FW: Chicago Beta: Chicago vs The Bay Area. Swimming downstream

http://www.chicagobeta.com/

Chicago vs The Bay Area… Swimming downstream Posted: 08 May 2007 12:33 PM CDT I’ve thought a lot about the tradeoffs of starting an internet company in the Chicago vs the Bay Area. Of course I love living in Chicago, but I want to have a good understanding of what, if anything, I’m missing by not being in SF to know if it could ever justify moving there. I just heard one of the most interesting answers to date. I was listening to an interview with Scott Rafer, CEO of Feedster and MyBlogLog. Toward the end he touched on what he thinks makes the bay area unique for entrepreneurs. I’m paraphrasing from memory: In San Francisco, social pressure is on your side. In other cities, if you are involved with a start-up, you’re a bit of an outcast. People often think your crazy before they even hear the business idea because the very concept of starting a company is out of the norm. In the Bay Area, on the other hand, there is an immense social pressure towards start-ups. Lots of people working for big companies are made to feel that they’re “missing out.” And when it’s the norm rather than the exception, people give you the benefit of the doubt. Nearly everyone has heard some business idea that sounded crazy and ended up making it big. I think this really gets at the essence of the culture. It’s a great explanation as to why you see a lot of what you see out there. I have experienced this “culture” every time I visit, but I had not identified it and put the words to it. It’s this “benefit of the doubt” that makes it easier to convince others to join you, raise money at early stages, convince your spouse/parents/relatives that it’s okay for you to quite your great job and give this idea a chance, etc. It’s like your swimming downstream. One caveat, I think this social pressure is a consequence rather than a cause of all the start-up activity over the years. There is something more fundamental about the geography or the culture that originated the phenomonen in the first place. Paul Graham has a great essay on why Silicon Valley came to be. Personally, I’m still not sold on SF over Chicago. Notice I’m still here. The jury is still out for me, I love Chicago.

Disney unveils social networking for preteens

By Gina KeatingTue May 1, 9:34 PM ET

Walt Disney Co. unveiled a program on Tuesday to let preteens create personal mini Web sites like MySpace's very popular social networking site for older teens and young adults, with parental controls it hopes will create a safe haven.

The Disney feature, called Disney Xtreme Digital, or Disney XD, is aimed at kids under 14, with parents getting control over Internet activities, Paul Yanover, executive vice president and managing director of Disney Online, said in an interview.

A chat feature requires parental approval for kids to go beyond trading canned messages designed to prevent users from revealing personal information, or from using profanity.

Kids can gather games, videos and music files from Disney's promotions-rich Web site and place them on a page that they decorate with a selection of motifs from the company's rich character library.

Yanover said the feature limits kids to using Disney content on their Web sites, and would allow parents to monitor interaction. At the same time, Disney can protect its image on the freewheeling Web, he said.

"There is a weaving together of entertainment and promotion and marketing," he added. "It's difficult to say where one ends and the other begins."

The feature is meant for use on high-speed Internet. The approximately 30 million U.S. broadband households already make up about 90 percent of visitors to Disney.com, Yanover said.

Kids earn points for every activity they participate in on Disney XD, and can use the points to purchase items such as virtual stickers or Rube Goldberg-type machines like bubble makers for their pages.

The goal is to create a community of kid marketers for Disney, as kids visit each other's sites and talk up Disney TV shows, characters, and products.

"I want tons of kids immersed in my brands and franchises. What better marketer do I have than a kid?" Yanover said. "It's really about building a kid community ... (that) extends beyond individual Disney products, Web sites and titles."

The company unveiled the feature at a New York event featuring 'tween heartthrob Corbin Bleu, star of the popular Disney Channel movies "High School Musical" and "Jump In," whose new album debuted on the site.

MySpace is owned by News Corp.

Reuters

WSJ: Virtual Worlds Now Cater To Kids, but Are They Safe?

Virtual Worlds Now Cater
To Kids, but Are They Safe?

By JESSICA E. VASCELLARO
April 30, 2007; Page B1

Kaitlin Stanger often spends her $10-a-week allowance on trendy accessories like boots and thick-rimmed sunglasses. But the items aren't for her. They're gifts for "MuffinGal," the 13-year-old's character in the online world Stardoll.com.

Every day for an hour or more, Kaitlin logs on to the virtual dress-up community to catch up with friends and spend her Stardollars, furnishing her room with everything pink in addition to buying clothes. "You get to really show off your personality," says Kaitlin, of Salt Lake City, Utah, whose mom buys her a bundle of 100 Stardollars for $10. "It's not just a picture of your face -- it's your whole style."

Part socializing and part game playing, online virtual worlds targeted at kids and teens are sprouting on the Web. Their strategy is to offer social-networking with training wheels. The sites aim to give kids the interaction of a site like MySpace or a virtual world like Second Life without the potential exposure to inappropriate content or inappropriate people. But the sites are still struggling to earn the trust of parents, who wonder if their kids really know who is on the other side of the virtual park or pizza parlor.

