Two local start-ups get boost from Silicon Valley

  • Article by: THOMAS LEE
  • Star Tribune
  • August 9, 2009 - 4:56 PM

Dave Fowler has never been so happy to fail.

Last year, the 26-year-old entrepreneur was accepted to Y Combinator, a prestigious Silicon Valley "incubator" that provides early-stage seed money, advice and industry connections to promising technology start-ups across the country. Fowler, along with Zachary Garbow, was developing a software program that would limit a user's time on the Internet.

After three months of coaching and hobnobbing with prominent tech executives, fellow entrepreneurs and venture capitalists in Mountain View, Calif., Fowler and Garbow returned to Minnesota -- and decided to scrap their technology.

Instead, the partners launched, which is developing a browsing tool that allows users to use social networking sites such as Facebook and Twitter no matter what Web page they happen to be on. The Rochester-based start-up is creating buzz among investors, and recently raised hundreds of thousands of dollars.

Y Combinator, Fowler says, gave him the confidence and expertise to fail and reboot.

"We spent three months going in the wrong direction," Fowler said. "Had it not been for Y Combinator, we might be still struggling."

As the nation's weak economy scares away investors, incubators such as Y Combinator and Tech Stars are providing a welcome home to tech start-ups searching for first-time money and tutelage, especially in nontechnology hubs like Minnesota.

"There is a relative dearth of risk capital to help young entrepreneurial companies get funded," said Marti Nyman, a former director of global alliances for Best Buy Co. Inc. who has spent considerable time in Silicon Valley. "You need investors comfortable with early-stage investing."

And they are becoming increasingly hard to find.

The number of companies receiving venture capital for the first time in the second quarter fell 5 percent, to 141, the lowest number since 1994, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial.

Emotional support

"In a tough funding environment, incubators can play a valuable role by helping companies refine business models quicker," boosting their chances of getting money, said Peter Birkeland, chief financial officer of Rain Source Capital, a St. Paul-based network of angel investors.

But beyond money, start-ups need a support network that can provide them guidance, services and emotional support. Nyman said that such a network does not yet exist in Minnesota, which is why he is creating Altavail Partners, a $17 million incubator in Minneapolis that will provide as much as $200,000, office space and legal and marketing advice to five tech companies a year.

Nyman said he modeled his incubator after Y Combinator. Founded in 2005, Y Combinator (a mathematical concept that refers to a function that creates another function) is the brainchild of Paul Graham, a Harvard-trained computer scientist and entrepreneur who sold Viaweb Inc. to Yahoo Inc. for $49 million.

"I especially wanted to help younger, more technically oriented founders get started," Graham said in an e-mail interview. "They often have a hard time convincing venture capitalists to give them money, despite the fact that they tend to make better founders."

Y Combinator provides start-ups as much as $20,000 in seed money in exchange for a 2 to 6 percent stake. The money is usually for living expenses, as the company founders must move to San Francisco for about three months. Y Combinator only accepts about 30 or so companies out of nearly 1,000 who apply.

Graham and other veteran entrepreneurs and investors offer advice about everything from identifying specific markets to coping with the emotional stress of launching a start-up. Y Combinator also hosts Demo Day, during which companies make presentations to about 150 top angel investors and venture capitalists.

But for Luke Francl, working with other like-minded entrepreneurs and just being in Silicon Valley is Y Combinator's most prized perk. Francl, with Marty Wetherall and Norm Orstad, founded FanChatter Inc., a Minneapolis-based start-up that lets users share photos and messages during sports games.

Midwest nice guys

Francl says the energy and excitement of Silicon Valley is a stark contrast to the low-key, risk-averse culture of Minnesota. In one popular coffee shop near Google's headquarters in Mountain View, it's not unusual to see owners of dozens of start-ups working on their technology.

"The climate is a lot different out here," Francl said in a phone interview as he prepared for Demo Day, which is this month. "In Minnesota, [networking events like] MinneDemo are a desert oasis. Out here, it's a lush jungle."

Francl recalls speaking with a stranger on the street.

"He asked me what I did for a living," Francl said. "I said I worked for a start-up. He laughed. 'You work for a start-up. I work for a start-up. Everyone here works for a start-up!' " implying that Francl had to be more specific.

Graham, of Y Combinator, said that he was impressed with FanChatter and Socialbrowse.

"They're quite similar in some ways: super nice guys who are also very determined," he said. "Come to think of it, that might turn out to be an advantage for founders from Minnesota.

"Being a good person is increasingly necessary in the start-up world," Graham said. "Now that everyone tweets and blogs about everything, if you're a jerk, it gets out.

"Evan Williams [the founder of Twitter] is another one of these super-nice guys who grew up in the Midwest, and I think it has helped them as a company."

What also helps is a Y Combinator stamp of approval, especially with investors.

"When you have Minnesota start-ups coming out of Y Combinator, of course you want to take a hard look at them," Birkeland of Rain Source said.

Thomas Lee • 612-673-7744

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