Courtesy of Gabe Rivera

Founder Gabe Rivera said he would 'hate to see Techmeme wither or die inside a bigger company.'

This is the fifth in a five-part series called “No VC,” which highlights startups that have succeeded without venture capital, the lifeblood of Silicon Valley.

Gabe Rivera often hears from Silicon Valley’s elite, who are eager to invest in his startup Techmeme, the favorite news website of technology industry insiders. But many of them, such as SoftTech VC’s Jeff Clavier, don’t get very far.

“The first time I asked Gabe if he would be interested in an angel investment,” said Clavier, “he replied something like: ‘I don’t want to deal with the obligations attached to raising money, and I still want to be able to take a nap after lunch.’”

Rivera created the site in 2005, when blogs and news outlets tracking the daily gyrations of technology giants began pouring a greater amount of content onto the Web. Techmeme collected the day’s most important headlines in one place, grouping together similar posts from different sites and constantly scanning for fresh news. Rivera had left his programming job at Intel and supported the new website and himself with $55,000 in personal savings. In 2006, he began selling ads and began growing his team.

Techmeme, which Rivera calls a “scrappy” operation, now has a staff of 12 who mostly work from his San Francisco apartment or their own homes. While the algorithm for sifting news has improved and Rivera has hired human editors to find stories the machines miss, the site looks almost identical to the way it did six years ago.

Reluctant to make revenue a priority over user experience, Rivera has resisted selling large-format graphical ads in favor of smaller promotions targeted at the industry Techmeme covers, including sponsored blog posts, help-wanted ads and announcements about upcoming events. Rivera declined to say how much the site makes, but said it covers the cost of labor, servers and everything else, “with a little left over.” Sales are at least $1 million, based on ad rates posted on the site.

However much money Techmeme makes now, it’s no secret that the potential is much greater. Rivera has turned down acquisition offers from major Internet players because he would “hate to see Techmeme wither or die inside a bigger company, and I’d hate to see our team get bogged down building another company’s doomed product,” he said. Investors approach Rivera about once a month. He tells them he doesn’t need the money and that they wouldn’t be patient enough to support the company he hopes to build.

“We’re still exploring what the product and revenue model is at a very fundamental level, and raising money too early in this process wouldn’t make sense,” said Rivera, 39. “It’s true that in many ways, more money would make many things easier, including hiring more good people. But I’m also concerned about what it might make not possible: patience in letting a product mature, or forgoing costly distractions like board meetings and fundraising.”

Clavier and other investors who have befriended Rivera over the years have stopped pestering him because they acknowledge his approach wouldn’t work for venture capital.

“The genuine question when you raise funding is how it allows one to grow faster, larger and more valuable,” Clavier said. “It seemed to me that Gabe was not clear that funding would get him there anyway.”

Mark Suster, an investor at GRP Partners in Los Angeles, reads Techmeme every morning and has also discussed funding with Rivera. While Suster admires the entrepreneur for his independent approach, he said that’s also what would make Techmeme a poor investment.

“Gabe is not the guy a VC would invest in,” Suster said. “I’m trying to find the guy who can say, ‘I want to change the world and have the biggest company possible.’ That’s who I need to finance. History would not suggest that he’s that guy.”

Still, Rivera continues growing the business at his own pace. He has built and staffed a separate site that aggregates media news, Mediagazer, and expects to do the same for other news-driven topics.

“I don’t believe anyone aiming to build the ‘biggest company possible’ could have made something like Techmeme,” said Rivera. “Any such person working on something remotely similar to Techmeme would instead focus on how to reach tens of millions of users as quickly as possible, and as a result, the relevance of the product for a community as focused as Techmeme’s would suffer.”

Plus, growing too quickly might get in the way of the naps Rivera takes after lunch almost every day.

“My naps are important,” he says. “We should all nap more.”

Original post is No VC: Why Techmeme’s Gabe Rivera Resists Investors by Tech Deals.

Courtesy Zoho Corp.

Zoho CEO Sridhar Vembu doesn't want to bring in venture capitalists who could ruin the fun of running the business, he said.

This is the fourth in a five-part series called “No VC,” which highlights startups that have succeeded without venture capital, the lifeblood of Silicon Valley.

At first, Sridhar Vembu couldn’t raise money for his enterprise software startup because he didn’t know how to run a business. Since figuring things out, he’s shunned investors because he doesn’t want venture capitalists telling him what to do.

