Capital Ideas From The Internet

Another way SAVP limits risk is by investing in young companies that have begun to generate revenue. Among Critical Mention's clients are Associated Press Television News, CNBC, and The News Hour on PBS. Having customers lets investors judge whether the product or service is really needed. "All you have to do is talk to the customer, and you're going to know about market acceptance," Cullman says. "Otherwise, you really don't know what you're getting yourself involved in."

Not surprisingly, many of the ventures receiving funding are Web-based because the Internet provides ubiquitous and cheap communication that furnishes access to devices everywhere. "When you put that combination together, you've created an infrastructure that allows you to create these new business services on a platform that's, in effect, free," Cullman says. "We've barely scratched the surface in terms of how companies can utilize in-place infrastructure to do their work cheaper or more thoroughly, and with better and more complete knowledge. The opportunity for these service businesses to expand exponentially and in an extremely rapid fashion is huge. It's only limited by the ability of the service itself to create value for the ultimate user."

Sometimes the added value can surprise the investor as well as a venture's founders. Critical Mention was created with the public-relations industry as a primary market, but the company soon discovered that politicians wanted its service, too. "They created another revenue stream never anticipated in the product," Cullman says.

Serial Entrepreneurs

Joining Cullman at the Manhattan presentation to scout startups to invest in was Robert Gailus, managing member of Lenox Capital Group LLC. Before investing, Gailus looks for a company with leaders who've had experience running a new business, so-called serial entrepreneurs. Too often, startups boast of nifty technology ideas but have little perception of how customers will use them.

"Many early-stage companies often have brilliant ideas, but they don't spend enough time doing the research required to position a product in front of investors and articulate the competitive landscape," Gailus says. "Oftentimes, you find someone who is a brilliant inventor or developer, but they don't quite understand the nuisances of the market, like developing price models."

And investors don't discount the importance of customers in the success of a new tech venture. In his 20 years as a venture capitalist, Gailus says only one of 75 companies he backed failed because the product didn't work. Most often, customers didn't feel comfortable with change, showing reluctance to adopt new technology. "We're all bombarded with more and more technology every day, making it more and more difficult to get people to adopt new things," Gailus says. "So the adoption issue becomes a critical element in an investor's perspective on the viability of the company."

Still, Gailus has his eye on companies such as VCinema Inc., which provides subscribers with on-demand access to feature films, TV shows, music performances, educational series, and children's programming via PCs, laptops, cell phones, portable media players, and TV set-top devices. VCinema's virtual library furnishes unlimited storage of the digital-video rights purchased by subscribers in a centralized Internet repository and remotely delivers the content to their viewing devices via broadband Internet or high-speed wireless networks. Children watching a movie at home on TV can continue watching the same program on a laptop while driving to Grandma's.

Be Realistic

But investing in vertical businesses means expectations of backing ventures that will grow into megabusinesses have been dampened. "These markets are smaller, meaning the companies when they grow up may be, realistically, $25 million to $50 million companies, as opposed to $250 million companies," Gailus says.

Still, there are plenty of growth opportunities for the entrepreneurs who use their imaginations to capitalize on existing technologies. That's Haft's hope at USCondex. Not only will USCondex serve as an online broker, but its technology can be tailored at little cost to offer online sales and marketing services to other brokers and condo developers. USCondex is a media portal, too, selling ads not only to condo sellers but to realty lawyers, title companies, and other businesses interested in attracting the attention of condo buyers and sellers. And then there's the data created by all who use the Web site, with untold opportunities for new offerings.

The technologies that are enabling me are really becoming common tools that you can start to use as a nice palette to intro-duce how you turn your business into data, and how you turn that data into content, and how you turn that content into cash flow," Haft says. "And that's really what we're all about."