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Valley Girl February 26, 2008, 12:01AM EST text size: TT

New York Comes to Silicon Valley

Look to recent funding deals for Ning and Slide to see evidence that Wall Street may be cutting out the middleman—venture capitalists

The relationship between the venture capitalists of Sand Hill Road and the securities firms and power investors of Wall Street has long been a cozy one. VCs hoping for a return on their investments will need banks eventually, while Wall Street needs VCs to nurture the most promising startups until they’re ready to go public.

Or do they?

Lately, some of New York’s biggest players have been cherry-picking the best pre-IPO investments for themselves. Marc Andreessen’s Ning was recently funded by Legg Mason (LM), T. Rowe Price (TROW), and Ziff Brothers Investments for a valuation of more than $200 million. Max Levchin’s Slide got $50 million from Fidelity Investments and T. Rowe Price, conferring a $550 million valuation on the maker of widgets for social networks (BusinessWeek.com, 1/18/08).

Predictably, pundits wrung their hands over sky-high valuations—missing entirely the real cause for alarm among Silicon Valley’s blue-shirt-and-khaki set: Wall Street is putting the squeeze on an already troubled VC community.

The VC Squeeze

If you’ve read anything I’ve written in the past eight years, you know I think the venture capital industry is in a bad way (BusinessWeek.com, 10/3/07). The calamity comes as ballooning global pension funds seeking better-than-broad market returns meet up with venture capitalists eager to fund the next Bill Gates, Steve Jobs, or Mark Zuckerberg (Facebook’s founder)—helping to create an entire asset class out of what probably should have remained a subset of niche investments.

The upshot: Very few firms are making so-called venture-style returns on all that money sloshing around Silicon Valley. Sure, last year’s initial-public-offering and acquisition numbers look good in the aggregate, but when you consider the time and money needed to birth all those “successes,” there were precious few home runs—and a lot of portfolio losses. Outside the handful of VCs that generate 90% of the industry’s returns, a lot of firms are struggling to stay viable.

VC life was already complicated by the so-called angel investors capable of parking big bucks in promising early-stage companies. A lot of hot startups are getting funding early on from angel investors who made their fortunes in the late 1990s. That, along with dramatically lower startup costs, means VCs are forced to buy in when the company is more mature and their funding brings far less ownership, and entrepreneurs are able to retain control in ways rarely seen in the Valley.

And now, thanks to Wall Street, VCs are also getting squeezed at the late-stage end. If even early-stage companies aren’t buying the mantra that VCs add value, provide guidance, etc., then surely a later-stage Web company that’s already reaching a large, valuable audience won’t. And as the Ning and Slide deals show, banks will almost always offer larger valuations—and meddle less.

An Elite Club

For Silicon Valley, the pinch may only worsen, thanks in large part to the efforts of Allen & Co. The New York firm is the expert matchmaker putting together name-brand entrepreneurs with a bank that wants them so bad, it’ll seemingly pay any price. Allen & Co. is heavily relationship-oriented, inviting the cream of the high-tech and media crop to its swanky Sun Valley Media Conference every summer. Where else can a young hotshot founder rub shoulders with Gates or News Corp.’s (NWS) Rupert Murdoch?

But don’t ask the notoriously media-shy Allen & Co. to weigh in on its power-brokering ways. Neither anyone at the firm nor those who do business with Allen & Co. would comment for this column. Last summer I asked a close friend of Allen & Co. if there was any way I could weasel my way into the conference as part of reporting on my book. “Few things in life are impossible, other than walking through a revolving door with skis over your shoulder and this,” I was told. Put another way, I found this July e-mail by searching my inbox for the words “no way in hell.”

Safe Bets

Allen & Co. isn’t entirely a black box, and Silicon Valley does well to understand how it works. While much of chummy Sand Hill Road runs on gut feeling, Allen & Co. relies more on armies of MBAs crunching numbers and running models. The firm does the hard work, finding and courting entrepreneurs, putting them through a due-diligence gauntlet, and then picking up the phone, calling a big institutional investor, and delivering a handsome investment package.