Vembu, the chief executive officer for Zoho, has no aspirations to take the company public. In 2000, he turned down a venture capitalist who would have valued the company at $200 million, he said. Now, Zoho makes nearly that amount in annual revenue.

“If you take venture capital, your goals change,” he said in an interview, adding that investors ultimately will push for an initial public offering or a lucrative sale. ”I have trouble seeing myself as a public company CEO, to be honest. I couldn’t care less for Wall Street and for quarterly earnings.”

Vembu’s company started out as an excuse for him to move back home to Chennai, India. He had been working on wireless technology for two years at San Diego-based Qualcomm, as did his brother, a software engineer. Then in 1996, the pair decided to do their own thing.

“We didn’t have a very strong business plan,” Vembu said. “It took us about a year and a half to settle on what products would make money.”

The brothers also took a while to decide on a name. The company had operated under Vembu Systems, Advent Network Management and AdventNet over the years. One reason for the changes was fear of being sued over trademark infringement, which can kill a company without venture capital, Vembu said.

Early on, the startup sold software to network-management companies, including Cisco Systems and Motorola. At the height of the dot-com bubble in 2000, when there were hundreds of networking companies in Silicon Valley, AdventNet sold its products to about half of them, according to Vembu. When the industry imploded, the company’s revenue dropped precipitously.

Then in 2004, AdventNet introduced ManageEngine, a software suite for corporate information-technology departments that now accounts for $120 million in annual revenue. The following year, the company created Zoho, which includes Web-based sales management, communication and productive tools.

In 2009, Vembu changed the company name to Zoho, and for good reason: The online tools have become its fastest-growing business. He forecasts that the cloud-software division could overtake ManageEngine in revenue in a year and a half. Zoho’s customer-relationship management programs compete with those from Salesforce.com and SugarCRM. The name Zoho is a take on the product’s target market: small office/home office (SOHO).

Vembu credits some of his company’s success to its long-term research projects and extended training program, which pays high school graduates in India and the U.S. to learn to code. Graduates of Zoho University make up about 15 percent of programmers employed by the company.

He said those types of endeavors might have been frowned upon by outside investors. It would be easier and quicker for Zoho to just hire qualified engineers, he said, but they wouldn’t be as connected to the independent corporate culture that Vembu has cultivated over the years.

Workplace climate is of special interest to Vembu. With 1,500 employees, most of whom work in Chennai and Pleasanton, California, his goal is to prevent these offices from turning into a “corporate environment,” something that would be difficult to do if investor expectations needed to be taken into account.

“It would take out the fun of work,” he said.

Original post is No VC: Zoho CEO ‘Couldn’t Care Less for Wall Street’ by Tech Deals.

Photograph courtesy of Quizlet

Quizlet founder Andrew Sutherland (left) hasn't found the need for venture capital.

This is the third in a five-part series called “No VC,” which highlights startups that have succeeded without venture capital, the lifeblood of Silicon Valley.

(This post was updated to correct the site’s pricing to $15 a year.)

One night this past summer, Andrew Sutherland was eating takeout at the office of his San Francisco-based startup, Quizlet, when a knock came at the door. He answered to find partners from a well-known venture capital firm. Based on the e-mails and phone calls he received from the firm before, Sutherland surmised they wanted to discuss a possible investment.

“I guess they thought that if they couldn’t get in through other channels, maybe we’d take an in-person meeting,” he said. “We turned them away.”

The 22-year-old  Sutherland has rebuffed numerous investors since becoming one of the hottest new stars in education tech. Quizlet, the program he created as a high school sophomore to prep for a French exam, has grown into one of the most popular study tools for students. The website has more than 12 million unique visitors a month and the company’s app has been ranked as one of the top educational programs in Apple’s App Store for the past three months.

Yet unlike high-profile startups such as Inkling and Kno, which have raised tens of millions of dollars from VCs eager to cash in on the boom in smartphones and tablets in the classroom, Quizlet remains entirely bootstrapped.

“We don’t need the money right now,” said Quizlet Chief Executive Officer Dave Margulius. He said the company is cash-flow positive and predicted that revenue would surpass $10 million in two years.

Quizlet became profitable soon after it was created in 2005, according to Sutherland, who built the flash-card program for the Web and supported it by selling Google AdSense promotions that let marketers place ads on the site. As the game grew more popular and server costs rose, he raised $30,000 from friends and family and invested profits from a separate site he helped to create — an e-commerce service called Collectors Weekly — to grow the business.

