Software Startups No Longer Need As Much Venture Capital, Says Founder of RescueTime

Venture financing—who needs it? Not early-stage software and Web startups, if you ask Tony Wright. I sat down with the serial entrepreneur and founder of Seattle-based RescueTime yesterday, and he had some intriguing thoughts about recent trends in the innovation community.

“The nature of VC is changing,” he said. “The notion of a ‘big launch’ is dead… The magic of something that takes hold in the market is not financially driven.” Instead, it’s about “running an experiment to see if the market has an interest in it. You don’t need venture capital for that.” What has changed in the past five years, Wright says, is that talent has gotten cheaper, software tools are even cheaper, and IT and Web infrastructure have become readily available and incredibly cheap. It used to be you needed $250,000 just to get started on a major software project. “Now it’s for relative pennies,” he says.

So the new model for getting software startups off the ground involves incubators and small investments, like the Boston and Bay Area-based Y Combinator, and Seattle-based Founder’s Co-op. Pay a two- or three-person team bread-and-water wages for a few months, say a total of $20,000, and see if it works. If it does, the company can then raise more money.

Case in point: RescueTime, which sells a Web-based tool which you can use to monitor how much time you spend on email and other applications. It got its official start in January as a Y Combinator-supported startup. The service now has more than 50,000 users, tens of millions of person-hours’ worth of data on how computer users spend their time, and an increasing number of corporate customers interested in the software as a productivity tool.

Wright thinks the question to ask VCs is, do you still believe you can help software startups? And if so, how do you make a $5 million investment actually work? Sounds like a challenge to me, one that I’m sure investors are grappling with as they try to find the next Amazon or Google. Wright also had many observations about local entrepreneurship and his company, which I’ll have to save for another time.

Finally, the hypothetical question came up of which three Seattle-area startups Wright would choose to invest in—besides his own, of course. His list looks like this:

—WidgetBucks, an advertising network that recently raised $10 million.

iLike, a music-discovery spinoff of Garageband.com that has more than 30 million users and has attracted investment from the likes of Khosla Ventures and Ticketmaster.

—Whatever the next startup is from Kelly Smith, co-founder of Imagekind (sold to CafePress last month for $15 million-plus). It’s still in stealth mode.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and Editor of Xconomy Boston. E-mail him at gthuang [at] xconomy.com. Follow @gthuang

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