Wall Street institutions love this model for a few reasons. Instead of trying to cram more money into the few truly rock-star venture firms, they can go directly to the hottest companies. If the deal hits, they walk away with a bigger slice of the proceeds even if they have paid a higher valuation, all the while avoiding paying millions of dollars in “management fees” and absorbing losses on the inevitable dogs in a VC’s portfolio. If it misses, big deal. What’s $20 million in a startup compared with $1 billion of Google (GOOG) or Yahoo! (YHOO) stock?

Besides, with markets in turmoil, a modest investment in a private company that won’t go public for a few years represents a relatively safe bet. Even if values decline, the investment won’t have to be marked to market on a quarter-by-quarter basis.

However eager these non-Silicon Valley investors may be to get a slice of Bay Area action, they’re not throwing around money with no strings attached. Wall Street banks aren’t going to be happy with a modest acquisition. If they’re investing at these kinds of valuations, they expect a big swing-for-the-fences IPO at some point. It can take a few years, but there better be a big pot of gold somewhere.

What’s In the Stars?

And not all of these East-meets-West Coast deals are structured the same. Shakier startups too are raising money from institutions, sometimes at terms that are far harsher. I doubt No. 2 widget maker RockYou gets close to the same terms as its larger, star-studded competitor Slide. The companies that can demand the sweetheart deals need to have a great story and some serious star power. Would Ning be worth $250 million without Andreessen? Doubtful.

That means we may not see many more deals like the ones Ning and Slide closed. But the threat these banks pose to investors isn’t about the volume of deals they’re scooping, it’s about seizing the best ones. In the case of Ning, Andreessen took some money from angels, but largely bankrolled the company with $9 million of his own money until he raised money via Allen & Co. VCs never had a chance. And Levchin also funded Slide on his own, in addition to tapping friends and investors from his PayPal days. There was one true venture round for Slide, and even the legendary Vinod Khosla of Khosla Ventures had to fight to get in.

There’s only one thing worse than VCs getting pushed toward later stages of investment—and that’s not getting to invest at all.

Lacy has been a business reporter for 10 years, most recently covering technology for BusinessWeek. Her book, Once You’re Lucky, Twice You’re Good: The Rebirth of Silicon Valley and the Rise of Web 2.0, will be published by Gotham Books in May, 2008. She is also Silicon Valley host of Yahoo Finance’s Tech Ticker.

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VCs Aim to Out-Angel the Angels

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VCs Aim to Out-Angel the Angels

Responding to the emergence of a new breed of wealthy investor, venture capitalists are boosting their early-stage investments in startups

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In October, as startup Jaxtr hit up venture capital firms for its first round of funding, it landed an unusual arrangement. Instead of taking a few million in cash from a firm that would hope to one day book a fat return, Jaxtr took a loan—just $1.5 million, from no less than four VC firms and three angel investors. None got the usual perk of a seat on Jaxtr’s board. The result is plenty of independence for Jaxtr, a maker of software that routes calls from blogs and MySpace profiles to cell phones. “You’re still basically on your own,” says Jaxtr Chief Executive Konstantin Guericke, one of the co-founders of networking site LinkedIn.

Jaxtr’s tale illustrates the new calculus governing high-tech venture capital. For years, angel investors and traditional venture firms existed in a sort of symbiosis. Wealthy tech-industry veterans willing to open their checkbooks for $100,000 or so—the angels, as they’re known—could bootstrap promising young companies before serious money, to the tune of six or more figures, from venture firms arrived. Angling for a slice of Jaxtr, however, were both groups: Mayfield Fund, Draper Fisher Jurvetson, Draper Richards, and the Founders Fund on one hand; angel investors Ron Conway, Reid Hoffman, and Rajeev Motwani on the other. “The company was a bit in the driver’s seat,” one investor says.