A scene from IAC's Zwinktopia, which will be introduced today

A variety of Internet companies are launching these virtual worlds, hoping to win the loyalty of kids at the start of their Internet years. Today, IAC/InterActiveCorp. plans to introduce its first such offering, Zwinktopia. Players will be able to create avatars, mix and match outfits and point and click to meet and chat with other users in teen-themed locations like bowling alleys and dorm rooms, paying their way with Zbucks, which they'll earn playing online games. (IAC and Dow Jones & Co. recently announced a joint venture to create a personal finance Web site.)

The sites shy away from advertising, for fear of alienating parents, especially those with younger children. Instead, online businesses are experimenting with a variety of business models, such as charging for virtual currency, selling subscriptions and bundling their services with toys.

Club Penguin, a popular online world founded in late 2005 by three Canadian fathers, is free to join but charges $5.95 a month for privileges such as the ability to buy accessories for your penguin. In the past year, its audience has quadrupled to more than four million unique monthly U.S. visitors, according to comScore Networks Inc.

Kids log on to the site, owned by New Horizon Interactive Ltd., to customize a virtual penguin and give it a name and a color. The penguins waddle around, playing games -- like sled races -- to earn coins that they can use to acquire flags, accessories and igloo furnishings. Penguins can also chat with other penguins through two chat modes: ultimate safe chat, which is limited to a predefined menu of greetings, and standard safe chat, in which all messages are subject to filters that screen for inappropriate language and personal information like phone numbers.

Competitor Webkinz, owned by toy and gift company Ganz USA LLC, is an online kid community accessible only via a code that is sold with one of dozens of plush animals like pandas, lions and poodles. The toys, which Ganz distributes through toy and gift stores, have sold out rapidly. Often the only place to find them is an online auction site, where they can be bid up to more than twice their typical price tag, usually between $7 and $12.

A scene from the Webkinz virtual world

Once logged in, users can access an online world of backyards and games and chat from a limited menu of phrases like "I think you are cool." (Webkinz will soon expand its chat feature to allow kids to type what they want, as long as the words are included in its kid-friendly dictionary, which excludes words like "punch" and "call.") Kids cook virtual meals, customize their rooms and keep their pet's health-meter score up by returning daily.

Nine-year-old Maeve Higgins signed up for Club Penguin last year because it was all her fellow third-graders were talking about. "It's cool," says Maeve, who logs on most weekdays to buy helmets and shoes for her penguin and to play games. "I like meeting new people."

But not all penguins are friendly. Maeve says she occasionally comes across someone who makes her uncomfortable, such as one player who called her "mean" and another who threatened to rob a virtual pizza parlor.

Lisa Higgins, Maeve's mom, is concerned about what kids might say to each other on the site -- and whether they are even kids. "The thing that alarms me is the chat," says Ms. Higgins, who watches over her daughter's shoulder as she plays on a laptop in the dining room. "Are these 6-year-olds or are they 42-year-old men?"

Many sites require a parental email to sign up but acknowledge that they can't confirm the email account is indeed a parent's. "Realistically, there is no way to know," says a spokeswoman for Club Penguin. "Kids will always try to beat the system."

One possible solution: parents creating their own accounts to monitor their kids. Kaitlin Stanger's mom, Karrie, also joined Stardoll, which gives her an inside peek at whom her daughter is chatting with. Kaitlin -- who was made uncomfortable when a member once offered her "free" money in exchange for her password -- says knowing her mom can see her friends makes her feel more relaxed.

And Ms. Stanger, 38, is becoming quite a fan. "It's a fun, creative outlet," she says, describing her character as "a little thinner and a little bustier" than she is. After all, she asks, "where do you get to buy furniture for $2 or less?"

Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com¹

URL for this article: http://online.wsj.com/article/SB117789256385586480.html

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Thinking Small

VC's are learning that tiny deals can go a long way.

From: Inc. Magazine, May 2007 | By: Ryan McCarthy

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As venture capital deals go, it doesn't seem like much--just $6,000. But that was all Sam Altman needed to get his new business, a cell phone software maker called Loopt, off the ground.

And if the investment seems rinky-dink, the investor certainly isn't. The money came from Y Combinator, a Cambridge, Massachusetts-based venture firm founded by heavy-hitting Internet entrepreneur Paul Graham. What's Graham, who created the seminal Web application that eventually became Yahoo (NASDAQ:YHOO) Store, doing playing with such trifling sums? "It's gotten to the point now where the most important things you need to found a tech start-up are food and rent," he says.

