Need proof that another dot-com boom is underway? Consider Jangl, Jaxtr and Jajah.
They're not part of a Scrabble game gone horribly wrong; they're names of Silicon Valley-area tech start-ups. And they don't just sound alike. Each offers a similar product — a type of Internet telephone service — and is about a year and a half old.
Standing out would be tough even if it weren't for the more than a dozen other companies in the same market. Yet Jangl, Jaxtr and Jajah have collectively raised almost $50 million in venture capital.
They're not that unusual. The tech industry — especially in Silicon Valley — is once again trying to do business like it's 1999.
U.S. venture-capital investment in the first six months of the year jumped 9% from the previous year, says a study from VentureOne and Ernst & Young. The biggest chunk went to the San Francisco area, where more than 400 companies closed deals with a median size of $10 million, the study says.
That's helped make jobs plentiful, parties lavish and tech entrepreneurship hip again. And ground zero once again seems to be Northern California, with its cluster of venture capitalists, start-up lawyers and dot-com veterans.
"You can't find anybody who doesn't have a business plan sticking out of their pocket," says Matt Marshall, editor of the VentureBeat blog. "Silicon Valley is back to its usual self."
But undermining the optimistic atmosphere is a huge question: How long can it last?
Competition in some Internet markets — often referred to as Web 2.0 businesses — is intense. Marshall counts 34 new companies alone that want to serve one small niche: letting businesses and other groups build their own social-networking sites.
Even entrepreneurs say a bust could be looming. They're just hoping to be among the survivors, or to cash out before the next crash.
"Our Realtor — the person who found us this office — is doing a start-up," says Jangl CEO Michael Cerda. "Things need to get reeled in."
The current Internet frenzy still doesn't compare with the peaks reached in 2000. In the first six months of that year, companies raised $52.2 billion in venture capital, compared with $14.5 billion in the first six months of 2007, the VentureOne study says.
Relatively few start-ups have cashed out through initial public stock offerings this time. Only 152 companies have held IPOs this year, compared with 406 in all of 2000, says Renaissance Capital's IPOhome.com.
But that may change soon, says Jim Chapman, a partner at Silicon Valley law firm Nixon Peabody. Interest in tech IPOs began to pick up about a year ago, and lots of deals are in the works, he says. Among those recently announced: credit site CreditCards.com; Classmates Media, parent of high school reunion site Classmates.com; and real estate site Iggys House.
The merger market is also strong, with deals such as Microsoft's $6 billion acquisition of online advertising firm aQuantive in August making headlines. In the past month, Yahoo alone spent $350 million on e-mail site Zimbra and $300 million on ad firm BlueLithium. Intel spent an estimated $110 million to purchase Havok, a gaming software company.
Getting their start
Big IPOs and acquisitions made many entrepreneurs millionaires during the first boom, and that's when many of today's dot-com founders got their start. Take Jangl's Cerda, who worked for several young computer-networking companies during the late 1990s and early 2000s.
After the market collapsed, Cerda consulted and ran a yoga studio. But the appeal of dot-coms was too great. He plunged back into the start-up world by helping found Ooma, an Internet telephone firm. After disagreements about business strategy, he left and co-founded Jangl in 2005.
Jangl is one of many companies that provide phone service that travels over the Internet instead of over a traditional phone line. There are several ways to do this. Companies such as Skype let people make calls via computer, using a headset. Others, such as Vonage, use phone adapters that connect to the Internet to complete a call.
Jangl targets a niche of this market by offering specialty calling services that use Internet technology to link traditional phones. One of these services provides customers with dummy phone numbers to give to potential dates and other strangers. Calls are transferred to the customer's actual number using Internet calling technology.
Cerda initially raised $2 million to start Jangl, which he says was quite difficult. Since enthusiasm for start-ups has taken off, he later raised an additional $7 million with relative ease. Jangl now has partnerships with dating sites True and Match.com, 20 employees and a Pleasanton, Calif., headquarters with mood lighting and bright orange walls.
The company also has more competition as a growing number of companies get funded. Jajah, located about 30 miles away, also offers anonymous phone calling and has a partnership with dating site eHarmony. It sells Internet phone service to businesses and offers other services, too.
