Tech start-up scene poised for revival

Young companies are getting hold of seed money and hiring--yes, hiring. Just don't expect to hear any booms.

Tech Industry
Mauro Bonomi has another wad of venture capital cash and is hiring tech talent again in the United States--but not like he did during the dot-com boom.

Bonomi recently landed about $10 million in venture funding for his company, Minerva Networks, which makes software that lets phone companies offer television services. This year, the 65-person, Santa Clara, Calif.-based company aims to hire 30 to 35 people, half or more of them likely to be computer professionals based in Silicon Valley or other parts of the United States.

Rapid growth, to be sure. But Bonomi says he would have brought on close to 80 people if the year were still 1999, when he led a software company focused on the DVD-publishing market and was part of the era's culture: Hire first, figure out how to increase revenue second.

News.context

What's new:
Venture capitalists have been raising new funds at a fast clip, and the money is expected to fuel a new wave of investments in a variety of tech fields.

Bottom line:
Technology pros have reason to be cautiously optimistic about jobs at start-up companies. But the scale of the funding likely will not rival that of the last Internet craze, and some of the positions created by new firms are likely to be located offshore.

More stories on venture capital

"The approach is going to be more cautious," Bonomi said. "Companies are trying to drive the top line before they add the people."

As Bonomi suggests, technology professionals have reason to be cautiously optimistic about jobs at start-up companies. Venture capitalists have been raising new funds at a fast clip, and the money is expected to fuel a new wave of investments in fields including energy, wireless communications and the Internet. But the scale of the funding likely will not rival that of the last Internet craze, and some of the positions created by new companies are likely to be located offshore.

Even so, new infusions of venture capital and seed money from individual "angel" investors are translating into real jobs again for computer pros in Silicon Valley, says Laura Roden, who sits on the board of the Silicon Valley Association of Startup Entrepreneurs.

"It seems to me that there is a resurgence," said Roden, who knows scores of managers and experienced software developers in the region. "The good people are all being hired."

No Internet Gold Rush
A flurry of hiring by new tech companies is good news to workers in the tech industry, who weathered hundreds of thousands of job cuts in the wake of the Internet bust. Silicon Valley, the heart of America's tech industry, has been losing jobs in the fields of software, semiconductors, and computer and communications hardware.

A recent report indicated that the U.S. tech industry may have reached the bottom of the trough last year when it comes to employment. But the average number of unemployed workers in nine high-tech categories remained close to 150,000 in 2004, according to the U.S. Labor Department. And in the first three months of this year, technology companies slashed nearly 60,000 U.S. jobs, according to another study.

U.S. venture capital, 1990-2004
U.S. venture capital, 1990-2004

The current climate is by no means a return to the heady times for tech start-ups five years ago or so. U.S. venture capital investment more than doubled in 1999 to $54 billion, and nearly doubled again to $105 billion in 2000 before dropping to $19 billion by 2003, according to research by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. Last year marked the first annual increase in VC investment since 2000. But the total for 2004 was $21 billion--a fifth of what was plowed into start-ups during the dot-com peak.

Venture capitalists invested $4.6 billion in the first quarter of 2005, according to a survey by the above-mentioned companies.

Back in the go-go days, nascent technology companies were caught up in a kind of arms race, which necessitated hiring lots of people, said Warren Packard, managing director at venture capital firm Draper Fisher Jurvetson. In the absence of revenue, a company's headcount was used as a means to measure its value, he said.

The same frenzied pressure to dominate a segment of the market no longer squeezes entrepreneurs, allowing them to "take time to build a business," Packard said.

Though the pace may have slowed, the start-up scene seems poised for a revival of sorts. For one thing, venture capitalists have been refilling their tanks. Venture capital funds raised $17.3 billion last year, up from $10.6 billion in 2003. The increase signals that VCs are creating new investment coffers as funds built five years ago or so are drying up, said Mark Heesen, president of the National Venture Capital Association trade group.

Fundraising by venture funds, 2000-2004
Fundraising by venture funds, 2000-2004

Heesen said VCs are deliberately starting smaller funds than they had during the Internet boom--they might be $400 million as opposed to $1 billion. This, he explained, allows VCs to avoid throwing money at "me-too" companies. Even so, the recent fundraising bodes well for start-up activity. "It will begin a new cycle," Heesen said. "The next cycle will mean that more early-stage investment will be done." He added that some portion of the new funding will go uncounted in official statistics, as VCs try to keep their companies in "stealth mode."