Angels with Deeper Pockets

What put Jaxtr in the driver’s seat is a turnabout in traditional roles for angel investors and venture capitalists. Venture capitalists are responding to the emergence in recent years of what have come to be known as super-angel investors, who sink multimillion-dollar investments into Web startups and other tech companies, often carrying them further into their life span before they knock on VCs’ doors. Professional angels and boutique angel funds have been a driving force behind emerging Web companies including Kevin Rose’s Digg and Revision3, Marc Andreessen’s Ning, search engine Powerset, and online music site Last.fm, to name a few (see BusinessWeek.com, Slide Show: “Tech’s Next Gen: The Best and Brightest”).

“We have the flexibility to invest like an angel or a later-stage venture capital firm,” says David Weiden, a general partner at Khosla Ventures, an angel-investment fund headed by Sun Microsystems (SUNW) co-founder Vinod Khosla. “Because we’re investing our own money, we can scale down to whatever we want.” Khosla investments range from $100,000 to $25 million, in areas including Internet technology and clean energy.

New Angels in Town

Other super-angels, including Silicon Valley veteran Conway, PayPal co-founder Peter Thiel’s Founders Fund, Philadelphia-based Josh Kopelman, and LinkedIn chairman and founder Hoffman, possess similar range, able to keep plugging capital into adolescent companies while swooping in to nab hot startups with an agility big VCs have been hard-pressed to match. “We’re not under pressure to put huge amounts of money into every deal,” says Mike Maples Jr., who has invested in Digg and Revision3. “The venture guys can’t really do that.”

Or can they? VC firms on both coasts are responding to the rise of super-angels by seeding startups with more small investments and using loans instead of cash to test ideas from unproven entrepreneurs. In a sense they’re aiming to out-angel the angels. The theory is that the investments take less legwork than nurturing companies through traditional rounds of funding, letting VCs get in on promising projects without much risk. “It’s their answer to this dilemma,” says Conway, an early investor in Google (GOOG) (see BusinessWeek.com, 2/20/06, “A Search Engine for Every Subject”).

VCs Aim to Out-Angel the Angels

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If the trend holds up, it could give Web entrepreneurs more choices about how they structure their companies and spark innovation. That’s if the VCs and super-angels don’t trip over each other as they compete for access.

Going to Seed

Mayfield Fund has increased its number of seed investments below $500,000, which sometimes include debt convertible to stock. It has funded Web startups including tech-support site Fixya, Wikiyou (which says it’s assembling Web users’ “collaborative, unauthorized biographies”), and Jaxtr that way. The approach lets investors quickly vet ideas, then “move on if it doesn’t work, or double down if it pans out,” Mayfield Managing Director Raj Kapoor said in an e-mail.

Charles River Ventures in November announced a program called QuickStart to seed early-stage companies with $250,000 loans, which the firm can convert into stock if the company decides to raise capital. Nearly half of Union Square Ventures’ current investments are for less than $1 million, double the company’s initial plan laid out in 2003, partner Fred Wilson wrote in his blog last October. And Mohr Davidow Ventures has also doubled its number of seed-round deals, to about 10 a year, compared with half that 18 months ago. It’s also using loans to invest smaller amounts in untested companies. The seed-financing efforts could become even more aggressive.

“Maybe we need to do this with more companies,” says Nancy Schoendorf, a general partner at Mohr Davidow. About half of the firm’s seed investments turn into larger Series A rounds, but trimming that fraction could increase profits. “It means we’re not taking enough risks,” she says. “You want to spend more time with great entrepreneurs, but then be hard-nosed before you put more money in. In theory, it should give us better returns.”

Angels Defend Their Turf

VCs’ newfound pluck doesn’t sit well with everyone. “They’re encroaching on our business,” says Howard Hartenbaum, a general partner at angel fund Draper Richards, who sold Internet phone company Skype to eBay (EBAY) for $2.6 billion in 2002. “Some entrepreneurs are saying, ‘Why should I take the money from you if I can take a loan from a VC?’ It’s easier money to get.”

But there’s a hidden cost to the loans, according to Hartenbaum. If portfolio companies that have taken on debt don’t meet development milestones, VCs can pull the plug before the equity round. “Now, the entrepreneur has to go to other investors and say, ‘Charles River doesn’t like us,'” he says.

