Jared Kim has just finished lunch at a Thai place in San Francisco's dotcom district. The check paid, he steps out onto the sidewalk of busy Brannan Street, pauses, and says, "I just hope there's no 9/11 in the next week." Kim has been promised a first round of funding for his latest startup, WeGame.com, a sort of YouTube for videogamers (see slideshow). Everybody's giving him a thumbs-up, and the papers are supposed to be signed within a week, but Kim is nervous anyway. A major terrorist attack killing thousands of innocent people could scuttle the deal.
Only someone with a teenage mind-set could personalize fears of a mass tragedy with such an offhand, casual form of solipsism. Kim is 19, an age when narrow self-absorption is tolerated (barely). Moreover, terrorism aside, he has little reason to worry about funding. If anything, it's easier than ever to find money for a startup, particularly one like his-a small, Web-based company with relatively low launch costs. Despite the credit crunch on the East Coast, there's plenty of money sloshing around Silicon Valley these days. Venture capital firms have more than they can invest: About $20 billion was raised in the first nine months of 2007. And while the vetting process remains intact for companies seeking significant backing, investors are also making lots of low-stakes bets on small companies without performing the same sort of intense due diligence. In January, Bay Partners created a $300 million fund, its 11th, a slice of which is set aside for 20 to 30 investments of up to $250,000 each.
That doesn't sound like much, but the ever-decreasing cost of computing power, bandwidth, and servers means that new companies-especially those based on the Web-don't require as much capital. "The same website that cost $5 million in 1995 to scale up to peak costs $250,000 today," says David Siminoff, a general partner at the Menlo Park, California, venture capital firm Venrock Associates. Because of these factors, Silicon Valley has hundreds of new companies, with names like Meebo, Hive7, and Eurekster, plus a universe of startups still in the development stage, like Kim's WeGame.
Plenty of them are helmed by post-adolescents. Aaron Levie and Dylan Smith were both 19 when they started a company as college students-at schools 2,500 miles apart. They communicated between the University of Southern California and Duke University via instant messaging. Their business, Box.net, allows computer users to store and share files and manage them remotely. Levie, now 22, says it's hard to imagine a company like theirs being launched during the first dotcom boom, especially from a dorm room. They'd have had to rent space and fill it with powerful servers. Instead, they rented servers over the internet.
"In terms of getting off the ground, our costs were reduced to next to nothing," Levie says. "We didn't need office space until year two." (Like most of these ventures, Box.net still isn't profitable.) Another entrepreneur, Arjun Mehta, recently got venture capital funding for his Santa Clara-based startup, PlaySpan, a marketplace for buying and selling virtual goods from online role-playing games like Urbaniacs. Mehta is in the sixth grade.
Because of the low stakes, these companies are not likely to draw Google-size payouts. A more realistic model of success is Buzztracker, a news-aggregation site sold to Yahoo in September for $5 million. "The outcomes are lower," Siminoff says. "The internet has gone from minting a few billionaires and a few hundred multimillionaires" to creating 10,000 success stories at $10 million apiece.
The new low-risk, low-payout strategy has another side effect: Failures need not be the cataclysmic events they once were. If Kim's company comes crashing down, he won't deem it a major setback. He has sunk a few months into the project but only about $10,000 of his own money. Serial entrepreneurs have long been a fixture in San Francisco and Silicon Valley, and in the wake of failures, they used to spend years between startups. In today's environment, Kim could be working on another idea within weeks.
In fact, he has failed before-several times in the past three years. He grew up in California but attended high school in Shenzhen, an industrial region in China, and it was there that he created his first company, a website for online gamers. His father, who now resides in China, found him some office space. There was nothing lean about Kim's approach back then. Cheap Chinese wages meant that he could scale up quickly. Before he knew it, he had several dozen employees and multiple projects under way. Big mistake. "Our burn rate was too high, and it became a management nightmare," Kim recalls.
After high school, he was accepted at the University of California at Berkeley. Even before classes began, he was thinking of new startups. He tried Stalkerati, a search engine for social networks; then, Hawtppl, a version of the popular website Hot or Not. Early in the fall semester, he started Yaqqer, a mobile instant messenger. (None of these took off.)
This past April, halfway through the spring semester of his freshman year, Kim dropped out to devote himself full-time to starting WeGame. He cleared his meager belongings from his dorm room and set up a live-work loft in San Francisco. It's not the most attractive location, squeezed against a freeway exit ramp, but it offers a ton of bandwidth. The building sits within a three-by-five-block area served by fixed-point wireless service that blasts data at 45 megabits per second, about 10 times the typical broadband speed. WeGame's corporate headquarters is a single desk topped with two 24-inch L.C.D. monitors, where Kim spends his days writing code.
