How the earliest of tech startups are surviving

"Alpha" companies at DEMO are self-funded, run by part-time CEOs

For several DEMO startups, building a new company is a part-time job.

Ah, the glamour of building a brand-new tech company… invitations to the Playboy Mansion, all-night booze cruises on your private yacht, and sometimes a little work thrown in just to keep you grounded.

Right? Actually, it's more like this: set up shop in cheap office space or your basement, empty your bank account and 401k to fund your brilliant idea, and work two full-time jobs while only getting paid for one of them. If it works, congratulations! You're the next Mark Zuckerberg (he founded Facebook with his college roommates). If it doesn't, start over with even less money than you had before.

That's basically the life faced by many of the newest entrepreneurs featured at this week's DEMO conference for emerging technologies. DEMO last year began including "Alpha" companies, startups that aren't quite as far along in their development as the featured presenters. There were 14 of them this week in Palm Desert, Calif.

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Jorge Vasquez, CEO of SocialOrbits, maker of a collaborative travel reservation and event planning app, has launched his company with $15,000 to $20,000 taken from his bank account and 401k, and has four employees that he doesn't pay.

An assistant vice president in a Merrill Lynch trading division, Vasquez says "I work all day during the day. I get done at 5, I come home and the first thing I do is walk in my office and I'm right at work."

Calling it a night at midnight "would be a good day," Vasquez says.

Yuan Zhang of DEMO Alpha presenter UppyMedia, which makes a fashion-focused application for Facebook, is an actuary by day and CEO and founder by night. Her director of marketing, Anna Yuan, works in business development for the semiconductor industry.

Starting a new company "is very exciting," Zhang says. "We said yesterday while we were preparing the company profile and the pitch that we wish we could do this all day, 24/7."

A similar experience is reported by Flinc, a German company with a real-time ride-sharing system.

"We are very lean," says Flinc CEO Klaus Dibbern. "We live in an incubator at a university where we don't pay any rent. Nobody has any salary. We're a seven-person team right now. Out of those, three during day time go out to different jobs. It's extremely lean, there is no money spent. [Appearing at DEMO, which cost $5,000 plus travel expenses] is the biggest expenditure we've had so far."

Alpha companies like SocialOrbits, UppyMedia and Flinc are looking for money from venture capitalists and other investors, but face an economy in which the venture cash available to tech startups has shrunk considerably.

Eric Liao, CEO and co-founder of MEDL Technology, has gotten off the ground with more than $100,000 of his own money, keeping costs low by locating most of his team in China. Obtaining external financing is particularly tough for MEDL because building hardware is more capital-intensive than building software (MEDL's product is a multi-purpose LCD screen for both consumer and business users).

"It's even more difficult for us because we're doing consumer electronics," Liao says. "If you're doing software it's a lot more lucrative in terms of the return."

Vasquez is looking for angel investment funding, and says venture capitalists are likely out of his league.

"It's been incredibly difficult," Vasquez says. "When you say you're self-funded and that tiny it's almost not worth their time. At this point unless we find an angel investor you've almost got to feel like you're going to go at it on your own. Were not a big enough fish in a VC's pond."

Zhang of UppyMedia says she can run the company without external investment, but that $150,000 in cash would help hire full-time staff and get the product into beta a bit faster.

"The key is we don't really even need that money to keep our company running," she says. "We have been bootstrapping and we haven't even spent much money yet. The key is we can keep it going, just a little slower if we don't have funding, but we'll be able to do it."

There are some advantages to starting up in a bad economy, several Alpha pitchers said. Liao says distributors for parts and components have more time to connect with him than they otherwise might if business were not so slow. "A lot of people wanted to work with us because they needed business," he says.

Vasquez says the economy has made it easier to find Web developers with time on their hands.

"There were Web developers when I started this two years ago who were acting like they couldn't give me 10 minutes," he says. "Now they're like ‘well sure what do you have, we'll work around that.' That's what the economy has done, is give guys like me opportunity, which has been a huge benefit."

Zhang, whose software product runs on top of Facebook, says advancements in enabling technologies have made it easier to start a company with little money. "We don't need a million dollars to build an app that looks great," she says.

Bill Scheurer, the head of KarmaKorn, claims "this is the best time in the world to be starting a company," for the same reason that stock traders want to buy low and sell high. KarmaKorn, which aims to create a virtual currency to promote charitable actions, is self-funded as of now but Scheurer said he is confident in obtaining venture capital money.

The MoneyTree Report and other research on venture capital in the United States show clearly that investments have decreased markedly, particularly for the newest companies. But Scheurer says there is also less "clutter" in the tech market, making it easier to get on investors' radar.

Investors "are smart enough to know how they got burned and where they got burned," he says. "They're smart enough to see real value, real potential. And they're smart enough to tell us the things they need to see."

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Copyright © 2010 IDG Communications, Inc.

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