Hoffman, who has invested in about 30 companies including Flickr, Six Apart, Digg, Powerset, and IronPort Systems (bought by Cisco Systems (CSCO) for $830 million on Jan. 4), says it’s unclear whether VCs can take on lots of small deals and still return enough of their funds’ value to the endowments and other institutions that front the money. “VCs are still trying to figure out what they should be,” he says. “It’s an open question whether those ideas work or not.”

Cooperation Is Possible

To be sure, VCs and super-angels are still striking plenty of harmonious deals. Conway cites RockYou, a slide show site he invested in alongside Kopelman’s First Round Capital and traditional VCs Sequoia Capital and Lightspeed Venture Partners. Now, he says, he’s introducing RockYou’s founders to his friends at News Corp.’s (NWS) MySpace, while the startup taps Sequoia’s and Lightspeed’s networks, too. “That’s kind of the best of all worlds,” Conway says. “You’ve got even more great minds thinking about the company and using their Rolodexes.”

And a few old-school VCs have always been willing to reach down to take small stakes in rock-star companies—most notably Sequoia and Draper Fisher. What’s more, the super-angels have hardly pushed traditional angels aside: Sun co-founder Andy Bechtolscheim, Netscape vets Andreessen and Ram Shriram, eBay founder Pierre Omidyar, and Motwani—Google founders’ Larry Page’s and Sergey Brin’s computer-science professor at Stanford University—all fit the profile of lower-stakes angel investors. Even some new faces are jumping in. Skype and Joost co-founder Niklas Zennstrom has started investing with a partner through a group called Atomico.

Yet as VCs shape new strategies for muscling in on promising deals, some say there are scenarios they may never be able to touch. Microsoft (MSFT), Google, and Yahoo! (YHOO) “love to acquire” small software companies for between $10 million and $30 million, whose technology they can turn into aspects of their sites, says Bill Gurley, a partner at Benchmark Capital. “There’s a big opportunity to build features for these large companies,” he says. But once VCs get involved and start pumping $10 million or $20 million into startups, they need the sale price to be more like $100 million to make the return their models demand.

“There’s a huge opportunity to make a lot of money,” Gurley says, “but not for the VCs.” So he’s steering clear for now. “There are lots of ways to make money in this world,” he says. For the handful of VCs trying to tread on angels’ turf, the hope is that opportunity lies where until now there has been resignation.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.

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Before You Accept VC Funding…

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SMALL BIZ August 3, 2006, 2:03PM EST text size: TT

Before You Accept VC Funding…

A veteran entrepreneur tells you what you need to look for in a venture-capital firm before before you agree to a deal

READ THE TIP SHEET >Venture capital can be the best thing that ever happened to your company or your worst nightmare. Make sure you know what you are getting into before you sign on the dotted line.

In my last column I discussed the extensive due diligence that venture capitalists conduct to evaluate an investment and what you should have in place to get an offer (see BusinessWeek.com, 8/1/06, “15 Things You Need to Score VC Funding”).

DO YOUR HOMEWORK.

A VC offer comes in the form of a term sheet—a document that details the amount the VCs want to invest, their conditions and requirements, legal rights, financial terms, and the controls they are seeking. If all goes well, you will get term sheets from more than one VC firm.

When that happens, it’s time to do your homework. All VCs aren’t created equal. They have the potential to bring a lot to the table, but there are always a few strings and onerous conditions. The more you know about your partners and the more careful you are about negotiating terms, the better your chances of a productive relationship (see BusinessWeek.com, 7/17/06, “Venture Capital: The Good, Bad, and Ugly”).

Here are the important questions to cover while doing your VC homework:

1. Besides capital, what does the VC firm bring to the table? Sales leads: What potential customers can they provide introductions to? Partner introductions: Who do they know within the companies you may want to partner with? Recruiting: How extensive are their contacts, and will they make their Rolodexes available? Will they help you interview prospective employees? Strategic advice: Do they understand your market? Will they be able to help you with business strategy? Mentoring: Can they help you develop your skills? Networking: Do they bring the companies in their portfolios together and facilitate networking?

