draw customers to their websites should plan to follow Google’s guidelines, advises Lee Odden, a search-engine marketer in Minneapolis. “You want to make sure that income doesn’t go away,” he says.‪

Some entrepreneurs say that as a result of Google’s recent adjustments, their websites are getting boosts.

The Austin, Texas, company SpareFoot Inc. has seen traffic to its website double in the past few weeks, according to Tony Emerson, who handles search-engine optimization for the 41-person firm.

“It was vindication,” he says, because he believes that some of his competitors engaged in unfair practices to get their sites to rank higher than his. “It’s been frustrating. We’d been doing the right thing for so long.”

SpareFoot, a database of storage companies, gets paid each time a customer who is moving—or simply needs extra closet space—uses one of the self-storage facilities listed on the site. Mr. Emerson projects the heightened traffic will yield a proportional increase in sales.

“We should fare well,” adds Jim Hale, a marketing manager for the Mayo Clinic. The Rochester, Minn.-based medical nonprofit saw its traffic increase 63% last year, compared with 12% in years prior. Mr. Hale credits Google’s earlier rounds of algorithm changes as the biggest factor for its traffic increases.

But Michael Eisenwasser, president of SongLyrics.com, a subsidiary of SoundMedia Inc. in Chicago, says his website is suffering. Traffic to the website, which relies mainly on advertising to generate income, has declined 20% from Google since Google’s update last month.

Mr. Eisenwasser says he doesn’t believe he’s guilty of violating Google’s guidelines. But he suspects his site’s rankings suffered because low-quality sites point to his. “We’re being punished because other sites are linking to us, sites we’ve never talked to,” Mr. Eisenwasser says. He’s now trying to contact the sites to ask them to remove the unwanted links in hopes of restoring his site’s previous ranking on Google, he adds.

Stained-glass artist Pam Hansen, 57, of Savannah, Ga., thought she was helping her Internet business by reciprocating links with other websites and signing up to get her site on link exchanges, such as LinkPartners.com and LinkMarket.com.

Now, she’s racing to remove the links because her site, AGlassMenagerie.net, is ranking much lower for certain search terms, such as “stained-glass windows”—one of her top products.

“I’d rather focus on doing the glass but I’m spending all my time trying to redo the website,” says the entrepreneur, who launched the business in 1996. She has no formal computer training, she adds.

Ms. Hansen says she knew there was a problem the day Penguin launched. Her Web traffic, usually hovering between 500 and 600 visitors a day, plummeted to less than 200.

She used to get several customer inquiries and one or two orders each week—but no more.

Write to Sarah E. Needleman at sarah.needleman@wsj.com and Emily Maltby at emily.maltby@wsj.com

A version of this article appeared May 17, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: As Google Tweaks Searches, Some Get Lost in the Web.

By SARAH E. NEEDLEMAN And EMILY MALTBY

Google Inc.

recently tweaked the way its search engine ranks websites, seeking to downplay sites it suspects of artificially boosting their rankings. Now some small businesses say they are scrambling to avoid being relegated to the Internet’s junk bin.

Among them is Andrew Strauss, the 47-year-old co-owner of San Francisco-based Oh My Dog Supplies LLC.

In the past, about 70% of his customers found his company from the results of Google searches, often for terms such as “dog beds” or “dog clothes.”

Ever since Google’s algorithm change at the end of last month, he says his website isn’t showing up in Google rankings—at least not where most people would see it.

Traffic through Google has plunged by 96%, he says. Mr. Strauss expects his six-year-old business to generate sales of $25,000 this month, down from $68,000 in March, the month before the changes. “We’re completely crippled now,” he says.

Mr. Strauss thinks it’s possible his site’s rankings nosedived because he had paid for hundreds of inbound links in response to a traffic drop of more than 50% following one of Google’s 2011 algorithm changes. He says he abandoned that strategy because it didn’t work.

His business also contributes posts about dog-related topics to websites like EzineArticles.com and Squidoo.com, with links to his site in each. Still, he doesn’t believe his site should be punished for that. “It’s just a regular marketing activity,” Mr. Strauss says.