Graham is not the only one who feels that way. A small but growing number of venture firms now provide seed-level funding--thousands rather than millions--to promising young start-ups. The approach differs from the usual venture capital model, in which investors take equity at the outset and demand board seats and input in day-to-day operations. But these smaller deals make particular sense in today's marketplace, the investors say. After all, tech firms now can be launched for peanuts. Thanks to declining costs for servers, more powerful coding languages, and the prevalence of free open-source software tools, brand-new start-ups can attract sizable audiences for next to nothing. And with the market awash in private equity, competition among investors for promising companies and concepts is more heated than ever. As a result, the number of seed-level deals increased almost 50 percent in 2006, according to PricewaterhouseCoopers, the National Venture Capital Association, and Thomson Financial (NYSE:TOC). "The days of throwing huge sums of money at an entrepreneur are gone," says Mark Heesen, president of the NVCA.

Y Combinator is a good example of the trend. Launched in 2005, the venture firm now dishes out between $10,000 and $20,000 per company to fund a three-month stay in Cambridge, where entrepreneurs spend their time perfecting their technology, meeting with mentors, and swapping ideas with peers. In exchange for the cash, Y Combinator takes a small stake in the companies it funds, usually about 6 percent. So far, two of its companies have been acquired, including Reddit, a news-aggregating site recently bought for an undisclosed sum by Condé Nast. Y Combinator is banking on a similar outcome for Sam Altman and Loopt.

Altman, now 22, founded the business in 2005 while he was a sophomore at Stanford. He was looking for a way to keep in touch with his friends on campus and got the idea to write software that would allow all of his friends with GPS-equipped cell phones to find one another. Altman heard about Y Combinator's newly launched program from a classmate and got in touch. Later that year, he got $6,000 from Y Combinator and left school. He spent the summer in Cambridge developing his product, listening to guest speakers, and learning the nuts and bolts of running a business. In return, he gave his investors an undisclosed amount of common stock in his company, which is based in Palo Alto.

For Altman, the trade has been more than worth it. Last September, Loopt launched its cell phone software exclusively with Boost Mobile, a subsidiary of Sprint Nextel (NYSE:S) with 3.8 million subscribers. Boost has since invested several million dollars in a TV advertising campaign to support the launch. Altman also plans to partner with several major cell phone carriers, which will roll out the service in 2007. The company is adding staff and recently raised $5 million in Series A financing from powerhouse VC firms like Sequoia Capital, which helped launch Google (NASDAQ:GOOG), Yahoo, and PayPal (NASDAQ:EBAY). "We have five people on our team, none of whom is over 23 and none of whom has any business experience," says Altman. "Y Combinator really understands what a company needs in its first three months."

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Techstars, a Boulder, Colorado-based venture firm, launched a similar program last year, offering start-ups as much as $15,000 and a three-month stay in Boulder, in exchange for 5 percent equity. Charles River Ventures, one of the nation's oldest venture capital firms, has also created a seed-level program, albeit with a slightly different approach. The CRV QuickStart program, launched in 2006, provides tech start-ups with low-interest loans of an average of $250,000 called convertible notes. Should the borrower go on to raise venture capital, the loan can be converted into equity at a discounted rate (a maximum of 25 percent off). The deal also gives Charles River the option to participate in the Series A round. "What we've noticed is that there is often an inverse relationship between the amount of money entrepreneurs raise and the quality of their companies," says George Zachary, a partner at Charles River Ventures.

For entrepreneurs, of course, these deals are a mixed bag. On the plus side, you get to keep more control. Angel investors, for example, often ask for a 20 to 40 percent equity stake right off the bat and will want to have some control of operations. Y Combinator, QuickStart, and other seed investors take much smaller stakes. What's more, there's no haggling over valuation--a process that can take months when dealing with VCs or angels. And getting accepted to these programs can be painless. You simply submit a description of your business or a prototype and sign a contract, a potentially crucial time savings that can help get your product to the market faster. The downside? If your venture hits it big, giving away a sizable stake in your company for a few thousand dollars might seem like a bad deal.

Still, QuickStart was appealing to Mike Phillips, co-founder of Mobeus, a communications software company based in Cambridge. Lacking a prototype or any significant market research, Phillips knew his company would have a hard time attracting VCs or angels. Indeed, without a clear idea of how big his company could become, he was hesitant to talk to any investors, whom he knew would ask him to place a specific value on his company and be eager to start talking exit strategies.

Instead of entering a guessing game about the future prospects of his company, Phillips used $300,000 from QuickStart--a 6 percent loan that he was able to close in just two weeks--to build a prototype and research the market while working closely with Charles River. The relationship has worked well enough that Phillips has just closed a multimillion-dollar Series A round with Charles River and Sigma Partners. The funds will help Mobeus bring its software to the consumer market, which Phillips expects will happen this summer. The ease and relative calm with which the deal proceeded almost made him forget he was dealing with a venture capital firm. "It's just a much simpler deal," says Phillips. "In a way, this is more natural than a typical VC deal because it gives both sides a longer time to get to know each other."

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