2. Track record. Check the performance of other companies in which they have invested. What types of returns did the founders of those companies receive?

3. Deep pockets. Do they have enough in reserve for follow-up rounds of financing? Can they get other VCs to co-invest with them? No matter how sure you are that you’re asking for enough, make sure more money is available if you need it. The odds are you will.

4. Founder relations. How did they treat the founders of their other companies? Were founders shunted after the financing was complete?

5. Friends in need. Did they stand by their companies when times got rough? Did they provide follow-up financing when things went poorly, and were the terms reasonable? Did they roll their sleeves up and help management?

6. Personality/compatibility. Do you get along? Are they a group of people you would want to deal with on a frequent basis for the next three to five years?

7. Integrity/ethics. How honest have the VCs been in past deals? Do they maintain a code of ethics and stick to it?

8. Reputation. What do other venture firms think about this one? Remember that you are going to be branded by the VC you choose. Their reputation is going to rub off on you.

9. Commitment. How many other boards is your VC on? Will they spend the necessary time to support you? Is this a significant transaction or just a distraction?

Ask the VCs these tough questions and check their answers with others. You should call several executives and founders of companies they have invested in—both the successes and the failures. Dig down to find out how valuable the firm’s assistance was.

Ask about the disagreements and whether they would consider an investment from the same VC firm again. Try to get an idea of what your future may hold.

You should also ask the VCs what they think about each other. By the time you are done, you’ll know about their battles and motivations and find that the VCs have as many warts as you do. You will also develop a realistic set of expectations.

OTHER KEY POINTS.

Here is some additional advice on what you need to do before you accept any deal:

1. Look very carefully at the terms you’re being offered. Get a good lawyer to help you understand each of the terms and negotiate hard before you sign anything. Some of the conditions may not seem significant now, but could come back to haunt you later.

2. Don’t accept an “exploding term sheet.” Some venture capitalists will employ used-car dealer tactics and pressure you with a short deadline. If the deal is good enough for them now, it will be equally good after you have completed your due diligence and looked into other options.

3. Negotiate the valuation, but don’t necessarily go with the highest valuation. The higher the stock price, the less ownership you have to give up for the same amount of investment. But there are many additional terms and conditions, and the highest valuation may not be the best deal. What’s equally important: the quality and reputation of the firm you’re dealing with and what other benefits it brings to the table.

4. Keep your options open and have backup plans. Just because you have a term sheet doesn’t mean that you will complete the deal.

5. Remember, there is no urgency for the VCs to make an investment. You may be in a hurry, but the longer the VCs wait, the more willing you become to accept their onerous terms. The best way to accelerate timetables is to create competition with other firms or via other funding options.

6. Don’t buy the line: “We’ll invest if you can find another firm to take the lead on the term sheet.” This is VC-speak for: “I’m too risk-averse to invest, but if a bigger firm jumps on the deal, I want a seat at the table.” Most VCs will bring their partner firms into the deal if there is a need.

If you pick the right partners and negotiate wisely, there is no reason that everyone can’t win in this partnership. The key is to know what you’re getting into and have reasonable expectations.

Wadhwa is Wertheim Fellow at the Harvard Law School and executive in residence at Duke University. He is a tech entrepreneur who founded two technology companies. His research can be found at http://www.globalizationresearch.com .

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Technology

Big Tech Buyouts

How 10 Internet startups cashed in big, and what their founders will do with the loot

By Douglas MacMillan

Silicon Valley angel investor Jeff Clavier expected August to be a slow month for acquisitions. To his surprise, two of the seven companies in his portfolio got bought within weeks of each other. Kaboodle, a site that combines shopping and social networking, sold to Hearst. Maya’s Mom, an online parenting community, sold to Johnson & Johnson (JNJ). “It’s a good time to be an investor because there are tons of opportunities out there that are interesting,” says Clavier, who put some of his returns toward starting a $12 million early-stage venture fund.

What’s good for investors is an outright bonanza for entrepreneurs. Not only are established Internet acquirers such as Google (GOOG), Yahoo! (YHOO), and News Corp. (NWS) spending lavishly on budding properties, companies such as Hearst and Getty Images (GYI) are placing smaller, strategic bets.

