Tech's Big Ideas Start Smaller
Startups Are Booming Again in Silcon Valley, but This Time It's Different
By ERIC NOE
Oct. 10, 2007 —
Silicon Valley is booming again, reminiscent of a decade ago, when precocious young minds hatched entrepreneurial ideas (sometimes admittedly half-baked) that incorporated the Internet in some way, any way, and turned themselves into paper millionaires.
Ideas are being launched at a pace that rivals the first Internet tech boom but with a decided difference this time. While the 2001 tech meltdown incinerated much of that paper and decimated the valley's one white-hot venture capitalist market, today's entrepreneurs are starting out with much less capital and investors are demanding much more in terms of results.
Signs of good times abound: The tech-heavy NASDAQ is up 15 percent for the year, and the stock price for the industry's iconic company, Internet monster Google, just peaked at more than $600, giving the not yet decade-old company a greater worth than stalwarts like Coca-Cola and IBM.
"Silicon Valley is alive and well," said Todd Greenwald, a technology analyst with Nollenberger Capital Partners in San Francisco. "And Google is by no means standing alone. The online advertising market is up 30 percent this year, and that's benefiting a lot of the players, Google included."
The Cheaper Startup
That enthusiasm has trickled down to the industry's lifeblood: tech startups. Venture capitalists are entertaining a growing number of startup ideas to help with next-generation Web applications as well as last-century tech like e-mail.
But unlike the 1990s, the financial investment needed to start a tech-based company is significantly lower today. Web startup costs are not nearly as prohibitive in 2007. They can even be cheap.
"There is a huge increase in the number of incoming company ideas coming to VCs," Jason Calacanis, a venture capitalist and self-described "entrepreneur in action," said in an e-mail interview. "This is due to the fact that it is easy to start companies today. A company that would need $1 million in capital to get to a beta product can be done for 10 percent of that price -- maybe 2 percent of that price."
At the recent TechCrunch40 conference in California, created by Calacanis and tech blogger and entrepreneur Michael Arrington, investors got a look at some of the newest ideas coming from the startup world.
The exhibitors, hoping to lure money from the many investors on hand, presented a variety of plans pegged to the Web 2.0 concept of social networking and user-generated content, attempting to piggyback on the massive success of online networking sites like MySpace and Facebook.
But not everything, such as new ways to balance your checkbook and organize your inbox, was next generation.
Some of the notable submissions:
Mint, which won the $50,000 prize awarded by the conference panel, is a personal finance application that lets users track bank, credit union and credit card transactions, and alerts users to upcoming bills, low balances or unusual spending, all in one spot.
WooMe is a networking site that brings the speed dating craze online. It lets users meet new people live in free five-minute sessions and negates the reliance on Internet dating profiles.
Xobni ("inbox" spelled backward) helps users organize, search and navigate their e-mail.
BeFunky is a service designed to a one-stop shop for creating digital online representations of themselves for use on their blogs, Web sites and social networks
Wixi is a new social network that invites users to interact through posting and sharing photos, audio and video content. The service allows content sharing through cell phones, blogs and instant messaging.
Even the way that investors discover new companies has changed.
A company called Bang Ventures has created an American Idol-style competition in which startups submit their business ideas to an expert panel. The best of those ideas are presented to the public for voting, and the top three ideas win $15,000 and free office space. As with the Fox show, there's no guarantee that public input will reward the most deserving ideas.
Another Bubble?
An influx of ideas all going after billions of dollars in private equity money adds up to … an odd sense of deja vu.
Is tech headed for another massive wealth-dissipating event?
Not likely, or at least not right away, say most observers. Investors and entrepreneurs learned from the mistakes of Web 1.0 goldminers who placed a premium on being first and gaining mindshare, with making money an afterthought.
"If you're trying to compare today with the late 1990s, venture capitalists are being more particular, more analytical, and the business plans are much more mature," Greenwald said. "Nothing is valued off of page views and eyeballs. The plans today are valued by profits."
That, and the reduced upfront costs will likely prevent a redux of the 2001 meltdown.
"Some things feel frothy to me -- the number of companies, the expectation that everyone will get rich quick, and the bad ideas being taken seriously," said Calacanis.
"The thing that is radically different is that the bad ideas are not getting absurd amounts of funding like they did last time. Heck, even the big winners are not getting absurd amounts of cash," he said. "When the market corrects … the tech industry isn't going to be hit too hard because there isn't a ton of excess."
Amid a nationwide housing slump and concern about U.S. credit, a financial market correction may be looming. But even if an economic slowdown dries up investment funds, the technology industry should be prepared to avoid a second bursting bubble, according to long-time Silicon Valley columnist and ABC News contributor Michael Malone.
"I read a lot about a potential bubble in tech, but I'm not seeing much evidence of that on the ground here in Silicon Valley," he said. "What we have now is a handful of companies -- Apple and Google in particular -- that are seeing strong stock valuations (though probably inflated in the case of Google) that are based on pretty good balance sheets."
"As for the rest of tech, I see a lot of companies that have had a good last few years, but which are now sliding downward into the classic four-year boom-bust business cycle that has characterized tech since the 1960s."