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

8/7/08Follow @gthuang

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 the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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  • http://www.rescuetime.com Tony Wright

    Great article– thanks! I would like to clarify a bit– mostly about the headline. It should be noted that we on the tail end of fund-raising ourselves. We’ve talked to several VCs (mostly ones who are shifting to be open to a lower dollar amount than the $3m+ that is historically so common)

    I do believe that MOST ideas for software startups can be “tested” in the market with very little money (which is what we did). Bootstrapping and increasingly important small-dollar investment can allow tech-centric teams to get a core offering into play to see if anyone responds.

    The danger here is to assume that the new model is “overnight success”. Just take 3 months, whip up a prototype, and it’s either pass/fail. You either sit back and watch it rocket to the top or you shut it down as a failure. While the instant scenario does happen, the reality of success stories is that you take a glimmer of user/customer satisfaction with your initial offering and build on it. For years.

    Depending on your model and goals, this trajectory might require (or at least benefit from) investment after the concept is proven in the market. For some ideas, big money VC investments is really valuable (notably, enterprise B2B plays).

    Great post by Matt Mullenweg (founder of WordPress) on overnight successes here: http://ma.tt/2007/05/meaningful-overnight-relationship/

    I wrote a bit about the transition from early market validation to profitability in a post called “Bootstrappers Beware” at
    tonywright.com/2008/bootstrappers-beware/

  • http://www.aspiresys.com Manoj prasad

    The concept of a “one-man” software company is becoming more and more realistic. A visionary with a great idea can get that idea out into the market with as low an investment and risk as possible.

    Working with an OPD company i have seen several instances of people who come to us with an idea for a software product. We then step in to completely take onus of the conceptualization, the development, the testing and the implementation of the product.

    A huge VC funding and an elaborate office infrastructure is not necessarily needed when the work can be done with a key skeleton team. In fact, the energy (and whatever available funds) can be better utilized to the more needed (and profitable) marketing and sales activities.

  • http://www.makinglifeezy.com.au Cam G

    Interesting post and the comments.

    I have observed a gap though between the incubator and the traditional area of VC’s.

    We went through the incubator model, put ourselves on starvation wages in order to prove that we had a market.

    In order to expand further, we didnt need $5m that VC’s, for the very reasons Tony Wright outlined. Costs in particular staff costs have come down significantly.