(Embargoed for use at 12:01 a.m. Eastern time on May 25.)
By Ari Levy
May 24 (Bloomberg) -- To start their company and get its
out the door, the founders of software maker 280
needed little more than a half-dozen computers and a
Francisco Tolmasky, Ross Boucher and Tom Robinson kept
in check by using code available free on the Web and
renting storage on the cheap from Amazon.com Inc. Expenses
about $4,500 a month, and the San Francisco
company -- two years
after getting off the ground -- is close to making a profit
From Silicon Valley to New York
, technology startups are
tapping individual investors
, friends and their own savings to
and product development. That helps owners keep
greater control of their companies and more of the equity. After
only raising about $100,000, 280 North says it has plenty of
to get another product to market
“The biggest line item in these companies now is rent and
food,” said Chris Sacca
, a former Google Inc.
executive who has
invested in 280 North and other early-stage startups. A decade
ago, “I don’t think you could write a line of code for less
than $1 million,” he said.
That means there’s less demand for big venture investments
The size of the average
venture round has shrunk by half to $6.3
million since the dot-com bubble in 2000, according to the
National Venture Capital Association
in Arlington, Virginia
figures don’t include smaller financings, known as angel
, that often aren’t made public.
Startups are getting by on less because they don’t need to
pay for software from Microsoft Corp.
and Oracle Corp.
are available from Google and the open-source
community. And instead of using servers and storage from
International Business Machines Corp.
and Hewlett-Packard Co.
they can pay much less for Web-based services from Amazon.com
and Rackspace Hosting Inc.
Foursquare Labs Inc.
, a New York startup that lets people
their whereabouts via mobile phones
, has parlayed an angel
into a business with more than 1 million users. And
San Francisco’s Flowtown Inc.
, a maker of software for
businesses, used money from friends and family to establish a
customer base of 7,000.
The large venture capital firms typically don’t make those
kinds of investments, since they’re aiming for bigger bets and
. Firms such as New Enterprise Associates
and Khosla Ventures have raised billion-dollar
in the past year.
Sacca took a different approach when he started his firm,
Truckee, California-based Lowercase Capital
. He realized that if
Web companies only need him to write checks of $25,000 to
$100,000, a much smaller fund made sense. So he raised a pool of
less than $10 million.
SV Angel, a firm run by Ron Conway
, follows a similar
philosophy. It raised a $20 million fund. Another early-stage
, Mike Maples
, says that for startups “$500,000 is the
new $5 million.”
The bootstrapping trend is depriving large venture funds of
some of the most
promising potential investments, says Steve
, an eight-time entrepreneur who teaches classes at
and the University of California
“If you’ve got a billion-dollar fund, there’s no way the
math works for you to put half a million dollars to work,”
Blank said. “The most exciting and profitable areas the past
couple years have been Internet
startups, which structurally,
the big guys with the billion-dollar funds can’t attack.”
280 North began with a $20,000 investment from Y
, a startup incubator that runs three-month programs
to help its companies meet people in the industry
. After going
through the program
in early 2008, the company’s founders rented
together in San Francisco’s Haight-Ashbury
The founders, all in their mid-20s, studied engineering
together at the University of Southern California
, where they built a program for developers to create Web
. The free software, called Cappuccino, has been
downloaded more than 100,000 times.
In December, 280 North started
selling a test version of a
product called Atlas that lets programmers quickly build
graphical Web apps without needing to write code. The company
plans to release the next version of Atlas this year and
generate enough revenue
to be profitable.
“Given the technology, it’s clear to us that this is not
something that needs big venture capital,” said Tolmasky
worked with Boucher at Apple for two years before starting 280
North. “We don’t need any sort of sophisticated hardware.”
Not all Silicon Valley startups are shying away from large
investment rounds. Facebook Inc.
has raised over $700 million in
the past five years. And Twitter Inc.
, Zynga Game Network Inc.
and Chegg Inc.
have each raised more than $100 million.
Still, to get into startups when prices
have to write smaller checks than in the past, says
, a founding partner at Menlo Park, California-based
Redpoint Ventures. The amount his firm expects to invest in a
typical Internet or software company has declined by 60 percent
over the past decade, he says.
“An increasing trend is big funds like ours banding with
angels and writing small checks just to try and get a foot in
the door,” said Yang, whose previous investments include
MySpace and TiVo Inc.
On about $100,000, Flowtown has rented space in Twitter
San Francisco office building
and created a product for small
businesses and nonprofits. Flowtown’s software helps companies
communicate with customers by using data
from social networks
reached profitability last year, founder
Ethan Bloch says the three-person company is still searching for
its business model and using customer feedback to find glitches
and improve features. Rather than raise money now to expand,
Bloch wants to have a clearer sense of where the company is
going. He’s in no rush.
“It was extremely cheap to get this first iteration of
Flowtown up,” said Bloch, 24. “We want to get to a point where
we really feel confident that we’ve found the model. That would
be better for Flowtown and our potential investors.”
For Related News and Information:
For stories on Internet companies: NI INTERNET
Top technology news: TTOP
For data on initial public offerings: IPO
--With assistance from Adam Satariano
in San Francisco. Editors:
Nick Turner, Tom Giles
To contact the reporter on this story:
in San Francisco at +1-415-617-7133 or
To contact the editor responsible for this story:
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