CNET también está disponible en español.

Ir a español

Don't show this again

Culture

High-stakes start-ups

Forget Sand Hill Road. Three San Francisco entrepreneurs are funding their software start-up with some killer online poker skills.

SAN FRANCISCO--Brad Meador's in luck. The virtual dealer at Eurobetpoker.com has just dealt him a jack and an ace of hearts. A few seconds and clicks of the mouse later, he wins the $62 pot.

Poker--Texas Hold'em, to be precise--is his game, and he nets an average of $100 to $120 an hour at it.

"As a consultant--a job that required frequent travel to Austin--I made about that much," Meador says.

News.context

What's new:
Two of the three co-founders of San Francisco software start-up ClearContext help fund their company with their winnings from online poker.

Bottom line:
Drawing on experience from the dot-com bust, venture-capital firms increasingly focus on companies that already have paying customers, leaving start-ups such as ClearConnect to fund themselves.

More stories on this topic

Sitting at his desk in a small, stuffy office in a gritty corner of San Francisco's South of Market district, Meador is nonchalant about the win. It's just another Wednesday morning at ClearContext, a software start-up that's keeping the lights on and the servers running with the aid of its founders' online poker winnings.

Meador, who is head of operations at ClearContext, and Deva Hazarika, the chief executive officer, have been playing poker in lieu of collecting paychecks for the past year while working to get their three-person company off the ground. After logging 50 or more hours a week at the office, each one spends another 10 to 15 hours, usually on weekends and evenings, at their favorite poker sites--mainly Partypoker.com, Ultimatebet.com and Pokerstars.

Meador, the lower-stakes player, makes enough to pay the bills in this high-rent town but not too much more.

"It's not enough to put away for retirement," says Meador, who's 34 and unmarried.

ClearContext, which makes a program that helps Microsoft Outlook users sort and organize their e-mail in-boxes, has certainly taken an unusual approach to venture financing. Yet the company's fund-raising technique may be a sign of the times in Silicon Valley, where entrepreneurs with new companies are adjusting to a more frugal reality after the go-go '90s.

No more easy money
While venture capital is on the rebound, funds have gravitated toward more mature companies--those with proven business plans, a lot of customers and steady revenues. Thomson Venture Economics, which is tracking the trend, reported recently that early stage companies grabbed just one-fifth of all venture capital investments last year. Historically, venture capitalists have invested about a third of their funds in such companies.

That's leaving many entrepreneurs, including Hazarika and Meador, to learn the art of bootstrapping a business.

ClearContext photos

"VCs are much more cautious about investing in concepts and now tend to wait until there is some proven customer traction," said Carl Haacke, founder of Skylight Consulting and author of "Frenzy: Bubbles, Busts, and How to Come Out Ahead."

"That means more entrepreneurs are bootstrapping and creating businesses while they are still employed," he said.

To demonstrate how picky venture capitalists have become, Haacke points to Delicious, a site that helps Web users organize their favorite Web links and share them with others, and Thefacebook, a site that lets college students browse each other's online profiles. Each company recently raked in a first-round venture capital investment, but only after they built enormous followings.

ClearContext isn't alone in taking unorthodox measures to drum up funding. One software entrepreneur in Denver who was desperate for venture financing recently relocated to Belfast, Northern Ireland, where he found willing investors, cheaper labor, and his first big customer, the BBC. The company, Fighting Bull Broadcast Technologies, makes software for monitoring TV and radio broadcasting equipment.

Although such measures may appear extreme, that kind of grit and sacrifice is actually a return to the norm, business experts said. An environment where money doesn't flow quite so easily is also likely to produce a stronger crop of start-ups for venture capitalists and angel investors to bankroll, they said.

"Entrepreneurs are always doing outrageous things to raise money--to get their passions turned into reality," Haacke said. "This (online poker) is a particularly vibrant one. But the issue is a return to normal."

