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Stuart Garfield
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As venture capitalists focus energy on bringing existing portfolio companies through the economic storm, new ideas are expected to find it harder to attract investor attention. And some entrepreneurs say they’re fine with that.
After all, it’s easier than ever for a startup going it alone. Cloud computing, open-source platforms, partner-based distribution and an abundance of programming talent now allow some New England companies to get close to break-even or better with little more than funds from friends and family. Some are growing fast enough that they are questioning whether they’ll ever need venture capital at all.
“In IT, the world has changed,” said serial entrepreneur and investor John Landry. “You don’t need the capital investments you used to. You don’t need marketing investments. You don’t need recruitment. If I want programmers, I go to Craigslist.”
That presents a challenge for VCs with large amounts of money to invest, said Landry, former CTO of Lotus Development Corp. and McCormack & Dodge Corp. Seed investments of a million dollars or less won’t, by themselves, scale to the VC business model, he said. “You can’t spread your partners that thin.”
To bootstrap a software company out of his Nashua, N.H., sales consultancy, Plan 2 Win Software LLC founder Steven Harper outsourced development to a former colleague who now runs a contract programming shop in India. He then used Salesforce.com Inc.’s (NYSE: CRM) open-source platform, which cut coding time by 75 percent, he said. Now, Salesforce.com will also provide marketing, distribution and infrastructure for Harper’s tiny company.
“This is a new era that hasn’t existed in the past,” said Greg Arnette, founder of Sonian Inc. “We’re a model for the future of startups that can solve big problems for a large audience with a very limited infrastructure behind the scenes.”
Six months ago, the Dedham company was looking for a $3 million first round of venture capital to propel its web-based e-mail archiving application. The money didn’t come through. Instead, the company expanded its angel round and focused on customer acquisition using cloud-based infrastructure and what Arnette called “a lot of grass-roots e-mail marketing.”
Farming out its core data center to Amazon.com Inc.’s (Nasdaq: AMZN) Amazon Web Services has allowed Sonian to grow with just one-fifth the staff that a conventional infrastructure would have required, Arnette said.
Opportunity to take wing
Companies like Sonian present an opportunity for angels, said Lucinda Linde, a partner at angel group Walnut Venture Associates. “It may only take an angel round,” she said, to get companies to the point where they can survive the downturn. “If they can become cash-flow positive, then they can control their own destiny.”
But the $3 million to $5 million round isn’t going away, said Edward “Ned” Williams III, a partner at Brook Venture Partners in Wakefield. There are still going to be companies that need cash to go after big opportunities, he said, and in a down market, there will be good opportunities for VCs who are still looking for new investments.
“If fewer dollars are chasing the same amount of deals, definitionally your valuations are going to be less,” he said. “Call us value investors.”
In fact, Arnette was back in downtown Boston Tuesday, meeting with possible venture investors. The difference is, now the company’s Series A round will look more like a typical “B” or “C” round, focused on quickly expanding a business model proven on a very lean budget.
On the other hand, Medford-based Ticket Stumbler Inc. isn’t looking for venture capital at all. It isn’t using the cloud, either, but traffic on TicketStumbler.com, the event ticket resale aggregator’s website, is growing 50 percent a month.
“We don’t even have a financial model,” said co-founder Dan Haubert. “Just going that whole route is very time-consuming when we could be building and talking to our users and improving the site.”
The two-person company uses an open-source platform to quickly add features. Its all-in monthly burn rate is “in the low four figures,” Haubert said.
“Everything keeps growing,” Haubert said. Right now, “Any sort of valuation we got, it wouldn’t reflect how fast we’re growing.”
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