By John Daly
Globe Investor Magazine, September 18, 2008
Illustration by Superbrothers
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 messaging 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 technologies 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 downtown office building. Inside, a dozen or so developers are hunkered around desktop 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.
© Copyright 2008 CTVglobemedia Publishing Inc. All Rights Reserved.