He also hired Margulius — a tech veteran who founded Boston.com in the early 1990s and worked as an executive at Evite — to help run Quizlet while he attended MIT. Last year, Sutherland dropped out of college to focus on Quizlet and help produce its first app for Apple’s iPhone.

Investors may like Quizlet because it’s not selling anything to school administrators or teachers, which usually involves clearing red tape and waiting out budget approvals. Instead, the simple and fun-to-use app appeals directly to students.

“A kid in California can create a Quizlet around a topic and 45 kids in South Carolina who don’t even know him can leverage that for their own studying,” said Semil Shah, an entrepreneur-in-residence at Javelin Venture Partners who has written about education for the blog TechCrunch.

Aside from selling ads, Quizlet also offers a $15-per-year version with no advertisements.

While Sutherland sees sales continuing to grow at least 150 percent a year for the foreseeable future, he’s more focused on getting his service into the hands of more students around the world. That’s a vision that may be at odds with outside investors, he said.

“A lot of VC companies go for a subscription business and try to monetize quickly,” Sutherland said. “We can build a bigger business that can serve a lot more people if we’re more open and not trying to get money out of every single user.”

Original post is No VC: Education Startup Quizlet Makes the Grade Going It Alone by Tech Deals.

Photograph by Stephen Foskett

Thomas Isakovich is taking an entirely different approach to building his second storage company.

This is the second in a five-part series called “No VC,” which highlights startups that have succeeded without venture capital, the lifeblood of Silicon Valley.

Thomas Isakovich started his first storage computing company, TrueSAN Networks, when he was 19. It was during the dot-com boom and venture capitalists were wildly betting on all things tech. Isakovich joined the party in 2001, taking more than $30 million from a group of investors even as the bubble was bursting.

Two years later, Isakovich was left with nothing. The investors, who had decision-making control, forced a sale of the company so they could get their money back amid a tumultuous market. The price wasn’t high enough for Isakovich to get a return.

Determined to avoid a similar fate, Isakovich took an entirely different approach to building his second storage company, Nimbus Data. He’s pulled in only about $2 million from angel investors — some who also helped TrueSAN get started — and hasn’t given a board seat to any outsiders. Six years after starting Nimbus, a provider of flash-memory storage, Isakovich is selling to more than 250 companies around the world, including EBay and Lockheed Martin. The South San Francisco-based company has 45 employees and could be ready for an initial public offering in 12 to 18 months, he said.

Isakovich, now 35, knew that large corporations faced a rapidly evolving problem: They were consuming and processing too much data for their old, clunky storage systems to manage. They didn’t need to buy more expensive, outdated spinning discs. Rather, they required efficiency that only intelligent software could offer.

Building a product from scratch on limited invested capital is a challenge for any tech company, which is why the venture industry exists. The task is even greater for a startup that’s trying to sell complicated systems to big enterprises, because the incumbents are massive and have long-standing relationships with corporate tech departments.

Without venture capitalists, Isakovich knew he needed to generate revenue, and fast. Using contacts he’d made while at TrueSAN, he forged licensing deals with IBM and Applied Micro Circuits that allowed these companies to use Nimbus’s early source code inside their products. Both were “seven-figure deals,” Isakovich said, bringing in millions of dollars to further develop the technology.

“There was a gaping hole in the market, and we were the main game in town,” said Isakovich, who started Nimbus while studying at Stanford University. “IBM needed it and needed it pretty urgently for the product they were working on.”

From there, he built out a team and an integrated product, with cheap off-the-shelf hardware and Nimbus’s customized software. Eventually he got into hardware development as well. Now, Nimbus is going head-to-head with NetApp, Hewlett-Packard and EMC, and frequently winning. According to Isakovich, the key is using technology to be capital efficient, in addition to creating a product that companies can’t live without.

“It’s a 21^st century approach to building a business,” he said. “The old way was you have to hire 100 salespeople to hit $200 million in revenue.” Now, “deals can be done through the Web and GoToMeeting and all these other things like high-def video conferences and remote demos,” he said.

Isakovich said he hears from venture capitalists a few times a week, but most of the calls come from late-stage and public market investors trying to build a relationship for the future.

“The word has gotten around that we’re past the stage of traditional venture investors,” Isakovich said. “And we’re very much set in our ways of building this thing without outside financing.”

Original post is No VC: Nimbus Takes ’21st Century Approach’ to Building Business by Tech Deals.

Photograph by Petrified Collection

FreshBooks says it has paying users of its Web-based accounting software in 120 countries.

This is the first in a five-part series called “No VC,” which highlights startups that have succeeded without venture capital, the lifeblood of Silicon Valley.