Another factor behind the start-up surge is the return of angel investors, said Roden, who is managing director of The Angels' Forum, a group of 25 private equity investors. Angel investors, who typically pony up less than $1 million to nascent companies, had retreated from the start-up scene during the tech downturn as their investments lost value, Roden said.

Energy, open source and podcasting
Among areas that are "hot" these days for start-ups are the consumer Internet realm and energy, said Sam Jadallah, general partner at venture capital firm Mohr Davidow Ventures. Jadallah's firm has invested in Jadoo Power Systems, a company near Sacramento, Calif., that makes fuel cells for professional video cameras and other machines.

"We also see open source as a pretty vibrant space," he said.

Packard cites as promising turf the "mobile space"--including Wi-Fi and WiMax technologies. The relatively new content-delivery techniques of Really Simple Syndication (RSS), blogs and podcasting also are interesting, he said. "The things programmers do in their spare time often relate to the very opportunities we're starting companies around," he said.

Also in demand at start-ups these days are the network administration or database chops that come from working at a company like eBay, Roden said. "There's a shortage of information technology people who have experience managing high volumes of electronic transactions," she said.

All this start-up activity, however, doesn't seem likely to trigger a torrent of new tech jobs for Americans. Newbie companies tend to have limited job openings, Heesen said. "You don't need too many folks when you're working out of your garage or in an incubator," he said.

What's more, many of today's start-ups send some of their development work to lower-wage nations, according to Shawn Carolan, managing director at venture capital firm Menlo Ventures. Carolan said probably more than half of software start-ups ship work offshore. "It's often a small percentage" of the work, Carolan said, "15 to 20 percent perhaps."

The fact that many nascent companies distribute their work across different locations--including to various parts of the United States--marks "a seismic shift from a few years ago," Jadallah said.

The change has come as telecommunications costs have dropped, collaborative technologies such as instant messaging have emerged, and companies have found that they can develop software in India for roughly half of what it costs in the United States.

India-based is benefiting from this trend. The company, which assists both start-up and established software companies in developing their products, added nearly 950 employees in the past year, for a total of 1,700. A typical software start-up may begin with 20 to 30 of its own in-house engineers in the United States and five or six Persistent engineers working out of India, said Ravi Krishnamurthy, president of Persistent's U.S. subsidiary. As the customer and Persistent grow more comfortable with each other over the course of a year or so, the Indian head count may jump to 30 or 40 engineers.

This approach suggests that tech jobs that may have remained in the United States in the past are migrating offshore--a major concern of some technology professionals. But working with Persistent doesn't mean U.S. software developers at start-ups lose their jobs. The company says the same U.S. workers typically move to higher-level jobs, such as product management and design.

By tapping the skills of offshore developers in India for tasks such as research and design, quality assurance and documentation, new U.S. companies can reap benefits, such as getting their products to market faster, according to Persistent.

But there's some skepticism in the VC community about sending a start-up's work halfway around the world. It's not simple to manage far-flung projects well, and start-ups can miss out on the benefits of watercooler conversations, Jadallah argues. "If you do it purely as a cost-driven thing, without the background or expertise, you never (get) the cost-savings you anticipate," he said.

Bonomi said that beginning in 2006 his company may hire some software developers offshore. But even then the "core" work on the product would be done in the United States, where his client base of largely rural telecommunications companies is located. "We are really developing brand-new technology," he said. "It requires a very close interaction with customers."

On the other hand, his U.S. hiring strategy is a far cry from the days of snapping up engineering talent as fast as he could. Borrowing a concept from Michael Dell and his lean manufacturing method, Bonomi says he's doing "just-in-time" software development. For instance, he knows he'll need more programmers to ensure that his code can handle 1 million video subscribers, up from the 100,000 he knows it can handle today. But, he said, "That problem is a problem we're going to face in six months."

Even if this generation of tech start-ups is hiring in a more guarded fashion than the last one did, today's new companies could well generate plenty of U.S. jobs over time, argues Heesen of the National Venture Capital Association. After all, he said, one in 10 Americans works for a company that was once venture-backed. "These are the next FedExes, Genentechs, Intels, Googles and eBays," he said.

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