Google declines to divulge specifics of its search-ranking algorithm, but it discourages paid links and low-quality website links. According to Google, the recent shifts in its algorithm, known as “Penguin,” will enhance the user experience and don’t punish businesses that follow its guidelines.

“The Penguin algorithm update was designed to reduce Web spam, which is when websites try to get a higher search ranking than they deserve by deceiving or manipulating search engines,” says Matt Cutts, a Google engineer. “In many cases, the affected sites had been spamming for a long time,” Mr. Cutts adds.

Among the tactics Google dislikes are “keyword stuffing,” or overloading Web pages with keywords, and paying for inbound links as a way to artificially boost search rankings.

Google makes about 500 changes to its algorithm annually. Penguin, the most recent update, affects only 3.1% of U.S.-based Google search queries, Mr. Cutts says.

Ralph Slate, 43, of Springfield, Mass., also says he’s getting pushed way down in the rankings as a result of the recent changes.

In the past, his database of hockey players often appeared in the first page of rankings when users searched for hockey players such as Evander Kane, or Jonathan Toews, for instance. But now, HockeyDB.com appears several pages deep into the ranking—an area where Mr. Slate worries few Google users would bother to go.

Traffic to HockeyDB.com is down by roughly 30% from the 50,000 daily visitors it was averaging prior to Google’s update, he says.

Mr. Slate suspects the reason is that thousands of other websites, including hockey forums, link to his HockeyDB.com. He doesn’t know which of those other websites Google might view favorably or unfavorably.

“I have never paid for a link, and I don’t do link-sharing sites,” says Mr. Slate. “I don’t do keyword stuffing. That’s why this is so frustrating.”

Google provides free tools, exposure and advice for webmasters and small businesses around the world, Google’s Mr. Cutts says. “We’re trying to level the playing field for those focused on building useful sites with compelling content for their users,” he says.

Because Google makes so many changes to its algorithm, it’s often difficult for small-business owners with limited resources to stay on top of all of its tweaks, says Barry Schwartz, a search-engine analyst in New York. ‪

Still, those whose business models rely mainly on Google to draw customers to their websites should plan to follow Google’s guidelines, advises Lee Odden, a search-engine marketer in Minneapolis. “You want to make sure that income doesn’t go away,” he says.‪

Some entrepreneurs say that as a result of Google’s recent adjustments, their websites are getting boosts.

The Austin, Texas, company SpareFoot Inc. has seen traffic to its website double in the past few weeks, according to Tony Emerson, who handles search-engine optimization for the 41-person firm.

“It was vindication,” he says, because he believes that some of his competitors engaged in unfair practices to get their sites to rank higher than his. “It’s been frustrating. We’d been doing the right thing for so long.”

SpareFoot, a database of storage companies, gets paid each time a customer who is moving—or simply needs extra closet space—uses one of the self-storage facilities listed on the site. Mr. Emerson projects the heightened traffic will yield a proportional increase in sales.

“We should fare well,” adds Jim Hale, a marketing manager for the Mayo Clinic. The Rochester, Minn.-based medical nonprofit saw its traffic increase 63% last year, compared with 12% in years prior. Mr. Hale credits Google’s earlier rounds of algorithm changes as the biggest factor for its traffic increases.

But Michael Eisenwasser, president of SongLyrics.com, a subsidiary of SoundMedia Inc. in Chicago, says his website is suffering. Traffic to the website, which relies mainly on advertising to generate income, has declined 20% from Google since Google’s update last month.

Mr. Eisenwasser says he doesn’t believe he’s guilty of violating Google’s guidelines. But he suspects his site’s rankings suffered because low-quality sites point to his. “We’re being punished because other sites are linking to us, sites we’ve never talked to,” Mr. Eisenwasser says. He’s now trying to contact the sites to ask them to remove the unwanted links in hopes of restoring his site’s previous ranking on Google, he adds.