In a sparse Palo Alto office building, Cerda's former firm, Ooma, is producing a $399 home Internet telephone system that can make long-distance calls for free. CEO Andrew Frame, 27, has raised $27 million in venture funding.
Jaxtr, another company in the neighborhood, offers cheap long-distance calling and a dummy number that forwards calls to a mobile phone. GrandCentral, a company that lets people manage multiple phone numbers and voice-mail boxes via a Web page, was acquired by Google in July.
"About half of the ideas that we had (when founding Jangl) have become companies themselves," Cerda says.
They don't just compete with each other. They must all take on, at least peripherally, established Internet telephone players such as Skype (owned by eBay), Vonage, AT&T and Verizon. Although the market is potentially huge, it's probably not big enough to sustain so many companies, says tech analyst Elroy Jopling at researcher Gartner. "There's too many," he says.
There are already a few signs of a possible shakeout. SunRocket, a company that provided cheap, computer-based phone calls, went under in August after three years of business. Shares of money-losing Vonage have fallen about 95% since their IPO in 2006.
"You're going to see 80% of (Internet phone companies) wash out," says Ooma's Frame.
Internet telephony isn't the only crowded Web 2.0 market. Dozens of companies are fighting to be the next MySpace-like social network. Some are general sites such as Passado and MyYearbook. Others are for specific groups, including Sermo (physicians), Infield Parking (NASCAR fans) and MiGente.com (Latinos).
The online video space is packed, too, with sites such as Revver, Veoh, Dabble, Buzznet and Yahoo-owned Jumpcut. Want online music? Try Pandora, Last.fm, Odeo, Jamendo or one of many other sites.
Those are just consumer markets. Foldera, TracBac and iFolder are among the companies offering online document-sharing and productivity tools for individuals and companies. Basecamp, Central Desktop and InventionDB are among those offering project-management tools.
The lists go on and on — and they're likely to get longer. Jeff Clavier, an early-stage investor at SoftTech VC, says he has been bombarded with business plans. Eager entrepreneurs have cornered him in the grocery store and the local deli, he says.
Even office meetings can be intense. One entrepreneur got so flustered when Clavier declined to invest in his company that "I thought he was about to hit me," Clavier says.
The frenzy was on display earlier this month at TechCrunch 40, a new conference designed to connect start-ups with potential investors and other partners. In a packed San Francisco hotel ballroom, crowds of would-be dot-com millionaires swarmed around Clavier and other venture capitalists, thrusting out their business cards.
The room featured gilded walls and huge chandeliers, but the dress code was pure dot-com: company-logo polo shirts, khakis or faded jeans and lots of guys with spiky hair and black-rimmed eyeglasses. As was the case during the previous dot-com boom, an overwhelming majority of the participants were young men.
Hank Barry, an investor and attorney at law firm Howard Rice, was one of the venture capitalists fighting his way through the enthusiastic crowds. But he insisted that "you have not seen the excesses that we saw (during the first boom)." Most start-ups have solid ideas and real products, he says. (Barry would know: He is most famous for being former CEO of music-downloading site Napster.)
Web 2.0 companies are also being more careful with their money, says Roelof Botha, a partner at Sequoia Capital. Jaxtr, for example, keeps its development spending tight and has almost no marketing budget, even though it raised $10 million in venture capital. "It's the discipline of a start-up," says CEO Konstantin Guericke.
Many good ideas remain to be discovered, says Sumant Mandal, a managing director at Clearstone Venture Partners. But the lousy ones are growing as dot-com mania takes off again, he says. That may be inevitable, given the sheer number of new companies. The office vacancy rate in Silicon Valley was 8.6% in the third quarter — the lowest it's been in six years, says real estate firm CB Richard Ellis.
Venture capitalists normally assume that at least half of their investments will fail, Clavier says. But in less than two years, SoftTech VC has sold five companies it invested in — Truveo, Userplane, MyBlogLog, Kaboodle and Maya's Mom — for healthy profits, he says.
That's a sign that there are great ideas being turned into solid companies, he says. At the same time, "It's not going to last," he says.
VentureBeat's Marshall doesn't expect a single big collapse, because companies and investors learned from some of their mistakes during the 2000 bust. But he predicts that many companies will wash out gradually as markets get oversaturated.
"There will be a lot of cold showers," he says.