Mike McDerment was shacked up in his parents’ basement in Toronto when the first venture capitalist called. It was 2006 and the entrepreneur was in his fourth year of work on FreshBooks, Web-based accounting software he’d created for small businesses. His startup had a handful of employees and no salespeople, but it was getting enough market traction to merit a call from Insight Venture Partners in New York.

“They scared the hell out of me,” said McDerment. “I wasn’t ready for what they had to offer. It was about running sales and enterprise teams. We barely have a sales team today.”

FreshBooks, which now has 110 employees, is part of a rare breed of technology companies that has achieved success without the help of venture capitalists, the lifeblood of startups for the past half century. While the company doesn’t disclose financials, FreshBooks has paying users in 120 countries and its product has been used by more than 5 million people since its inception, McDerment said. The software is free for independent consultants and freelancers that have fewer than four clients. Paid packages start at $19.95 a month.

McDerment, 36, isn’t opposed to taking outside investment money. He raised about $100,000 from family and friends in the early days to go along with $30,000 of his own money to kickstart the business. He then brought in some angel investors that also act as advisers, though he won’t say how much they’ve contributed. McDerment said he’s just never gotten comfortable with taking capital from an institution that views his company as part of a portfolio.

He’s right to be concerned. Venture capital is known as risk capital, because investors are gambling on unproven technologies that often fail. Therefore, they make many bets and double down on the breakout hits, often ignoring or winding down the others. Yet, McDerment says the risk goes both ways. For him, the peril is that an investor comes in with interests that are unaligned with his own and those of his company.

For example, FreshBooks spends boatloads of money on customer support because that’s what keeps users coming back and encourages them to spread the word. An investor could see that as an unnecessary cost that could be outsourced or automated, McDerment said.

He also doesn’t want to sell the company or be forced to take it public before he’s ready, even if an investor needs the money back to shore up its own returns.

“I don’t want to deal with your problem,” McDerment said. “I’ve got enough of them on my own.”

McDerment has long since left his parents’ house, and earlier this year moved the company into an office near the University of Toronto. He still gets multiple calls a week from venture capitalists, including one the day before our interview offering to put in $25 million. He takes the calls and engages with investors, because there may be a time when FreshBooks wants or needs the money to scale faster or just add to its balance sheet.

At this point, he’s beyond the traditional venture phase and more in the category of growth investors. Still, if he chooses to take in money, McDerment wants to set the terms. He won’t allow investors to come in with so-called liquidation preferences that allow them to get paid out first in the case of a sale. He also won’t let in anyone who can’t commit to a 10-year investment, a time horizon that doesn’t fly with most venture capitalists.

“I don’t want to hear anything about you needing your funds back until year No. 9,” McDerment said. “At which point I will call you and ask you if you still want it back in the next year.”

Original post is No VC: FreshBooks CEO Sees Risk Capital as Too Risky by Tech Deals.

The money hasn’t stopped flowing. Over the past decade, venture firms poured between $20 billion and $32 billion a year into startups, spawning successes such as Facebook, LinkedIn and Workday.

But those stories are the exceptions. More often than not, venture investments return little if anything to the financiers, with the businesses they back getting tucked into bigger companies or withering altogether.

However, there’s a third class of startups that’s even less frequently discussed. They’re the ones that go it alone or with just the support of friends, family and a few angel investors. Sometimes the venture firms just miss them, and other times the startups shut them out.

When these entrepreneurs succeed, they do so as underdogs. Not only do they lack a financial cushion, they also forego the connections, branding, marketing prowess, publicity and overall stamp of approval that accompany the big bucks from a major venture capital firm. But by going this route, these entrepreneurs keep their ownership, grab control of their own destiny and, perhaps most importantly, gain a real appreciation of money.

Ed Zschau teaches that to students in his high-tech entrepreneurship class  at Princeton University, and he’s observed it in the handful of startups he’s backed as an angel.

“Companies that don’t have much money when they start out develop good habits,” said Zschau, who previously worked as a venture capitalist and served four years as a U.S. congressman for California. “They’re able to do a lot more with less.”

Starting next week, Bloomberg.com’s Tech Deals blog will profile five startups that have succeeded without venture capital. Success does not mean becoming a multibillion-dollar public company, but rather having reached a point where the business is thriving or the brand is at least big enough to make VCs deeply regret missing out.

Look for a series of posts that we’re calling, “No VC.”

Original post is No VC: How 5 Startups Skirted Tech’s Financiers by Tech Deals.