Silicon Insider: The New World of Startups

Every true entrepreneur faces a moment of personal reckoning.

For Santosh Jayaram, that moment came last week.

For the last 18 months, ever since he earned his MBA from Oxford University, he has devoted almost every waking hour of his life to trying to create a new company. He moved back to San Francisco, where he had once been a salesman for a tech company, reconnected with a couple of old acquaintances -- Indian immigrants like himself -- and set to work. Each morning he said goodbye to his wife, Dawn, as she drove off to work, then settled into a local coffee house with his laptop and got down to business.

Santosh's initial notion for a new company involved local wireless connections for municipal governments, an idea that foundered in the face of difficult technical problems and almost insurmountable political challenges. Three months of 80-hour weeks, scores of interviews and long nights of research… and Santosh walked away without looking back.

He might have given up then. After all, most of his classmates had already settled into high-paying and prestigious jobs in industry, finance and venture capital. But Santosh had found his calling. He was an entrepreneur. And he sat, day after day, sipping his coffee, surfing the net, still wearing some of the increasingly ratty clothes he'd bought in college, soldiering on in search of another great idea that could be turned into a viable company.

He found it several months later.

Inspiration in a Photo Collection

While at Oxford, Santosh and Dawn had taken hundreds of photographs -- of the school, of England and of their vacations on the continent. Now those photographs sat, disorganized and mostly unshared with friends and family on Santosh's desktop. He had long ago concluded that too much time had passed, and that he was just too busy, to ever send them out. Worse, he was continuing to take photos, all destined for the same fate -- until, like some of his friends, there would one day be thousands of photographs, unseen, unshared, clogging his disk. He already had friends in that predicament.

Making matters even more painful was that Santosh, like his friend Ayush Gupta was an immigrant -- both young men had left families a half-world away. As good sons, they felt guilty that they were not staying in touch with home often enough; by the same token, letters -- and more importantly, pictures -- from home were few and far between.

Almost every important new technology product and service has its beginnings with the angry question: Well, why the hell can't we do that?

That was the question Santosh asked about photosharing in early 2006. Finding the answer led Jayaram, Gupta and a third friend, Supreet Singh, to create a new company, called Powersnap, and to spend a year sacrificing almost everything they had in the quest to make that company and its product real. As with any startup operation, it was exhausting, physically and financially.

Now, late on a night in mid-January, just a week before the formal public announcement of Powersnap Alpha to the world, Santosh hit the wall. He was exhausted, sick and broke. He hadn't slept more than two hours per night since Christmas, and even that sleep was fitful because he was worried about his baby son -- just to put the maximum stress on themselves, both Santosh and Ayush had recently become fathers -- who was also coming down with the same flu bug. Having dug himself in so deep, what happened, Santosh asked himself, if the product failed? It was an entrepreneur's classic 3 a.m. moment.

The answer, Santosh decided, as all true entrepreneurs do, is that it didn't matter. As he said to me the next day on the phone, "I suddenly realized that it wasn't important anymore whether the product succeeded or failed. All that counted was that we completed it, that we got it to market, even if it killed us."

The Rules of the Game Have Changed for Startups

I've always been very conscious as a journalist of making public any conflicts of interest I have with my subjects. In the case of Santosh and Powersnap, that conflict couldn't be deeper. I've advised Santosh all of the way through the creation of both this company and its aborted predecessor, trying to help these young founders make their way through the traps and pitfalls of new company creation.

My connection with Santosh goes back even further. I met Santosh and Dawn through my old assistant at Forbes. In those days Santosh was a tall and irrepressible bundle of energy -- smart, inexhaustible and ready to take on the world. And I recognized early that he was a true entrepreneur: Having twice been turned down by Oxford's Said Business School, he flew his own way over to England to help me with my Silicon Valley program, talked his way into an interview with the dean, and was accepted. He graduated near the top of his class.

But my interest in Santosh and Powersnap is more than personal. Silicon Valley may still be the heartland of high-tech entrepreneurship, but the rules of the game have changed in recent years. I wanted to see just how.

Historically, when you started a new company, you assembled a team that covered all of the components of a full-sized company -- from manufacturing to administration to marketing and sales. You then developed a sophisticated business plan and took it around to investors. If you were lucky, you found an angel or two willing to invest enough funds to get you through prototype development.

Then you made the rounds to venture capitalists and exchanged a sizable percentage of the company's ownership for the money to take your product to production and hire the necessary staff to manage a major company and run a marketing campaign. The goal was to build a company sufficiently successful -- a couple generations of follow-up products, a thousand employees, $100 million in revenues -- to take the firm public and pay back the founders and investors for their years of support.

Foregoing IPOs for Buyouts

That model began to fall apart with the generation . . .and it has been completely revised in the world of Web 2.0. Thank to Sarbanes-Oxley and other regulations, today's startups rarely plan to ever go public. Rather, their goal is to reach sufficient size to be the subject -- the most famous recent example being YouTube -- of a multimillion- or even multibillion-dollar acquisition by a big Web 1.0 behemoth like Google or Yahoo.

