Many Internet Start-Ups Are Telling
Venture Capitalists: 'We Don't Need You'
SAN FRANCISCO—Internet start-ups and venture capitalists are back in vogue in Silicon Valley. But now the two don't necessarily go together. Consider Flickr, the innovative online-photo service launched by a small Canadian company early last year. Like many Web start-ups today, it was built on a dime: Husband-and-wife founders Stewart Butterfield and Caterina Fake used cheap software to construct the Flickr site, eschewing pricey computers. Some gear, such as computer storage, was "about 100 times cheaper" than it would have been even five years ago, says Mr. Butterfield. It cost only about $200,000 to pay salaries and get the site up and running, he says.
By last year, several top venture-capital firms were clamoring to invest in
Flickr through its parent company, Ludicorp Research & Development Ltd. In
December, Mr. Butterfield had a funding offer from Accel Partners of Palo
Alto, Calif. But the entrepreneur decided instead to sell to Internet giant
Yahoo
"It was a very complicated decision," Mr. Butterfield says. But since Flickr
already had a large user base and plenty of buzz, selling to Yahoo with its
"hundreds of millions of customers" seemed like a better plan.
It's a scenario playing out all over Silicon Valley—and one with
potentially big ramifications for venture capitalists. A new generation of
Internet companies—many offering online photo and blogging services or
downloadable software for businesses—have been built for a fraction of
the cost just a few years ago. That's mainly due to the increasing
popularity of cheap "open source" software and programming tools, as well as
dramatic cost reductions in computer memory, storage and Internet bandwidth.
And all this is happening at a very inconvenient time for the
venture-capital industry: It raised more money in the first three quarters
of this year than it did in 2004—and needs places to park it.
Many Internet companies attending a Web-business conference here earlier
this month described venture money as "almost superfluous," says Jason
Pressman, a principal at Shasta Ventures in Menlo Park, Calif. Venture
capitalists generally say their money and expertise are still needed to
build large-scale businesses, and they don't mind investing a little bit
less in companies that have built businesses on the cheap but still want
some venture money.
But some entrepreneurs believe the balance of power in Silicon Valley is
shifting for at least a subset of Internet-focused start-ups. "There is
magic in independence," says Chris MacAskill, co-founder of online-photo
site Smugmug Inc., which has no venture funding—and, according to Mr.
MacAskill, doesn't want any.
Start-ups also are becoming easier to build without venture cash because
entrepreneurs can now outsource programming chores to cheap, offshore
engineers. Brad Silverberg, a partner with Seattle-area venture-capital firm
Ignition Partners, says his son recently introduced him to a classmate from
the University of Southern California who had built a sophisticated
Web-storage company, called Box.net Inc. "It's two kids, and [some]
development was outsourced to some Russian guys they met on the Internet,"
says Mr. Silverberg.
Some entrepreneurs can now get their start-ups off the ground for less than
one-10th of what it used to cost. Former Excite Inc. President Joe Kraus,
for example, has publicly talked about how he started his new Web-media
company, JotSpot Inc., for about $100,000 two years ago. That's far less
than the $3 million it cost to launch Excite in the 1990s. "The cost of
getting out to market [today] is so low," and "that spells a different time
for venture capitalists," he says.
Besides Flickr, companies that decided to forego venture money include
Weblogs Inc., a blogging company bought by Time
Shasta's Mr. Pressman says a two-tiered start-up market is now developing,
with some Web companies focused on long-term expansion with venture money
and others looking to a quick sale—for perhaps $20 million to
$50 million—to big Internet brands like Yahoo, Google, AOL, or Microsoft
For many companies, "that's sort of their plan—get acquired for a decent
amount of money," says Evan Williams, who founded Blogger.com, a Web site he
sold to Google in early 2003 for an undisclosed sum. Mr. Williams didn't
take any venture money to build Blogger.com. [1] But he received an undisclosed
amount from Charles River Partners for his new venture, a San Francisco
podcasting company called Odeo Inc. With Odeo, "we thought we had the
opportunity to do something more substantial," and that required venture
capital, he says.
As for Flickr, Peter Fenton, a partner at Accel Partners, maintains it could
have been a "breakout" company that fundamentally changed the way people
view and share photos on the Internet. "I really wish we had made the
investment," he says.
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