How Tech Got Its Groove Back
Cautiously optimistic. Those are the words you hear, from Silicon Valley to New York City, when you ask about the mood of the technology industry today. From young startups to old pros, everybody is looking hopefully forward while keeping one eye on the pitfalls of the past. And in the thick of it all, entrepreneurs are lighting the way with solid business plans and a careful attitude toward funding.
OK, now brace yourself. Internet companies are making a comeback. Not money-burning dotcoms as we knew them, but businesses like CertificateSwap.com, an online marketplace for buying and selling gift certificates. CEO Cameron Johnson is a veteran of more than a dozen ventures. He's also 19 and living in a dorm at Virginia Tech. Internet entrepreneurs are a diverse bunch these days.
These new companies aren't whooping it up with indoor basketball courts and lavish launch parties in expansive office buildings. CertificateSwap.com doesn't even have an office. "I've got a Web designer in India, another one in the Ukraine, and one in the Netherlands," Johnson says. "My programmer is in New Hampshire. I've got two people [who] handle customer support out of California." And he still hasn't actually met his partner and co-owner, Nat Turner, a 17-year-old living in Texas. Says Johnson, "The Internet allows you to create these virtual corporations."
The Internet, which spawned so much excitement during the boom and ate up so much capital during the bust, has evolved into an entity that entrepreneurs use to enable new-and more sane-business concepts. Many of these startups, CertificateSwap.com included, are just saying no to VC funding. "We'd rather have a smaller company and be profitable," Johnson says. His venture is entirely self-funded. With no central office or inventory to maintain, the no-VC approach works for his business.
Fortunately for those entrepreneurs actually seeking outside funding, VCs are showing signs of coming out of hibernation. They're still a little gun-shy after the bust. But that has manifested itself in a more careful approach to choosing which companies to fund. Mark Oster, management advisory services partner with Grant Thornton in New York City, has been keeping an eye on VC movements. "Funders have moved the goal posts back," he says. "They're not going to fund until there is a demonstrated product or service, revenues and customers." That may sound like common sense, but it typifies the new stance VCs are taking toward technology companies.
One business that has passed muster under the eyes of VCs is BitPass, a micro-payments company in Palo Alto, California. The company has logged $1.5 million in series-A funding since starting up in 2002. CEO Kurt Huang, 33, is co-founder along with chief technology officer Gyuchang Jun, 32. Their story echoes the experiences of so many Internet boom startups, but with some important differences. The founders were both Stanford students working on degrees-the proverbial two college kids starting a dotcom. But don't call BitPass a dotcom. It's actually a software and services company. Micropayments have been done before, but not with the mix of user-friendliness, flexibility and good timing that BitPass brings. (On a side note, BitPass is great news for Internet entrepreneurs who are looking for a way to accept scads of small payments for content or services.)
Guy Kawasaki, CEO of Garage Technology Ventures, sees the potential for BitPass' success. Garage is one of the firm's chief funders. Kawasaki has helmed Garage for five years and has seen a lot of swings in Silicon Valley. He sums up the changes since the bust this way: "Back then, all you had to be able to do was PowerPoint. Now you need to do PowerPoint and Excel." Though VCs are emphasizing the need for proven technologies, proven leadership teams and watertight business models, Kawasaki says there's still room for technology entrepreneurs who don't necessarily fit the new mold. Just look to history: Companies like Apple Computer, eBay, Google and Microsoft defied convention, and they won't be the last.
So are we in for another technology boom? The answer seems to be a resounding "sort of." Kawasaki calls it a "boomlet." Huang says one sure sign is that parking around Palo Alto is getting tighter, and office vacancy rates are slowly dropping. He calls it "the boom without the bust and with the revenue model." And we're back to that sense of cautious optimism. There are certain technology sectors that are looking pretty rosy right now. Nanotechnology still has a lot of buzz, but it's in extremely early stages. Wireless, security, enterprise software and e-commerce are often mentioned as hot areas.
Now that we know technology businesses are rebounding, we turn to look at where all the innovation is coming from. You'll get different answers depending on whom you ask. Some say older, experienced entrepreneurs are behind most of the startups. But as Johnson shows, there are still very young entrepreneurs launching companies. And as the BitPass founders show, there are still recent Stanford graduates helming their own tech ventures. Being located in Silicon Valley isn't necessary, either. As Johnson and CertificateSwap.com show, you don't even necessarily need an office.
Many large companies are looking at smaller technology businesses almost as outsourced R&D resources. Reduced R&D spending in enterprises has opened up opportunities for entrepreneurs. Kawasaki also sees this as a good time for high-valuation public companies to go shopping for early-stage technology businesses. The days of zooming from startup to a quick IPO exit plan are gone, but now entrepreneurs have opportunities to sell their products or services to larger companies.