But what changes when these company founders see their handiwork snapped up by the highest bidder? Sure, some of these lucky ducks will plow proceeds into the next big thing. But many opt to stick around, keeping a hand at the tiller long after the ownership changeover.

In this slide show, BusinessWeek.com highlights the founders and venture capitalists behind some of this year’s biggest tech buyouts to learn how they got their seat at the negotiating table with millions on the line, and what it’s like to be among Silicon Valley’s nouveau riche.

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Technology

FeedBurner

Founders: Eric Lunt, Steve Olechowski, Dick Costolo, Matt Shobe
Acquisition Price: $100 million, according to TechCrunch
Buyer: Google
Funding: $8 million from Mobius Venture Capital, Draper Fisher Jurvetson, Portage Ventures, Sutter Hill, and Union Square Ventures

The Runup:
When FeedBurner launched its free RSS feed management tool for bloggers and other Web publishers in 2004, its sleek design won high praise and attracted hundreds of thousands of users, but it was unclear how the technology could be monetized. The answer was syndicated advertising, or targeted text links much like Google’s AdSense, but served within an RSS reader, which the company began testing in 2004 and started charging for in 2005. Google announced its mostly cash acquisition in May.

The Payoff:
As part of the deal, FeedBurner’s co-founders and 30-person staff will work for Google for at least a few years, but they get to stay put in their Chicago headquarters. The search company hasn’t announced formal plans to tap FeedBurner’s vast pool of user data, but a note sent to account holders shortly after the acquisition hinted that this was in store: “If you take no action by June 15, 2007, the rights to your data will transfer from FeedBurner to Google,” the message said.

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Gore, Geldof, Venter…And This Guy?

At this year’s gathering of tech and design luminaries, Ben Kaufman aims to create a big product—in 72 hours—for free

https://i1.wp.com/images.businessweek.com/story/08/370/0220_mz_64gore.jpgInvestors have poured $3 millon into Kaufman¹s Web startup, Kluster Jason Grow

Al Gore will be there. Sir Bob Geldof is on the bill. So is Craig Venter, the genomic pioneer. As scores of global glitterati gather in Monterey, Calif., on Feb. 27 at the technology, entertainment, and design conference known as TED, they’ll be joined by a 21-year-old who wears low-slung pants and an oversize coat. That would be Ben Kaufman, CEO of a Burlington (Vt.) software startup called Kluster. Kaufman has landed an entire room at TED—precious real estate—to demo his new social network. It’s a Web site that brings people together to generate new ideas, products, and designs. If all goes according to plan, the event’s great minds and celebs will converge on Kluster’s virtual world to turn an idea, in the course of 72 hours, into a prototype—ideally something that will help fight disease, slow global warming, or ease the plight of the poor.

How did Ben Kaufman land a gig at this year’s TED? He tends to get what he wants. Three years ago, when he was still in high school, Kaufman persuaded his mother to mortgage their Long Island home for $180,000 of startup capital to make headphones for iPods. He quickly founded a company, Mophie, and got a manufacturing line running in China. He rushed over to iron out a production glitch just days before his high school graduation.

Two years later he spent a quarter-million dollars on a booth at Macworld and turned it into an improvised studio. He invited attendees to contribute ideas for Mophie’s next product, and 125 of them made recommendations. Then 30,000 people voted on the ideas. The result: an iPod case that doubled as a bottle opener and key ring. During the 72 hours of the show, he and his sleepless team went on to manufacture a prototype. They eventually sold 40,000 of the gadgets, called the Bevy, in 28 countries.

Kaufman launched his current startup, Kluster, last August, after he surprised his venture investors by announcing that he wanted to roll their investment in iPod accessories into a Web startup. They resisted at first. “Imagine you invest in a company that makes fire trucks, and then they tell you they want to sell chocolate bars,” says Bo Peabody, founding partner of New York’s Village Ventures, Kaufman’s biggest investor. But Kaufman won over Peabody and his other backers. Within a week he sold Mophie, and the investors promptly poured $2 million into Kluster, later adding an additional $1 million.

