High hurdles for tech start-ups
Venture investors are back, but they want to invest in young companies that boast global skill sets.
Today venture capital is flowing more freely than at any other time in the past four years amid an improving marketplace for IT products and services. Yet the costs of operating globally to reach still-cautious corporate customers are hurdles that are increasingly difficult for many technology start-ups to clear.
How difficult? Well, listen to J.P. Rangaswami, global chief information officer of Dresdner Kleinwort Wasserstein, the Frankfurt-based investment banking subsidiary of insurer Allianz. He says he'll consider buying hardware or software from a start-up only if it has a strong management team that can cope with another tech spending downturn, a solid funding base to survive that inevitable downturn and a consistent strategy that indicates the start-up will be able to support anything Dresdner Kleinwort Wasserstein might need from it in the future.
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Oh, and any prospective vendor to Dresdner Kleinwort Wasserstein must also boast cutting-edge technology that will solve a variety of the investment bank's problems simultaneously, Rangaswami says. No easy feat, obviously, but start-up executives everywhere hear these same demands from potential customers all the time. Worse still, venture capitalists are well aware of customers' demands when they conduct their due diligence on potential start-up investment opportunities.
To cope with these new realities, Portaga, a White Plains, N.Y.-based software start-up, is angling to survive and thrive by targeting the corporate marketplace with software that automates travel planning on an individual's desktop. The software updates flight changes automatically in customers' Outlook e-mail windows and allows customers to change travel plans without entering a credit card number each time.
The product sounds decidedly retail, but Portaga targets companies that have fewer than 500 employees and which don't have an exclusive travel agent. And the company offers its software through larger, travel-oriented companies. So far, it has signed a deal with Cendant's Avis car rental unit, and it plans to announce a partnership with Sabre Holdings of Southlake, Texas, in a few months.
Portaga CEO and founder Robert Kost aims to have his newfangled travel software on 500,000 desktops within a few years. Portaga earns between $1 and $3 for every $1,000 spent by consumers on others' Web sites. Its success will depend on its ability to further penetrate that corporate market.
The company has raised a first round of funding for an undisclosed amount from West Conshohocken, Pa.-based First Round Capital; Fort Lee, N.J.-based Geocapital Partners; and Cove Harbor Partners and Genesys Partners, both of New York. Kost seeks second-round financing now and hopes VCs believe Portaga can thrive, thanks in part to the global reach it can achieve via its corporate partners.
Another start-up seeking to penetrate the corporate market and negotiate fair revenue-sharing agreements is Medio Systems. The Seattle company makes a search engine for mobile phones and handheld devices. Anyone familiar with the Wireless Application Protocol, or WAP, technology--which is used to search on mobile phones by scrolling through screen after screen before arriving at the desired page--knows how useful a direct and accurate mobile search function would be.
The problem for start-ups trying to develop such an efficient WAP search function, says Ken Gullicksen, a general partner at Morgenthaler Ventures, is that even if the technology works, "it's difficult to build a large company doing this through telecommunications partners." But Medio, founded last year, raised an undisclosed amount of seed-stage financing from Silicon Valley venture firms Mohr, Davidow Ventures and Dot Edu Ventures, and it hopes to earn revenue by sharing monthly subscription fees paid to mobile phone carriers by selling ads and content around the search results.
CEO Brian Lent acknowledges that no large, independent tech companies have been built by sharing revenue with mobile phone carriers, though he notes that Jamdat Mobile of Los Angeles and Openwave Systems of Redwood City, Calif., are making a run at long-term success with different types of mobile services offered through the carriers. Jamdat offers mobile games; Openwave sells location communications software.
These two companies have proved that the business model works; the carrier shares the revenue earned from the data portion of the mobile phone subscription or on a per download basis. But will it work for ads?
Perhaps in Asia, mobile-phone-crazed consumers will download ads, but it hardly sounds like something U.S. or European mobile phone users will leap at. Lent, however, argues that mobile telephony is the only major communications medium that has not embraced ads as a potential revenue source. And he's right. The potential is enormous, and global carriers may well realize that sharing revenue with technology and media partners is a way to explore the opportunity.
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