Stained-glass artist Pam Hansen, 57, of Savannah, Ga., thought she was helping her Internet business by reciprocating links with other websites and signing up to get her site on link exchanges, such as LinkPartners.com and LinkMarket.com.

Now, she’s racing to remove the links because her site, AGlassMenagerie.net, is ranking much lower for certain search terms, such as “stained-glass windows”—one of her top products.

“I’d rather focus on doing the glass but I’m spending all my time trying to redo the website,” says the entrepreneur, who launched the business in 1996. She has no formal computer training, she adds.

Ms. Hansen says she knew there was a problem the day Penguin launched. Her Web traffic, usually hovering between 500 and 600 visitors a day, plummeted to less than 200.

She used to get several customer inquiries and one or two orders each week—but no more.

Write to Sarah E. Needleman at sarah.needleman@wsj.com and Emily Maltby at emily.maltby@wsj.com

A version of this article appeared May 17, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: As Google Tweaks Searches, Some Get Lost in the Web.

By SHAYNDI RAICE, ANUPREETA DAS and JOHN LETZING

Facebook Inc.

priced its shares at $38 apiece for an initial public offering that would make it the most valuable U.S. company at the time of its stock market debut.

The social network priced at the top end of the range it set earlier this week, when it said it would price its IPO at $34 to $38 a share from $28 to $35 a share, in a sign of the tremendous investor appetite for the offering. At $38 a share, Facebook is valued at $104 billion, the biggest-ever valuation by an American company at the time of its offering.

Facebook’s IPO is set to raise $18.4 billion, becoming the second-largest U.S. IPO of all time behind Visa Inc.’s 2008 offering that brought in $19.65 billion, according to Dealogic.

Facebook would be the 23rd largest U.S. company by stock market capitalization, ahead of firms like Amazon.com Inc.

and Cisco Systems Inc.,

according to Capital IQ. It would be the 909th in terms of annual revenue.

The price was set only a short time before it was announced. Earlier in the day, Facebook executives and senior bankers on the deal were holed up in a meeting discussing the price, said people familiar with the matter. The company tried floating higher numbers to investors but was rebuffed, said one of the people.

Facebook, its executives and early investors are selling up to 484.4 million shares, which will raise as much as $18.4 billion. The company’s shares will begin trading on the Nasdaq Stock Market around 11 a.m. ET on Friday with the symbol FB.

A Facebook spokesman declined to comment.

Facebook’s IPO is a crowning moment for Silicon Valley’s latest tech boom. Last year, Web companies including LinkedIn Corp.,

Groupon Inc.

and Zynga Inc.

went public in the first sustained drumbeat of Internet offerings for years.

That has continued this year, with Internet companies such as Yelp Inc. going public, while enterprise-technology companies such as Splunk Inc. also staged strong IPOs. Other Web companies that are still closely held, such as Twitter Inc. and Dropbox Inc., are viewed as possible IPO candidates in the future.

Facebook’s final pricing comes amid recent financial disclosures that threw some cold water on the ballyhooed IPO. Last month, the company reported that its first-quarter sales fell 6% from the fourth quarter to $1.06 billion, while profit slumped 32% to $205 million over the same period.

Earlier this week, The Wall Street Journal reported that General Motors Co.

plans to stop advertising with Facebook after deciding that paid ads on the site have little impact on consumers’ car purchases. The move raised questions about Facebook’s online advertising business, which currently generates the bulk of the company’s revenue.

Still, Facebook remains one of the few firms among the recent crop of Internet start-ups making public debuts that is profitable. In 2011, Facebook posted a profit of $1 billion and $3.7 billion in sales, compared to a loss of $56,000 and $272 million in sales as recently as 2008.

And Facebook enjoys the highest profile of the recent generation of Web firms, with an audience of more than 900 million users globally, which by itself would make it the third-most-populous nation in the world. That giant user base was built in less than a decade; co-founder and Chief Executive Mark Zuckerberg founded Facebook in his Harvard University dorm room in 2004.