With Kluster, Kaufman’s idea is to distill the collaborative magic from that booth at Macworld. He describes it as a social network and virtual studio, complete with its own currency. If it works, he says, companies the world over will turn to Kluster to bring to life all sorts of projects.

With his new venture, Kaufman is in the thick of the latest rage in the networked world: the economy of free labor. Eager volunteers have created massive wealth online. They write and edit entries in Wikipedia, hone the Linux operating system, and populate sites such as Facebook and MySpace (NWS) with the details of their lives—all for free. Successful businesses, increasingly, are those that figure out how to engage large groups—employees, customers, even passersby—to pitch in their energy, ideas, and knowhow. And companies from IBM to a Chicago startup called Inkling are design- ing systems to harvest the wisdom of crowds.

TURNING PLAY MONEY INTO DOLLARS

How can businesses draw in these armies of volunteers? Kaufman and his 10-member tech team are betting they can build a bustling community around a virtual economy for innovation—one with its own currency, the Watt. When you click into Kluster, which debuted on Feb. 19, you bet Watts on your own ideas or invest in those proposed by others. It’s a bidding system powered by algorithms. Ideas that attract investments prevail, and those who invest in them gain equity in the project—whether it’s a logo, a toy, or a corporate marketing campaign. If a company buys a product or an idea from Kluster, Watts turn into dollars.

Even before the debut, Kaufman marketed a prototype of Kluster to major corporations and signed up four of them (he cannot disclose their names). The companies, in software, toys, beverages, and music, are scheduled to run development and event-planning projects on the system within the next six months. One possible glitch: intellectual-property rights for community- designed products. Lawyers are working on it, Kaufman says.

His opportunity at TED dates back to that Macworld booth, the scene of his original crowd-sourcing venture. One person drawn to the project was Tom Rielly, partnership director for the TED Conferences. “I hung out at the booth for an hour,” he says, “and I said to myself: This is major chutzpah.'”

Months later, Kaufman was sitting across from Rielly at his New York office, pushing to make Kluster a chief SPONSOR at this year’s TED. “I told him I could give him a six-foot table, two chairs, and a monitor,” Rielly says. “He said: That’s not enough.'” Rielly found a way to free up a room for him.

Not all the news is good. Two weeks before TED, Kaufman held brainstorming sessions in Burlington. His plan was to introduce a crowd to Kluster, luring folks into his downtown lair with vouchers for free drinks at local bars. He had hoped that ideas would percolate on the brand-new system, including a project for the TED attendees. More than 100 thirsty and curious visitors made their way in, but their ideas for TED came up short.

So it will be up to the celebs at TED to develop their own idea. Kaufman hopes they’ll duck into the Kluster room between speeches, cocktails, and meals and pour their genius—and their Watts—into something new. In the process, of course, this horde of top-drawer talent will be laboring for free, working hard to piece together Ben Kaufman’s next big idea.

Baker is a senior writer for BusinessWeek in New York .

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Microsoft Startup Accelerator adds 30 new companies

By Paul Mah | Published: January 24, 2008 – 08:36AM CT

Microsoft announced that it has added more than 30 companies to its Microsoft Startup Accelerator Program, which was launched in October 2007 with an initial pool of 20 selected companies.  This brings the tally of emerging businesses under the program to over 50.

The Microsoft Startup Accelerator program is designed to help startups accelerate software development and market visibility through customized engagement plans.  This comprises access to premier support staff, software licenses and subscriptions, new technologies, and possibly access to Microsoft Technology Centers for software testing and architecture guidance.

Daniel Lewin, corporate vice president of Strategic and Emerging Business Development at Microsoft, remarked in a statement, “We are very pleased with the excitement and momentum behind the program from the entrepreneurial community, and we will continue to focus on expanding the program to support the success of an even broader set of startups worldwide.”

The Microsoft Startup Accelerator Program has a local presence in France, Germany, India, the UK, and the US.
Interested startups can apply via the process outlined at the Microsoft Startup Zone.

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