Burned dot-coms offer lessons

When Silicon Valley entrepreneur Bill Nguyen launched two technology companies during the late-1990s dot-com boom —Seven Networks and Onebox — each went through about $2 million a month. The startups hired hundreds of people and spent heavily on marketing and sales.

That’s not how Nguyen is using cash at his newest startup, music Web site Lala.com.

Since getting $9 million in venture-capital funding in mid-2005, Lala Media Inc. has stashed 60 percent of that money in the bank. Nguyen has hired just 20 people for Lala, most of whom are engineers. The Palo Alto, Calif., company has spent little on marketing and sales. Its staff members built some of the desks they use in the office and sometimes play janitor to scrimp. Lala is currently burning through about $200,000 a month, says Nguyen.

“When you got venture-capital money previously, many people thought you immediately needed to spend it by hiring 40 or 50 people,” says Nguyen. “Now we view the money as just an asset and not an immediate license to spend.”

Stories like Nguyen’s have become a defining element of a new tech boom that has some echoes of the dot-com bubble. While startups in Silicon Valley and other entrepreneurial enclaves are once again proliferating, they spend cash differently.

Past excesses were exemplified by startups such as online pet store Pets.com Inc., which burned through $110 million in 1999 and 2000 — including spending an estimated $25 million on advertising in venue likes the Super Bowl. Those dot-coms typically staffed up quickly with dozens of new recruits, and were known for lavish launch parties and other expensive marketing.

Today’s startups, by contrast, often hire just one or two new staffers a month, hoard cash and find inexpensive ways to attract attention, such as limited Internet advertising and more reliance on word of mouth through Web users. The result: Startups’ “burn rates” — Silicon Valley parlance for how much cash a young company with little revenues and no profits goes through each month — are noticeably lower than in the past.

Indeed, while tech startups are raising less funding these days — an average of $8 million each time, down from $11 million in 2000 — they are making the money last longer. According to research firm VentureOne, tech startups in Silicon Valley now survive an average of 17 months on a single round of funding before needing to raise more money, up from 10 months in 2000.

All of this suggests that the current tech boom may play out differently than the dot-com frenzy, which ultimately ended in a swift and paralyzing crash in 2000. While many startups will still fail, those with more money saved up are lasting longer than their dot-com predecessors. Many may endure long enough to become profitable, even if they never reach the stratospheric heights of a Google Inc. or YouTube. So when a bust hits, unlike the dot-com crash, it could shape up to be a more gentle decline with the impact more dispersed over time.

“Any crash this time won’t be as precipitous as in 2000,” says Roelof Botha, a venture capitalist at Sequoia Capital and former chief financial officer of electronic-payments company Pay-Pal Inc. “Because startups aren’t going through cash at such a blistering pace, that gives companies more time to figure out what works in their business.”

Botha notes that spending habits at his former company, PayPal, are no longer emulated. PayPal, founded in 1998 and now owned by eBay Inc., burned through about $10 million a month in mid-2000 to maintain a staff of 200. In total, PayPal spent $150 million before it finally broke even. “Tech companies now take far less money to get to profitability,” says Botha.

Aiding today’s trend of startup parsimony are factors such as cheaper technology. While startups once spent millions of dollars on expensive computers and software, many new companies can now instead exploit inexpensive server systems, open-source programs (modifiable software that comes in free or inexpensive versions) or Web-based services to build and launch their products. What’s more, more startups are now using cheaper labor overseas, such as in India, which lowers continuing operational costs.

Dot-coms also previously shelled out millions to sign up registered users, spending an average of $35 on advertising, sales and other promotions to get just one user, say venture capitalists. But with Net access t now far more mainstream, startups don’t need to spend wildly to get attention from consumers.

“We can start super-cheap these days,” says Seth Sternberg, a co-founder and chief executive of Meebo Inc., a Web-based instant-messaging startup in Palo Alto. When Meebo launched in late 2005, Sternberg recalls it took just a shoestring budget, with four people who worked out of their homes. “You just don’t really need too many people anymore.”

Now Meebo, which raised $3.5 million in venture funding in December 2005, is spending about $160,000 a month on its business and 12 employees, says Sternberg. More than half of the firm’s money remains in the bank, he adds. When the company held a party to celebrate its one-year anniversary in September, the shindig was held in an office parking lot to save money. Only tortilla chips, water and soda were served.