Skip to main content
part one: tech startups

To get a sense of just how polarized the world of technology startups is, consider the case of SocialDeck.

Founded in 2007 by two University of Waterloo graduates, SocialDeck makes – or, used to make – social games for mobile platforms such as smart phones.

If you've heard of the company this year, that's because it made headlines when Google Inc. acquired it for somewhere in the range of $20-million – a massive windfall for its founders, following a bidding war that's believed to have included heavyweights such as Farmville maker Zynga Inc. and Research In Motion Ltd.

It is, in many ways, the quintessential tech startup success story. But what a lot of people don't know about SocialDeck is that its founders struggled through a number of dismal startup failures before stumbling onto an idea that worked.

Such is the state of tech startups today. A decade ago, when dubious dot-coms such as were raking in millions in investor money, it seemed that anyone with a startup idea could easily secure funds.

But today, in the aftermath of the dot-com bubble and a global recession, venture capital money is much more difficult to come by.

Additionally, investors expect startup creators to get by on a lot less, thanks to the reduced costs of, for example, building applications for smart phones and tablets, rather than desktops and laptops.

Every now and then, a startup will make headlines with a massive round of funding (a recent $41-million payday for a social app called Color got many observers thinking about the potential for another dot-com bubble in the app world).

But for the most part, today's tech entrepreneurs are expected to fund their operations on a lot less.

In this series, we explore the somewhat labyrinthine world of tech startups. For many outside observers, the process of conceiving of and funding a startup may seem straightforward. But the number of funding outlets has grown significantly in recent years.

Traditional venture-capital firms, which look to invest in small startups and reap windfalls when those startups are acquired or go public, still play a big role in the startup ecosystem.

Indeed, SocialDeck's major round of funding before it was eventually acquired by Google came from the BlackBerry Partners Fund, which invests in companies doing innovative things on mobile platforms (as the name suggests, RIM is a big backer of the fund).

But increasingly, the incubator model is coming to compete with traditional venture-capital firms and angel investors. Incubators such as Toronto's Extreme Venture Partners tend to fund startups much in the same way as traditional investment firms, but take a much more hands-on approach in day-to-day operations. The thinking is that by surrounding new entrepreneurs with talent and resources, their startups will be able to grow much faster.

The incubation model also exists outside the traditional venture-capital ecosystem. Ryerson University, for example, runs a highly successful program called the Digital Media Zone, which gives startup founders access to office space, resources and well-established advisers.

Increasingly, Toronto and Waterloo have become Canada's hotbeds of venture-capital and incubator action. However, the biggest names in the industry still reside south of the border.

One of the most famous such firms in the United States is Y Combinator, which takes a hybrid approach to investment that touches on the major startup industry trends of the past few years – small investment dollars spread out over many startups, and an emphasis on quick turnaround time.

In the California-based Y Combinator model, the firm invests an average of less than $20,000 per company twice a year on about 60 or so startups. Armed with the money, the startups move to Silicon Valley for three months, where Y Combinator staff work with them to perfect their pitches.

Finally, the investment firm holds a large investor event, where the startups make their pitches.

Even though the amount of money invested per startup today can often be a lot less than what it was a decade ago, the competition to find the next Twitter or Facebook is fierce. Virtually every major tech company, from Microsoft to Google, has entire offices dedicated to potential acquisitions. As such, the picture for budding tech entrepreneurs is looking brighter today than at any time since the height of the dot-com boom.

In the coming instalments of this series, we'll look at what startups are doing to distinguish themselves from the crowd, and the myriad options available to those who want to go it alone in the tech sector.

The series continues next Thursday. Other stories can be found on the Web Strategy section of the Report on Small Business website.

Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: