Monday, February 18, 2008

N.E. dot-com startups flock to web consumers

By Christopher Calnan

The consumer-focused dot-com business, long considered a West Coast entrepreneurial staple, appears to be thriving in New England, with more than a dozen Internet startups either launching or being funded recently.

The rising activity is being attributed to several factors -- lower development costs, extended beta versions, fast revenue from click-through ads -- that have changed the game from a decade ago, industry observers said.

The change in dynamics has spawned a crop of web-based consumer startups that look different from what has been the typical, business-to-business New England technology investment.

Startups include Boston's Snif Labs Inc., whose technology lets customers remotely monitor their dogs and network with other pet owners. Cambridge's SpotScout Inc. operates an online marketplace selling parking places to motorists. And another Cambridge company, My Happy Planet Inc., operates a social-networking site that helps users learn new languages.

In January, a Cambridge fantasy stock-investing website closed on a $750,000 Series A round of investment. The UpDown Corp. has grown to 20,000 members since being launched by a Harvard Business School student in September 2007. It has raised a total of $1.2 million from a Swiss angel investor.

While New England investors have been criticized in the past for staying away from consumer-focused dotcom startups, local venture capitalists seem unfazed by the rising number of options here. In fact, the varieties and niche markets of these websites seem endless, investors said, and their biggest hurdle is to pick the winners.

"From an investor's perspective, how do you create big, profitable companies? That's the challenge," said Chip Meakem, general partner at Kodiak Venture Partners, a Waltham VC firm.

New England-based Web 2.0 companies, both consumer- and business-focused, attracted the most venture capital in the nation during the first half of 2007, topping California's Silicon Valley, according to data from Dow Jones VentureSource and Ernst & Young LLP. Total-year figures are scheduled to be released next month.

Data showed 10 New England-based, VC-backed businesses based on the latest generation of web technology received a combined $102 million by midyear '07, compared with nearly $90.5 million attracted by 25 Silicon Valley companies.

During 2006, 12 such companies in New England attracted nearly $62 million in capital, Dow Jones reported.

"You can put up a website tomorrow and literally generate revenue from day one. That wasn't true seven years ago," said the founder of the Web Innovators Group, David Beisel, vice president of Venrock, a Cambridge venture capital firm. "People are realizing this and trying new services."

Online fantasy businesses have also been gaining traction. In addition to UpDown, Southborough's Guildcafe Entertainment Inc. launched a social networking site for gamers in 2006, and Somerville-based Eastland Media LLC launched Fafarazzi.com, a celebrity fantasy league.

Eric Hjerpe, a partner at Waltham's Atlas Venture (which tied with Polaris Ventures as the most active New England VC firm during 2007), said consolidation has limited acquisition competition in business-to-business investments. By comparison, consumer plays often generate higher-valued exits due to a larger number of potential acquirers, he said.

Steven Domenikos, the founder of three technology companies, including the 18-month-old IdentityTruth Inc. in Waltham, said the recent dot-com activity is reminiscent of the climate in 1999-2000, the height of the dot-com bubble when investment became irrational.

In October 2007, IdentityTruth launched its web-based tool that, for $99 per year, notifies members of possible misuse of their identities. But Domenikos said attracting investors for a $7.2 million Series A round of financing in 2006 required expectations that varied from his business-focused startups.

"Consumer plays require a different mind-set," he said. "They're not an overnight success."