Way back in the summer of 2005, when Seth Sternberg and a couple of Silicon Valley pals in their mid-20s launched a Web 2.0 start-up, they raised the initial financing the old-fashioned way: They ran up $2,000 each on their credit cards.
That was all they needed for a few months of work on what would become Meebo, an instant messaging service that users can access from any computer, not just their own. "We weren't paying ourselves," says Sternberg. "We were working from our apartments." Nor did the trio need to buy or lease big computer servers--you can rent online access to Amazon Web Services' giant server farms for a couple of hundred bucks a month.
A few months later, some individual angel investors put $100,000 into the mes--saging service. That December, Sequoia Capital, a respected Silicon Valley-based venture capital firm, invested $3.5 million. Meebo went live in 2006, and roughly 30 million people a month now use it, often through Facebook.
This past May, Meebo raised $25 million in new venture funding, and tech industry analysts and pundits valued the company at more than $200 million.
Whether you call them Web 2.0 or consumer applications, they've rocked both the Internet and venture capital financing over the past years. Both descriptions refer to sites where people interact on the Internet, rather than just passively pointing and clicking. The sites also tend to -be built with open-source computer code that's available to anyone, and function pretty much as free software that you can access online any time. "You can build them for hundreds of thousands of dollars, not millions," says Sergio Monsalve, a partner with Palo Alto, California-based Norwest Venture Partners.
The goal for the venture capitalist is the same as always: the Big Score. In the 1990s, that meant that a large venture capital fund might seed 20 companies with $10 million each, wait a few years and then invest even more in the successful companies. Most of the start-ups went nowhere, but one sometimes hit the jackpot à la Google.
The venture capital model is now being accelerated because of Web 2.0. "All tech-nologies improve exponentially," says Timothy Draper, founder of Draper Fisher Jurveston, a $5.5-billion venture firm that was an early backer of Hotmail, Skype and, more recently, Meebo. "More change creates more creativity, more entrepreneurs and more money." But how does a VC choose between perhaps hundreds of proposals from software developers?
As with the dot-com frenzy of the late 1990s, the b-word--bubble--is being tossed around. Few Web 2.0 companies have gone public, actually, because the tech IPO market is still hung over. But some have been bought for a lot of money. Rupert Murdoch's News Corp. paid $580 million (U.S.) in cash for MySpace in 2005, and Google forked out $1.7 billion in shares for YouTube in 2006. "There have been by far more M&As than IPOs," says Norwest's Monsalve.
Just how fast and easy it is to develop Web 2.0 applications is apparent if you visit an outfit like Extreme Venture Partners in Toronto. It's run by two engineers: Amar Varma, 32, who worked in California for a few years in the early 2000s, then returned to Canada to join tech fund management firm Vengrowth Asset Management; and Sundeep Madra, 31, who put in six years at giant Cisco Systems before returning. Last year, the duo raised $10 million from several partners to seed new Internet and wireless ventures.
Extreme recently moved into the top two floors of an early-20th-century down--town office building. Inside, a dozen or so developers are hunkered around desk-top machines and laptops--mostly guys in their 20s in short sleeves.
Varma and Madra want to get applications from concept to prototype within, say, three months, and spend up to $1 million to get the ventures to the next financing stage. That could mean a bigger investment by a VC firm, or being bought out.
To improve their odds, developers try to piggyback on BlackBerry, Facebook or other popular services. They will also test a prototype online early. The first version doesn't cost a fortune, so it doesn't have to be perfect. On the other hand, unpromising ideas have to be killed fast. "Lemons ripen early," says Varma. "We often have that talk after someone's been working on something for a few days."
That bigger investment by a traditional VC firm is still a big hurdle, however. Kevin Talbot is managing director of RBC Venture Partners group, and, at a technology conference in May, he announced plans for the new BlackBerry Partners Fund, with $150 million provided by RBC, Research In Motion and Thomson Reuters. It will invest in new applications for mobile devices, including--but not limited to--RIM's BlackBerry. At the eight-week mark, says Talbot, the fund had been deluged with almost 1,000 business plans.
The RBC group was already seeing 500 to 600 proposals a year, he says, yet it invests serious money in just a handful--a few million dollars each. To provide anything less to a project would not be economical for many large institutions or funds. Talbot draws a distinction between something like a barbecuing-tips website that an individual might start and run, and a large-scale company that in--cludes all the traditional elements such as marketing, customer relationship management, compliance and so on. "Investors have got to figure out if it's a business, as opposed to a feature," Talbot says.
Out in Silicon Valley, the buzz on Sand Hill Road this past spring was that even Web 2.0 sites that had attracted lots of users and one round of VC funding were having trouble getting, say, $3 million or $4 million more.
At some point, a venture has to have real prospects of profits. Yet even Meebo, a Web 2.0 star, has an annual revenue of only about $1 million. Despite all the traffic that social networking sites get, a lot of users simply don't click on traditional online display ads. So, this spring, Meebo started trying to sell ads that users can play with--icons connected to movie trailers or games, for instance.
Still, Meebo's Sternberg isn't worried about the bottom line. "The goal is to get really big," he says, "and to bring live communication to the Web." If you attract enough eyeballs, someone will want to reach them. General Motors, for one, plans to boost its online advertising spend----ing from $197 million (U.S.) last year to $1.5 billion (U.S.) by 2011.
This dash for growth sounds a lot like the strategy of the old-school dot-com developers of the '90s. Some, like Amazon.com's Jeff Bezos and Google's Larry Page and Sergey Brin, were proved right----- --and spectacularly so. Unfortunately, thousands of others were wrong--sometimes painfully so.
NEW TECHNOLOGY, OLD-SCHOOL STRATEGY
Will the next Big Score come from Canada and make piles of money for some Canadian venture capital investors? The odds look long. Take Dan Latendre, 44, the CEO of Waterloo-based Igloo Inc., which makes software for corporate use--"Facebook for the enterprise," as one company backer describes it. But little besides the actual product is cutting edge.
Latendre is a tech industry veteran. In the 1990s, he rose through several executive positions at Open Text Corp., which became a Canadian software sensation when it raised $54 million in an IPO on Nasdaq in 1996. In 2004, when he "retired," as he puts it, Research In Motion co-CEO Jim Balsillie approached him to spearhead a pet project--creating a global non-profit networking site for scientific researchers.
"LinkedIn and Facebook were just starting to emerge," says Latendre, and he liked the ease of use of those Web 2.0 sites. He wrote a grant proposal for Ontario's Ministry of Research and Innovation, and his site eventually received $15 million. While doing that, Latendre says, the "light bulb thing" went off over his head. Why not commercialize the technology for corporate users? As Latendre says, networking knowledge within companies, and between them and their clients and suppliers, "has been stuck in e-mail."
The scientific site now has -roughly 250,000 users worldwide. This past May, Igloo secured $4 million in first-round venture capital funding through RBC Venture Partners group. Latendre wants the rest of 2008 to be a building year for Igloo, and he's aiming for major growth in 2009.
Is he happy? Not entirely. He didn't get the funding until he had helped run one of Canada's most successful software companies, secured provincial funding for a new idea, recruited a business heavyweight (Balsillie) as a company director, and won over the biggest bank in the country. "It bothers me that we have no Web 2.0 leaders in Canada," says Latendre. It's a tall order, apparently.