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Investors Resume Funding Online Startups

Investors are making a cautious return to online startups.
August 1, 2006
URL: http://www.entrepreneur.com/article/159950

If you missed the first internet wave, it may not be too late. Working with new business models and boosted by investors' growing appetites for dotcom startups, a second swell of online enterprises is emerging.

Venture capitalist Sam Jadallah of Mohr Davidow Ventures in Menlo Park, California, says that since media giant News Corp. paid $580 million to buy fast-growing online community-builder MySpace.com in 2005, entrepreneurs have been working feverishly on internet business plans they hope will appeal to consumers, investors and potential buyers.

Another reason for the return of interest in the internet: affordability. "The cost to get into business and experiment is dramatically lower than it was in the first boom," says Jim Fowler, 41, CEO of Jigsaw Data Corp., a San Mateo, California, company founded in 2003 that helps members buy, sell and trade business contact information. Open-source software, offshore programmers, commodity-priced servers and other elements of internet infrastructure are better developed, better understood and less costly than before, Fowler says.

The companies that are part of the resurgence employ an approach labeled Web 2.0. It calls for websites to actively involve users, who build the business by contributing personal pages a la MySpace or valuable information like the corporate executives' phone numbers and e-mail addresses bartered on Jigsaw.com. "It's a lot more participatory now," says Di-Ann Eisnor, 34, co-founder of Platial.com, where users contribute maps of favorite places. "[Users] don't just come in and read something; they come in and do something."

While some ventures such as Jigsaw are directly monetizing information, others, like Platial, plan to give the information away and sell advertisements to businesses anxious to expose their messages. Eisnor's eight-person Portland, Oregon, company was founded in September 2005 and has yet to sell any ads. However, its promise was enough to gather seed money from well-respected Silicon Valley investor Kleiner Perkins Caulfield & Byers.

In another departure from the web boom of 2000, Eisnor hopes to lure local businesses to place ads by charging mainly for the number of visitors who click on advertiser links. "We're trying to make sure the local businesses can see what putting their message on Platial.com is doing for them," she says. "It's a lot more accountable this time around."

Entrepreneurs can expect to be held accountable to investors as well this time. Capital is available, but first-round financing today typically comes from angel investors putting up a few hundred thousand dollars, not the millions VCs pumped into untested companies during the last boom. "The days of raising $100 million for a concept not yet proven are behind us," Eisnor says. As long as investors don't get carried away and pump massive sums of money into unproven companies this second go-round, we shouldn't end up like last time, with a savage downturn sweeping up even healthy companies, Jadallah says.

It does seem that neither public nor private investors are anxious to throw much good money after the bad that fueled the last wave of internet excess, so competition will be fierce. Everybody, of course, hopes to be the next MySpace, but a matter of broader significance is that the basic Web 2.0 approach may have inherent vulnerabilities which could derail this boom before it gets far.

The biggest potential issue is the question of who owns the information that these web services collect and display. Jigsaw.com, for instance, traffics in information about private individuals. Fowler says the tidbits in Jigsaw's databases are neither copyrightable nor trade secrets. They might be considered private, however, and if they were, it might mean trouble, but Fowler says he doesn't foresee any government action restricting Jigsaw's ability to sell its service.

Services like Platial's stand on slipperier ground because they deal with data someone else owns--the maps come from Google. Thus far, the search engine titan is letting Eisnor and others use the maps for free. She expects to have to start paying for the data, but what form that relationship will take she doesn't know. "Those are questions we haven't needed to answer yet," she says. "But we will this year."