In this new model, revenues aren't important; what matters is the size of your community. The big acquirers already have the revenues, but what they need are ever larger populations of committed members who can be converted into even larger sources of revenues. So the name of the game for startups is to get going, build as big a community as you can in the shortest amount of time, and then await the bidders.

This new tech startup model typically doesn't require nearly as much investment -- a fact that is driving traditional capitalists crazy. It also doesn't require very many employees -- you could have put the entire staff of YouTube, when it sold to Google for $1.7 billion, into a single, average-sized conference room.

But what it does take is an absolutely brilliant core idea, an inhuman business pace and a way to tap into the special kind of magic that takes a simple message and somehow puts it on the lips of 100 million consumers -- especially teenagers -- in the course of a couple months without the use of advertising or any other traditional marketing technique. It is a technique that was pioneered by Google, reached an early peak with FaceBook and has been turned into an art form by Web 2.0 saints like Evan Williams with Twitter.

This is the path that Santosh and his team have chosen to take with Powersnap. What he saw in his research into online photosharing was that while there are many huge Web photo sites -- Flickr, Shutterfly, Snapfish, etc. -- all are essentially silos for holding photographs. What was needed was an application that sat on top of these silos and enabled users to easily organize their huge and growing (thanks to cheap digital cameras and cell phones) photo files and then automatically send them out to predetermined lists of "subscribers," such as family, friends and workmates.

That was the clever part. Santosh was delighted to discover that there was nothing else like it on the market, or, apparently, in development.

With VCs, It's Put Up or Shut Up

The next step was to fund development. Being a new MBA and having been taught the traditional rules of entrepreneurship, Santosh and his team made the tour of Valley venture capitalists -- only to be told to come back when they had a finished product.

This was to be Powersnap's first great challenge. Many startup teams fold at this point, caught in the Catch-22 of not having enough money to build their product and not having a finished product to lure enough money. But Santosh took stock of his situation and decided to soldier on. He knew that in Ayush he had a veteran programmer (Cisco, Sun) who actually dreamed in code. Supreet is a master user interface guy (Ford, IBM, HP were among his clients). And best of all, a remnant of an earlier venture, he had a group of contract programmers back in India ready to take on any task.

With what little money they had, the team set to work, spending days and nights on both sides of the world, writing code. Early on, the team decided they had just enough money to focus on a single photo site. They chose Flickr because of its affiliation to Yahoo, its millions of users, and most of all, because Flickr opened up its code to them. If they succeeded with Flickr users, the team decided, they would get enough money from investors to fund custom versions of Powersnap for the other sites.

In late autumn 2006, the Powersnap team ran into their second great challenge. Simply put, they were broke. Months of complete focus on the company had burned up their savings, and now there were new babies to add to the financial (and emotional) burden. A traditional startup would at this point have gone into suspended animation as the founders raced around begging for investments. And most such startups are never resuscitated.

But in the intervening months, Santosh had learned a great many things about the new world of Web 2.0 entrepreneurship. So when the crunch came, he and the team decided not to stop, but to keep running on empty until they had finished the alpha version of the product, a date they targeted at Jan. 23. It was during the grey and cold early weeks of January that Santosh had his late night resolution. For him and the others, all that mattered now was to finish.

Once You Make It, You Have to Sell It

But that still left marketing. A product, no matter how brilliantly designed, is worthless if no one hears about it. Five or 10 years ago, this would have been another fatal moment in the history of most traditional startups trying to bootstrap their way financially. Given the noise of modern life, a traditional product may take $10 million just to penetrate the public consciousness.

But once again, Web 2.0 has it own rules, most of them still unwritten.

What matters now is that the new idea embodied by your product or service is picked up and proliferated across society. Sociologists and linguists have called this a 'meme,' though a more accurate term may be 'beme,' a term coined by marketing maven Tom Hayes for a 'business meme.'

A successful beme can, in a kind of chain reaction, reach millions in a matter of days -- and because the obstacles to participation are miniscule (a few clicks on the computer) it's possible to gain an army of users in less time than it took a traditional product to even reach store shelves. Just look at the jaw-dropping growth of FaceBook, for example.

The trouble is, a lot of smart young Web 2.0 entrepreneurs understand this, and a traffic jam of new companies is growing, all trying to capture the fancy of populace. Today, Powersnap is one more of them, using every trick it can think of -- chat rooms, blogs, hip Web sites, word of mouth, download sites -- to see if it can spark its own explosion.

Will it work? Nobody knows. If you want to find out how it's going, just Technorati or Google 'Powersnap' every few days and see how well the message is being conveyed.

In the meantime, consider that epiphany that Santosh had last week. By its lights he and his team have already succeeded. They have taken a product from idea to market in less than a year, and they have done so without a staff, and indeed, without any outside investment. That would likely never have happened a decade ago.

Whatever happens from here, they have already created a miracle -- and taught the rest of us something important.

This is what it takes to be an entrepreneur in Silicon Valley in 2007.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone, once called the Boswell of Silicon Valley, is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is best-known as the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the "Silicon Insider" columnist since 2000.