New tech startups, unlike the past, choose thrift

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When Silicon Valley entrepreneur Bill Nguyen launched two technology companies in the late 1990s dot.com boom -- Seven Networks and Onebox -- they each went through about $2 million a month. The startups hired hundreds of people and spent heavily on marketing and sales. That's not how Mr. Nguyen is using cash at his newest startup, music Web site Lala.com.

Since getting $9 million in venture-capital funding in mid-2005, Lala Media Inc. has stashed 60 percent of that money in the bank. Mr. Nguyen has hired just 20 people for Lala, most of whom are engineers. The Palo Alto, Calif., company has spent little on marketing and sales. Its staff built some of the desks they use in the office and sometimes plays janitor in order to scrimp. Lala is currently burning through about $200,000 a month, says Mr. Nguyen.

"When you got venture-capital money previously, many people thought you immediately needed to spend it by hiring 40 or 50 people," says Mr. Nguyen. "Now we view the money as just an asset and not an immediate license to spend."

Stories like Mr. Nguyen's have become a defining element of a new tech boom that has some echoes of the dot.com bubble. While startups in Silicon Valley and other entrepreneurial enclaves are once again proliferating, they have a distinctly different approach to spending their cash.

Past excesses were exemplified by startups such as online pet store Pets.com Inc., which burned through $110 million in 1999 and 2000 -- including spending an estimated $25 million on advertising in venue likes the Super Bowl. Those dot.coms typically staffed up quickly with dozens of new recruits, and were known for lavish launch parties and other expensive marketing.

Today's startups, by contrast, often hire just one or two new staffers a month, hoard their cash and find inexpensive ways to attract attention such as limited Internet advertising and more reliance on word of mouth through Web users. The result: Startups' "burn rates" -- Silicon Valley parlance for how much cash a young company with little revenues and no profits is going through each month -- are noticeably lower than in the past.

Indeed, while tech startups are raising less funding these days -- an average of $8 million each time, down from $11 million in 2000 -- they are making the money last longer. According to research firm VentureOne, tech startups in Silicon Valley now survive an average of 17 months on a single round of funding before needing to raise more money, up from just 10 months in 2000. (VentureOne is a unit of Dow Jones & Co., publisher of this newspaper.)

All of this suggests that the current tech boom may play out differently than the dot.com frenzy, which ultimately ended in a swift and paralyzing crash in 2000. While many startups will still fail, those that have more money saved up are lasting longer than their dot.com predecessors. Many of these companies may endure long enough to become profitable small businesses, even if they never reach the stratospheric heights of a Google Inc. or YouTube. So when a bust hits, unlike the dot.com crash, it could shape up to be a more gentle decline with the impact more dispersed over time.

"Any crash this time won't be as precipitous as in 2000," says Roelof Botha, a venture capitalist at Sequoia Capital and the former chief financial officer of electronic-payments company PayPal Inc. "Because startups aren't going through cash at such a blistering pace, that gives companies more time to figure out what works in their business."

Mr. Botha notes that the spending habits at his former company, PayPal, are no longer emulated today. PayPal, founded in 1998 and now owned by eBay Inc., was burning through about $10 million a month in mid-2000 to maintain a staff of 200. In total, PayPal spent $150 million before it finally broke even. "Tech companies now take far less money to get to profitability," says Mr. Botha.

Aiding today's trend of startup parsimony are factors such as cheaper technology. While startups once spent millions of dollars on expensive computers and software, many new companies can now instead exploit inexpensive server systems, open-source programs (modifiable software that comes in free or inexpensive versions) or Web-based services to build and launch their products. What's more, more startups are now using cheaper labor overseas, such as in India, which lowers continuing operational costs.

Dot.coms also previously shelled out millions of dollars to sign up registered users to their Web sites, spending an average of $35 on advertising, sales and other promotions to get just one user, say venture capitalists. But with access to the Internet now far more mainstream than in the late 1990s, startups don't need to spend wildly to get attention from consumers.

"We can start super-cheap these days," says Seth Sternberg, a co-founder and chief executive of Meebo Inc., a Web-based instant-messaging startup in Palo Alto. When Meebo launched in late 2005, Mr. Sternberg recalls it took just a shoestring budget, with four people who worked out of their homes. "You just don't really need too many people anymore."

Now Meebo, which raised $3.5 million in venture funding in December 2005, is spending about $160,000 a month on its business and 12 employees, says Mr. Sternberg. More than half of the firm's money remains in the bank, he adds. When the company held a party to celebrate its one-year anniversary in September, the shindig was held in an office parking lot to save money. Only tortilla chips, water and soda were served. Meebo plans to announce a second round of funding of $9 million today.

Many venture capitalists right now are flush with cash to invest, so some are giving bigger-than-needed chunks to startups. They also like to give more so startups have enough socked away in case of an emergency.

The startups that save are also finding their cash cushion gives them more time to tweak their products and business model. Munjal Shah, CEO of startup Riya Inc., raised $19.5 million in venture capital in 2005 and 2006 to nurture what was then a digital photo Web site. But while 10 million photos were uploaded onto Riya's site from users, "we just couldn't figure out how to make money" from the idea, says Mr. Shah.

So Mr. Shah has since put the photo site on the backburner to focus on Riya's new business, a visual shopping search engine called Like.com that launched in November. Like.com makes a commission each time it sends an Internet shopper to an e-commerce Web site and each time that site completes a sale based on that lead. Because Mr. Shah has kept most of Riya's money in the bank, he says that affords him time to shift gears and overhaul his business plan.

"In the past, many people raised enough money to just launch a product, but I've raised enough so that we can go through three iterations," he says. He adds that Riya, San Mateo, Calif., has enough cash to last till 2009, even if it doesn't generate any revenue.

Meanwhile, Gibu Thomas, CEO of software startup Sharpcast Inc., recently capped his company's work force at around 45 people, down from the original 60 he planned to have. That's because adding more hires would bump the company's burn rate up to $1 million a month from $500,000 a month now. While Sharpcast, Palo Alto, has raised $16.5 million in venture funding and still has $12 million in the bank, Mr. Thomas isn't ready to take any chances.

"Cash is queen these days," says Mr. Thomas, who estimates Sharpcast can last another two years even if it doesn't produce any revenue. "Fiscal discipline is harder to teach later in the life of a company, and we want to be the last guy standing."



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