The main draw for the website he's building will be a software "camera" that can record short segments of videogames. Those highlights can then be posted on the Web, YouTube-style, for other gamers to see. Similar software already exists, but it costs about $40 and compiles uncompressed video that takes up an enormous amount of space on a user's hard drive. Kim's version, which can be downloaded free from WeGame, will compress recordings with, he claims, no significant loss of quality.
The idea faces challenges. Most significant, Kim's recorder will work only with PC-based games, not with popular consoles like Xbox, PlayStation, or Wii. Of the $33 billion worth of videogames sold last year, only 22 percent are PC-based. Kim says his plan is to gain traction with PC gamers and then negotiate deals with console makers. And he insists that the market for PC games is still significant enough for him to be able to use it to bootstrap himself into the big leagues. "All kinds of virtual worlds are strictly PC at this point and will be for the next half-decade," he says, referring to role-playing games like World of Warcraft, EverQuest, and Club Penguin.
Another concern for Kim's website is that gamers might simply continue to post their highlights on YouTube. You can find clips from Halo or Doom on the video-sharing site today, and some are big hits. A World of Warcraft how-to guide has been viewed more than 6 million times. Kim says his version will be better. "If they post a highlight on YouTube, it will be lost in the millions of videos, most of which are nongaming," he says. "YouTube doesn't allow them to categorize their content. They can only post into its Gadgets and Games section, which is very generic." (YouTube includes a search function, but it's limited.) There's a technical drawback as well: YouTube videos are converted to rates of about 300 kilobits per second. Kim says that WeGame files will convert much more information at the same speed, producing clearer, richer images.
But how will the company make money? That objective was skirted in the first dotcom boom, and startups today are again beginning to take it rather casually. Kim says he's more intent on attracting users right now than in figuring out how to generate revenue. (Sound familiar?) He'll run advertising, naturally, and he expects sponsorships. Maybe he'll eventually charge for game downloads. But the endgame is most likely a sale of his company rather than an initial public offering, and that marks another difference between the last tech boom and this one. Going public isn't a realistic goal for many of these startups, especially for ventures that, like Kim's, fall into the "leantech" category-those with low overhead and small staffs. Instead, he would be just as happy selling out to a large corporation.
It all sounds almost too easy: Design some software, give it away, and then start counting the money. But if WeGame's potential isn't yet clear, it's at least promising enough for investors to take a flier on the company. In August, Kim met with a potential backer, 33-year-old Naval Ravikant. Ravikant had started a few companies himself, including the classified-ad search site Vast.com and, before that, Epinions.com, which eventually merged with another company, went public, and was bought by eBay in 2005 for $620 million. Ravikant and Kim had talked earlier in the summer, and Ravikant had offered him funding, but Kim wasn't ready. A few weeks later, Kim emailed Ravikant late one night, and the pair agreed to meet the next morning at 11.
They sat at Caffe Centro, a coffee shop where deals get made in South Park, the leafy heart of San Francisco's Web industry. Within walking distance are the offices of Wired magazine, the social-networking site Twitter, the blog search engine Technorati, and the Web-based video-publishing service VideoEgg, along with Yahoo's Brickhouse research lab and a host of startups that few have yet heard of. Ravikant and Kim talked for just a few minutes before Ravikant offered him $250,000. Kim was surprised and elated. "He emailed me the term sheet right there from his laptop," Kim says.
For his part, Ravikant left the meeting impressed by Kim. "He knows what people want on the internet. They want things simple and social. People want to show off what they're doing to their friends and do it without hassle. His design is very simple, and he's doing it very cheaply."
Kim drew a similar investment from True Ventures, a small firm that specializes in early-stage companies and has no problem making investments of a few hundred thousand dollars. The firm has already bankrolled startups like Automattic, founded by Matt Mullenweg, creator of WordPress blogging software.
It's a sign of the current climate in Silicon Valley that Kim-a teenager with several unsuccessful Web ventures behind him-came away with more than $500,000, about twice what he thought he would need. Better yet, he managed to negotiate favorable terms, retaining more than 60 percent of the company's equity, he says. As soon as Kim secured the funding, he sent an instant message to Dennis Fong, one of his unpaid advisers. A videogame champion who once won a Ferrari in a Quake tournament, Fong also co-founded a gaming site called Xfire.com and later sold it to Viacom for $102 million. "Jared said, 'I just raised a round,'?" Fong recalls. "I said, 'Congrats. Now the work begins.'?"
By late October, Kim had put some of the money to work by hiring a software coder as his first full-time employee, and he was planning to launch the beta version of his site. "In three months, I could be out of business or I could be the next hot startup in Silicon Valley," he says. And if it doesn't fly? "I'm 19. I have a lot of years in front of me."Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.