Anticipation for Facebook’s IPO has built to frenzied levels in recent weeks. In a sign of the intense interest, Facebook said Wednesday it would boost the size of its IPO by 25%, or about 100 million shares, as early investors sell as much as $3.8 billion in additional shares. Goldman Sachs Group Inc.,

Tiger Global Management and Facebook director Peter Thiel—who was one of the social network’s first investors—more than doubled the amount of stock they plan to sell.

Neither Facebook itself nor Mr. Zuckerberg are changing how many shares they will offer. Mr. Zuckerberg is selling shares worth up to about $1.2 billion in the IPO, and his personal stake after the offering will be worth up to $19.1 billion.

Even before Facebook filed papers for an IPO in February, the firm’s shares were in high demand. Facebook stock was being traded on the secondary market—where sellers of shares in private companies can link up with buyers, usually with a company’s permission.

Before trading in Facebook was stopped on secondary platform SharesPost at the end of March, the shares were auctioned for $44.10, implying a total company valuation of nearly $103 billion.

Facebook’s IPO, which has gone off without a reported glitch so far, represents a win for the three main underwriters Morgan Stanley, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc.

Morgan Stanley, which won the coveted lead left spot in the deal, was considered a shoo-in for its experience in technology IPOs. Goldman Sachs was expected to come in second because of its $1.5 billion private offering in January 2011, but was beat out by JP Morgan, which put its top bankers on the effort to woo Facebook and is playing a central role in the IPO.

For J.P. Morgan, the plum underwriting role is a bright spot given the bank’s recent troubles with trading losses. So far this year, the bank ranks as the top bookrunner on U.S. listed IPOs for a total deal value of $1.5 billion, excluding Facebook’s public offering, according to Dealogic data.

At Facebook’s Menlo Park, Calif., headquarters, employees planned to usher in the IPO with an all-night computer programming session, or “hackathon,” until Mr. Zuckerberg presses the opening bell on the Nasdaq Stock Market at around 6:30 a.m. local time.

—Geoffrey A. Fowler, Alexandra Scaggs and Stephen Grocer contributed to this article.

Write to Shayndi Raice at shayndi.raice@wsj.com, Anupreeta Das at anupreeta.das@wsj.com and John Letzing at john.letzing@dowjones.com

A version of this article appeared May 18, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Facebook Prices IPO at Record Value.

By PUI-WING TAM

The coveted club of Silicon Valley start-ups worth a billion dollars is quickly losing its exclusivity.

At least 20 closely held U.S. companies backed by venture capital are now valued at $1 billion or more, including the latest inductee, Pinterest. The online scrapbooking start-up, which launched in 2009, this week raised $100 million in capital at a $1.5 billion valuation despite having little revenue and no profits.

Today’s membership exceeds even that during the frothy days of the late 1990s dot-com bubble, when 18 such start-ups scored a $1 billion-or-higher price tag, according to an analysis by Dow Jones VentureSource.

Most of the valuation frenzy has unfolded only recently. Since the beginning of last year, 15 start-ups have landed 10-figure valuations. Only two weeks ago, note-taking app maker Evernote Corp. hit the milestone. “We weren’t chasing valuation but we had offers for significantly above $1 billion,” said Phil Libin, Evernote’s chief executive.

The billion-dollar list now excludes Facebook Inc.,

which on Friday is set to become a publicly traded company, valued at north of $100 billion. But it does include a large share of high-flying Web players such as file-sharing company Dropbox Inc. and room-rental provider Airbnb Inc., as well as a few lesser-known start-ups such as e-commerce platform company Rearden Commerce Inc. and business software maker Workday Inc.

“Everyone thinks they’re in Lake Wobegon,” said Venky Ganesan, a venture capitalist at Globespan Capital Partners, referring to the Garrison Keillor novel about the fictional town “where all the women are strong, all the men are good-looking, and all the children are above average.” In Silicon Valley these days, “everyone thinks they’re smarter than the average” in making some of these big start-up bets, he said.