For Meador and Hazarika, who met as students at Rice University, the respite from the high-pressure venture capital scene is a welcome one, at least for now. Each of them rode the highs and lows of the late-1990s Internet boom at other high-tech start-ups--an experience they'd rather not repeat.

Hazarika's wild ride began in 1996 with Moai Technologies, where he was a founder. The San Francisco software company was a player in the then-hot arena of online marketplaces for business supplies and services and followed the same arc as many other dot-coms in that market.

Moai raised $70 million in venture capital, hired 350 employees, and filed to sell its shares to the public. Then the Internet bust of 2000 hit and Moai withdrew its initial public offering plan. It ran up a big debt and sold itself to a Pittsburgh start-up for about $6 million.

"I can't even believe the way we spent money. Someone made a huge mistake."
--Brad Meador, ClearContext co-founder, on his experience with an early dot-com start-up

Meador had a taste of New Economy excesses as "culture czar" (his actual title) at Xcelerate, an Internet consulting firm based in Fort Lauderdale, Fla., with backing from the Carlyle Group and Idealab. At its peak, in 2001, the firm flew in 350 employees from across the country and put them up at a fancy Florida resort for the weekend.

Two months later, Meador was laying people off, including one of his best friends. "I can't even believe the way we spent money," he says. "Someone made a huge mistake."

Back to reality
At ClearContext--a one-room office in a plain two-story building next to a freeway overpass--Meador and Hazarika are getting in touch with their frugal sides. An empty cardboard box is perched precariously in front of a skylight on the rafters above. The box, along with the fan whirring in the doorway, helps reduce the afternoon heat, Meador explains.

The space is just big enough for the two of them and their chief technology officer, Frank Kang. Kang, whose wife brings in an executive salary, is the only one who doesn't play poker. He has a knack, though, for finding good deals on computer equipment offered on eBay.

"Frank is an expert at finding things really cheap," Meador says.

Glamorous it's not. But Meador says he's glad to be there. He says he turned down two other job offers, one of which paid a six-figure salary, to start ClearContext. He has high hopes for the company and its product, ClearContext Inbox Manager, which he is eager to demonstrate.

The program, which the company released in October for $29.95 a copy, is basically an Outlook add-on--one of hundreds of such products. But the product's mission is worthy: It's aimed at helping Outlook users who are overwhelmed by hundreds of e-mails every day sort and prioritize incoming messages.

After it's installed, a process that takes a matter of minutes, Inbox Manager uses a set of patent-pending algorithms to determine which messages are high-priority and shuttles them to the top of the in-box. The software also color-codes messages to signal their urgency or lack thereof and groups together all messages in a thread. The program takes its cues from numerous factors, including the sender of the message, the people to whom it's addressed and whether the user replies to it.

Outlook itself offers a rudimentary version of these features, but Inbox Manager is a much more sophisticated tool, Meador says. While Outlook can prioritize messages based on a single characteristic, Inbox Manager weighs several factors to create a composite score, giving it a more nuanced and accurate picture of message priority, he says. In addition, the program works in the background, fine-tuning rules based on the dynamics of a particular in-box, while Outlook requires users to set up and change rules by hand.

Internet users have downloaded thousands of copies of the free 30-day trial version of the program. The number of paying customers is in the hundreds and the biggest block are--who else?--Microsoft employees, Hazarika said.

Already at work on a 2.0 version of the program, Hazarika and Meador are trying to keep their expectations and their poker playing in check.

"It started as a hobby, but ended up being a revenue source that allowed us to keep paying ourselves and paying the rent," Hazarika said of online poker. "We definitely didn't plan on that. But there are many ways that entrepreneurs scramble to get the bills paid--this is one more example of that."

They hope to grow the company into a profitable and successful business that furnishes each of them with comfortable paychecks. If Microsoft or someone else offered to buy them for a few million dollars along the way, that wouldn't be so bad either, Meador said.

"I do hope there'll be some reward beyond what I'd make" going in another direction, he said. "But in the end, what's really important to me is to work at a small start-up with two guys I really trust."