Paste number 13090: Many Internet Start-Ups Are Telling Venture Capitalists: 'We Don't Need You'

Paste number 13090: Many Internet Start-Ups Are Telling Venture Capitalists: 'We Don't Need You'
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Many Internet Start-Ups Are Telling
Venture Capitalists: 'We Don't Need You'

By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
October 31, 2005; Page C1

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 Inc. for what people familiar with the matter say was about $25 million, significantly higher than the value Accel had put on the company and Accel's proposed investment.

"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 Warner Inc.'s America Online unit earlier this month, and Android Inc., a wireless firm snapped up by Google Inc. earlier this year.

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 Corp.'s MSN service. Indeed, many of the modest Web start-ups operating today offer products and services that seem more like Web-site features than standalone businesses.

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. 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.

--Kevin J. Delaney in San Francisco contributed to this article.

Write to Rebecca Buckman at rebecca.buckman@wsj.com

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