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Web-centric entrepreneurs find models that attract investment

Madison, Wis. - Five years removed from the dotcom bubble, when adolescent business models were scorching investors and questioning the value of the online world, new business models that investors find attractive are emerging. The models are both progressive in their cutting-edge approach to business and traditional in their adherence to financial realities.

The picture of those business models was made clearer by a panel of Internet entrepreneurs who came together at the recent Wisconsin Early Stage Symposium to discuss the types of web-based ventures that are “attracting capital and showing promise” in today's market.

I was privileged to be on the panel, which included Jellyfish.com CEO Brian Wiegand and Securitas Technologies founder Praveen Sinha. Scott Button of Venture Investors offered the perspective of the venture capitalists. Foley & Lardner attorney Chris Cain, who formerly was with Sonic Foundry, moderated the discussion based on his insights from working with entrepreneurial ventures.

The panelists were rich in experience from more than half a dozen software and web-based start-ups - many venture-backed during the industry's darkest hours. Several of the entrepreneurs have gone full cycle and are enjoying recent successful exits, with that insight adding to the exchange of ideas. In addition, the panel's entrepreneurs are on to their next web-based ventures. Overall, the situation provided a glimpse of where these serial entrepreneurs see opportunity in a maturing Internet business world.

Before launching Jellyfish.com with business partner Mark McGuire earlier this year, Wiegand established venture-backed NameProtect.com and BizFilings.com. Both remain strong businesses.
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Sinha's first venture was UltraVisual, a software medical imaging company he co-founded; it later merged with Emageon, a company that did a successful IPO last year and which currently has a market capital value in excess of $300 million.

I drew on my experiences at Doral Systems Corp. and venture-backed Mortgagebot, each fast-growing Inc. 500 companies that leveraged technology for growth as an outsourced managed service business and a “software-as-a-service” business, respectively. Mortgagebot was recently acquired by a private equity firm for $94 million.

The three serial entrepreneurs have created hundreds of “New Economy” jobs; mostly software development positions in previous ventures with annual aggregate salaries that topped $20 million. If they're successful again, the panelists are expecting to hire nearly 100 software developers over the next three years.

As the Internet and the businesses that leverage it have matured, a couple of themes came through in the discussion.

Revenue models

Clearly, the revenue model for traditional software-centric businesses has evolved. That isn't news, but the newer models are becoming entrenched and are attracting customers and capital. Most of the businesses represented on the panel were driving revenue, not through licensing but, rather, from subscription fees, success fees, or transaction fees. Some combined those revenue drivers with professional services.

All of the panelists' new businesses were hosted, web-based solutions, not client-based software.

Customers are clearly warming to the new model, since it allows quick adoption and lower monthly costs without the infrastructure headaches and implementation delays found in internally supported solutions. Internet entrepreneurs like the scale of hosted solutions and quick deployment of new customers. Investors like the utility-like nature of recurring revenue and the ability of the model to foster development of a “sticky” customer base less likely to abandon the company for a competitive option.

Market opportunities

The markets served by the panelists' companies were varied and in many cases opportunistic and not about deep-rooted complex technology. Wiegand has a knack for creating businesses in response to frustrations that he experienced in his day-to-day life with existing business models. BizFilings started when Wiegand found out he had to pay “$2,500 to my lawyer to incorporate one of my businesses.” Why couldn't that be done online at a fraction of the cost? BizFilings.com was the answer.

The business model for Jellyfish came from Wiegand's aggravation with his online shopping experience. He wondered why the company that pays more for search result placement ends up at the top, when what the searcher is looking for is the best price.

Sinha sees opportunities to transfer technology out of the Wisconsin Alumni Research Foundation portfolio. “I found the technology developed at the UW-Computer Science Department by Dr. Somesh Jha and his colleagues to hold exciting promise in dealing with the next generation of malware (viruses, spyware, Trojan, etc.)," he said "After researching the market, I believe the technology to be far superior to what is currently being used.”

For me, success has come most often through partnering with visionary industry experts. These stand-out individuals have shared the attributes of an instinctive entrepreneurial mindset, deep understanding of their markets, and a strong appreciation for the importance of a compelling value proposition to stakeholders. I have been able to bring my perspective to the mix and show how the proper use of technology can create dramatic scale and leverage to a business model.

In the businesses I've been a principal in to date, none of the technology deployed has been groundbreaking or rooted in deep science. However, its specific application has enabled business models and created offerings that the targeted market has found novel and embraced enthusiastically. Winning companies have resulted when the technology has enabled the business model, and the business model has in turn validated and guided the technology.

Raising capital

For many investors, it's essential that you have existing revenue to be considered for financing. That's particularly true of Wisconsin investors, who are very pragmatic. They want to see revenue traction early to prove out the business concept.

Button (Venture Investors) confirmed that in remarks at the symposium, saying, “We'd probably run for the hills” if an entrepreneur sought financing based on the promise of making money in the future.

Another factor often cited as important to venture investors is the presence of good management. But it's not always essential to have the right people currently on board; what is important is the willingness to be open to bringing on good business people, Button said. If the entrepreneur has great technology but not-so-great business skills, he or she needs to recognize that shortcoming before investors will seriously consider a deal, he said.

There are plenty of examples where the best technology didn't win in the marketplace because a lesser technology had better business management behind it.

Mortgagebot is a good example of success based on a proven, viable revenue model, a good, experienced management team, and scaleable technology to drive value.

As the Jellyfish model shows, however, innovation is important, particularly innovation based on intellectual property or surrounded by barriers to potential competition, Button said. “We're very focused on models that have strong IP or walls around them,” he said. And there is unwritten IP to consider as well, which includes “know how” and business practice trade secrets.

Previous articles by Geoff Bastow

Geoff Bastow: New Silicon Pastures director envisions more home cooking for Wisconsin angels

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Geoff Bastow is an entrepreneur, software and business architect, private equity investor and CEO of Thin Air Software. He has founded or co-founded four technology companies in Wisconsin, in both bootstrapped and venture-backed environments. He can be reached at geoff.bastow@thinairsoftware.com.

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