One thing common to new Internet companies in Silicon Valley these days is that they don't need a lot of money to get off the ground. But venture capitalists are...
SAN JOSE, Calif. — One thing common to new Internet companies in Silicon Valley these days is that they don’t need a lot of money to get off the ground.
But venture capitalists are eagerly stuffing cash anyway into the hands of some Internet entrepreneurs who have been getting buzz — and who are willing to take it.
That has put some startups in a tricky position. Many Internet entrepreneurs don’t need the cash, because they’re building products cheaply — using open Web technologies, often with two or three developers. So in return, they’re demanding that VCs have a lot more to offer than just cash.
Take Marc Andreessen, the co-founder of Netscape Communications, the Internet browser that helped usher in a new Internet era in the mid-1990s.
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Andreessen is now apparently sinking much of his time in Ning, a new Palo Alto startup. Ning recently launched its product, a company that offers easy tools for people to build more sophisticated Web sites.
It has cost so little to launch Ning that so far it hasn’t needed to take much, if any, money from venture capitalists. It has 14 employees, mostly developers.
That may be prudent for Andreessen, who has enough name recognition and likely enough wealth, to pull it off without help. But there are other, less-known entrepreneurs taking a second tack.
One is John Roberts, 38, who founded a Cupertino Internet company, SugarCRM, last year. The company helps businesses manage their relationships with customers.
SugarCRM’s software was done dirt cheap. Roberts and his small team worked out of their homes, chatted through the night via computer on Yahoo!’s Instant Messenger and met only once a week at a small borrowed office.
Within four months, they had launched a test version and had 1,000 people downloading the software. “I was a total neophyte,” Roberts recalls.
And as a newbie to the cutthroat startup world, he decided to take venture capital, even if he didn’t need as much as he eventually accepted. VCs first wrote him checks for $7.75 million in two earlier rounds, and then they injected $18.77 million more two months ago, in a round led by New Enterprise Associates (NEA).
“We weren’t actively looking for money,” Roberts explains, adding that he had hardly touched the cash from the second round. But there were other reasons to work with VCs — namely contacts.
Scott Sandell, an investor at NEA, had approached him, and Sandell was special. He had invested earlier in Salesforce.com, the company SugarCRM is competing against, and Sandell could help give him some advice and connections firepower.
Indeed, 10 companies already have switched from Salesforce.com to SugarCRM, says Roberts. One is Walnut Creek’s Covalent, a software company, where co-founder Ryan Lindsay said he found SugarCRM much cheaper to use.
Indeed, most other Internet companies seem to fall between those two extremes in deciding whether to take venture capital.
Another company built on the cheap is San Francisco’s Sphere, which soon will unveil a new search engine to find and filter blog information. Founder and Chief Executive Tony Conrad, previously an entrepreneur and venture capitalist, says his team of three built the company on $200,000. That’s way under the budget of $500,000 that he had taken from about seven individual investors.
At the time, Conrad carefully selected each of his investors, he explains, based on their experience. The money was trivial. “You have the ability to build a product on pocket change,” he says.
Sphere’s situation reveals another aspect of the changing behavior among VCs. Conrad selected Doug Mackenzie, a venture capitalist from big-name venture firm Kleiner Perkins Caufield & Byers. Interestingly, though, Mackenzie invested so little money that he did so out of his own side fund, called Radar Ventures — out of which he doesn’t usually invest in Internet companies.
He still worked hard, explains Conrad, citing how Mackenzie got some Stanford graduate students to test Sphere early on, comparing it with other blog searches. “There’s just no way we could have gotten to that,” Conrad says of his small team.
But Conrad said it showed how investors need to put in time early with a small startup — even if they can’t invest as much money as they like, which would assure them a bigger return in the event of success. Firms such as Kleiner traditionally like to put millions to work.
But at least Mackenzie’s early work ensured him a position where he could help pick the team and make a larger investment later, when the company needs to grow.
“If you really want to have a seat at the table,” Conrad says of venture capitalists, “you’ve got to be involved at an earlier stage — putting in little dollars, and then really work the deal.”
Matt Marshall is a columnist for
the San Jose Mercury News.