The valuation frenzy is being driven by investors’ desires to find the next big hit a la Facebook, and a belief that this time it’s different with the new generation of Web companies. Many of the start-ups are experiencing strong growth—generally with users and sometimes also with their revenue—and are benefiting from a confluence of tech trends such as social media and mobile technologies that give these companies huge audiences.

In his own venture firm’s analysis of the billion-dollar club, Mr. Ganesan said the pipeline of 20 or so closely held companies is almost equal to the number of publicly traded Internet companies with market capitalizations of more than $1 billion, which he counts at 23.

“Can we really double the number of Internet companies that have over a $1 billion market cap?” Mr. Ganesan asks. “That feels statistically hard.”

The swelling number of billion-dollar club start-ups shows how frothy and murky private-company valuations have become. While public market valuations are typically a function of a consensus between many buyers, in private-company financings it takes only one deep-pocketed investor who is willing to pay up to set the price.

In Pinterest’s case, investors had virtually no revenue to base their valuation on, but they were enamored with the site’s surging user-growth rates. Pinterest reached 20 million unique visitors to its site last month, up from around 1 million in July 2011, according to comScore Inc., which has called it one of the fastest-growing standalone sites it has tracked.

Last month, mobile photo-sharing app maker Instagram was acquired by Facebook for $1 billion. Instagram has no revenue but only 18 months since its launch its user base grew to about 30 million people.

Many of today’s billion-dollar club members do differ from their dot-com brethren in that they generate revenue, and spend far less cash than Web companies a decade ago. Dropbox CEO Drew Houston, for example, has said the San Francisco company is profitable even though a minority of its users pay fees to store large amounts of files.

How many of these billion-dollar companies will ultimately lead to big profits, however, is unclear. In the dot-com bubble, many billion-dollar companies —such as online grocer Webvan and online toy seller eToys—famously flamed out.

More recently, social games maker Zynga Inc.

was valued at around $14 billion in private-market transactions before it went public last December at around a $9 billion valuation. It now has a market capitalization of about $6 billion.

But if any of these start-ups turn out to be the next Facebook, which is set to produce some of the biggest-ever returns for venture capitalists, any losses on other start-up bets will be quickly papered over. Venture capital firm Accel Partners, which took a chance on Facebook in 2005 with a $12.7 million bet, now holds a stake valued at $7.7 billion.

One effect of so many billion-dollar club members is that it drives up start-up prices everywhere. Earlier this week, Quora Inc., a question-and-answer site started by two of Facebook’s earliest employees, raised a new financing valuing it at $400 million, up from around $86 million two years ago, said people familiar with the matter.

The problem is, everyone looks at a $1 billion financing “and says that’s the price for their company,” said Gary Little, a venture capitalist at Morgenthaler Ventures, which invested $8 million in Evernote in 2009. “In heady times, it does raise valuations across the board.”

“We all worry about this,” added David York, CEO of Top Tier Capital Partners, a San Francisco firm that invests in venture-capital funds. “Some of [these bets] are working so it’s hard to completely throw the baby out with the bath water. It’s on the one hand, on the other hand.”

Entrepreneurs say taking a $1 billion valuation is just good business because it builds up a war chest of cash.

Evernote’s Mr. Libin, who has presided over the company as its user base has jumped to more than 30 million from six million in January 2011, said his start-up’s financing round earlier this month was the start of the firm’s IPO planning.

“As CEO of Evernote, I don’t care whether there’s a bubble or not,” he said. “What we want is to make sure we’re isolated from market forces and bubble dynamics and that we’ve got the resources to get through it.”

Write to Pui-Wing Tam at pui-wing.tam@wsj.com

A version of this article appeared May 18, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: $1 Billion Club Gets Crowded.

BY MONICA LANGLEY

J.P. Morgan Chase & Co. Chairman and Chief Executive Officer James Dimon had just committed the most expensive blunder of his 30-year career, failing to detect the risk of trades that had begun to generate huge losses at the bank.

On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses. But there were no details about the trades themselves. “I want to see the positions!” he barked, throwing down the papers, according to attendees. “Now! I want to see everything!”

When Mr. Dimon saw the numbers, these people say, he …