Here's a blast from the past: Remember the search engine Excite.com? Its big purple mascot now resides in the quarters of LiveOffice, a small-business Web marketing and collaboration services company in Torrance, California. Matthew Smith, 35, co-founder and COO of LiveOffice, helped shepherd the company from its start in a small office in 1994 with a financial services software focus, through the downturn, and out the other side with 55 employees and a wider portfolio of service offerings. Though it started before the boom, by maintaining a focus on profitability, LiveOffice was able to grow while other techs fell by the wayside. That approach is now prevalent throughout the industry.
LiveOffice has picked up a variety of bargain-priced relics from shutdown dotcoms at auction. Besides equipment and a mascot, they've also taken on a lot of dotcom veterans as employees. "We're able to find people [who] have a much different perspective, a much more mature perspective," Smith says. "Everybody is really excited and motivated." You may be wondering if this is a good time to start a technology business. From a talent and affordable equipment perspective, it is. And as LiveOffice shows, for tech entrepreneurs who have been at it for a few years or more, it's a good time to think about expansion.
You can start by reading Entrepreneur's 4th Annual VC 100 listing in the upcoming July issue. Another good place to start is simply by keeping up on the news. Dow Jones & Co.'s VentureWire keeps tabs on all sorts of VC comings and goings. Check up on recent deals at VC Buzz. To get a feel for some of the leading Silicon Valley angel investors, check out the Band of Angels and The Angels' Forum LLC. Research is smart, but nothing replaces getting out and networking.
Here's a sneak peek at what's ahead for new tech entrepreneurs, particularly those who choose to use the Internet as a delivery platform for software or services. When we asked Johnson and Smith what their biggest challenge is today, we received pretty much the same answer. Says Johnson, "Our greatest challenge is simply getting the word out."
Smith says his greatest challenge is "letting people know who we are, what we do, what we stand for and what our products can do for them." This isn't the lust for "eyeballs" and brand building that obsessed Internet companies in the late '90s and early 2000. The new boom (or boomlet) features a grass-roots approach where word-of-mouth, customer service and user-friendliness are all powerful marketing engines.
Some things haven't changed. Huang has a cot beside his desk and puts in the kinds of insane hours so many young technology entrepreneurs were familiar with during the boom. "I'm pretty much here all the time," he says. "It's my passion, and I don't think of it as work." The advantages of an established company allow Smith, on the other hand, to have more regular hours than when he first started. He says a regular schedule has helped his employees avoid the burnout that hit so many technology workers after the boom. Johnson has the most unusual schedule of all, usually fitting in his CertificateSwap.com time late at night, between schoolwork, soccer and college life.
Everyone we interviewed had advice for technology entrepreneurs. When it comes to thinking up innovative business plans, Huang has a suggestion: "You've got to focus on pains, and the best kind of pains are the personal pains. We wanted to build a system that we would use." Huang and Jun got tired of seeing Web sites they liked fold due to the lack of a revenue model. Their micropayment system helps sites collect lots of small amounts. If you can find a way to solve a technology issue that bothers you, it could be the basis for a new business.
Johnson has a basic suggestion: "The best thing you can do is research. You better know who your competitors are," he says. "You have to know everything about everybody." With more startups hitting the market and more established tech companies looking into expansion, make sure your great idea hasn't been run through already. But if you can fill a need or save consumers or businesses money, you're off to a good start.
So what conclusions can we draw from this? Some technology entrepreneurs today are young. Some technology entrepreneurs today are older and more experienced. Enterprise software is big. Wireless is big. Security is big. Internet companies are back and smarter than before. You may not need their help, but VCs are seeking solid investment opportunities. Looking at all that, it's hard to draw any sweeping conclusions. And that's actually good news. It means there's a lot of room for entrepreneurs to start or grow their technology businesses.
Whether you're sleeping on a cot in an office or launching a business with contract workers all over the globe, these are new days for technology entrepreneurs. As Oster says, "Those who ignore the past are doomed to repeat it." If entrepreneurs heed those lessons, we won't have another cycle quite like the dotcom explosion and implosion of the past decade. So get your well-thought-out business plans ready, throw "cautious optimism" to the winds, and dive in. The water is all right.
For a solid sign of enterprise software and services growth, look to the IT research and consulting firm META Group Inc. META sees the market for enterprise content management tools hitting $2.3 billion in software and $7 billion in services by 2007, a compound annual growth rate of 15 percent. Entrepreneurs looking to launch a new business or expand their offerings should keep an eye on these technology trends. There will always be opportunities for savvy startups in these growth areas.