Seattle discovers prudence

Seattle (AP) – founder and chief executive Elie Finegold had no problem raising capital for his company, which matches those seeking office space to those who have it to lease.

Since the company was founded in 1998, Finegold managed to raise $3.5 million. But in August, when his business plan called for a final round of funding – for use in the company’s official launch – it wasn’t there.

So laid off 17 of its 39 employees and pushed back its October launch to date.

Across Lake Washington in Bellevue, Usama Fayyad was in a different situation. His six-month-old company, digiMine, had to choose which venture capitalists to take money from.

“It was really unexpected, because they actually came to us.”

Fayyad said: “I didn’t realize we were going to grow so fast, but they frove the process and it was wrapped up in all of two weeks.”

The difference illustrates the changes that have taken the Seattle technology industry by storm in 2000. Gone are the exuberant dot.coms, hoping to sell everything from T-shirts to beauty products online. Gone too are the venture capital dollars for such ventures.

However, venture capitalists are quick to point out it’s still possible to make it big in e-commerce. But there’s a new emphasis out there, a term unheard of in the head days of, well, last year: fiscal responsibility.

‘The rules are actually the same’

“There was so much enthusiasm, and there were a lot of different business models out there that got funded,” said Todd Francis, a partner at Trinity Ventures. “There truly was a feeling out there that the rules had changed, but the rules are actually the same. You need a good product or service, a good management team, and a clear path to profitability.”

Path to profitability – the new buzzphrase of the post-internet economy. The Seattle stalwart of the world’s e-commerce sites, (AMZ: Research, Estimates), has even started using the phrase to appease angry Wall Street analysts who feel the company hasn’t been forthcoming enough with its plans to actually make money.

For smaller companies, it’s been even harder, especially after April 14, when the Nasdaq fell 355 points and the Dow plummeted 617 points. The dot.coms were hit hard, and many plans for initial public offerings were shelved.

One of those postponed IPOs belonged to Rival Network – formerly before the phrase “” become unfashionable. The company laid off 40 people in July, even though it had received $35 million in venture finding in February. Small business Web site (ONVI: Research, Estimates), which went public in March before the correction, has seen its stock price fall from a first-day high of $78 per share to under $5 per share this week.

Some are still going strong

That’s not to say that content and e-commerce sites are all bust. Despite laying off 10 people earlier this year, online jeweler is still going strong.

Of course, part of that comes from the peculiar nature of the jewelry business. Jewelry is a high-margin business to begin with, and even with insurance, shipping costs are low. Plus, the company doesn’t have to deal with the usual commissions that other jewelers pay their sales staff.

“We have a very different business than most e-commerce sites,” said BlueNile chief executive Mark Vadon. “We have great margins on what we do, and that will bring us to profitability a lot more comfortably than other businesses out there.”

In the meantime, deals are still being made with new startups.

Money heading toward Web services

“But I think since April 14, you’re finding that there are better deals being made. The entrepreneurs are coming up with better plans,” said Jon Staenberg, a venture capitalist and founder of Staenberg Venture Partners.

Today, the smart money seems to be heading toward Web services – complex programs that can be accessed and used by businesses and consumers over the Internet.

DigiMine, for example, is a Web service that provides data mining and database housing for small to mid-size companies. Instead of such companies having to pay for expensive database software and the computers to hour it, they use digiMine not only keeps the data, but to make it accessible over the Internet as well as provide the tools for those companies to “mine” the data to find trends and other information.

In addition, CrossGain Corp., headed by long-time Microsoft executive Tod Nielsen, and, another enclave of Microsoft alumni, are both making tools that will help bring unprecedented interactivity to the Internet, much in the same mold as Microsoft Corp.’s (MSFT: Research, Estimates) .NET strategy.

These firms are working to help others link their current computing networks to the Internet, making it easy to do just about anything online, from anywhere in the world. Imagine, for example, having access to everything in your office, online and at your fingertips instead of tucked away in filing cabinets.

“I don’t think Seattle ever went away,” Nielsen said. “I think it just changed and evolved, like it should.”

Source: CNN fn


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