The Business of Startups Is Business

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asp?capId=23612957'>O'Reilly AlphaTech Ventures. "For a while, people were not focusing on infrastructure and applications for the Internet, but now it's popular again because there's real pain and real need there," says Michael Skok of North Bridge Venture Partners.

Business Networks

Some startups and their funders are focusing on business-focused ventures to hedge against economic travails that could damp demand for green tech or consumer-specific services. "No one sector is leading the way as they did in the 1990s," says Alan Spoon of Polaris Venture Partners. Inspired by a resurgence in crafting and a desire to sell his own handmade furniture, Robert Kalin in July, 2005, launched Etsy and built it into the world's largest online marketplace for sellers of handmade crafts (BusinessWeek.com, 7/23/07). The company boasts more than 73,000 active sellers who last year sold almost 2 million items worth $26.5 million. In January, Etsy raised $27 million from Jim Breyer at Accel Partners, Union Square Ventures, and Hubert Burda Media.

OpenDNS caters to larger companies. Headed by David Ulevitch, 26, OpenDNS helps more than 4 million consumers and organizations, including 10,000 schools, block inappropriate Web sites and protect their computers from spam and phishing schemes. OpenDNS identifies "bad" sites using a database, EveryDNS, which Ulevitch created in 2001 and made open to developers who in turn submit and verify names of harmful or malicious Web sites. OpenDNS makes its service available for free but generates revenue through a partnership with Yahoo! (YHOO) to show ads to users. Amid the housing and credit crises, "free is certainly the right price," Ulevitch says, with good reason. The less than two-year-old company is profitable.

Ad Revenue

The OpenDNS business model underscores another theme unifying some of the most successful innovators: generating revenue through ads. Online advertising is expected to rise 22.7%, to $25.9 billion, in 2008, according to market research firm eMarketer. "Advertising is where most of [today's Web entrepreneurs] plan to make money," says Tracy Lefteroff, global managing partner of venture capital and private equity at PricewaterhouseCoopers.

Founded in 2005, New York's Phreesia developed a handheld tablet that helps health-care providers collect and manage patient information. Co-founders Chaim Indig and Evan Roberts make the device available to doctors at no charge. Physicians use the tablets in place of traditional clipboards for patient check-in. Phreesia makes money by selling ad space to such companies as pharmaceuticals makers that want to reach those patients via the digital tablet. Phreesia, which raised a total of $13.25 million in funding from HLM Venture Partners, Long River, Polaris Venture Partners, and Village Ventures, supports more than 1,000 doctors and is adding 300 to 400 new doctors a month, Indig says. The company expects to record more than $10 million in ad revenue this year.

As the economy slows, companies like Phreesia that are generating sales and cobbling together a workable business model may very well continue to attract the attention of increasingly selective venture capitalists and the customers—be they consumers or companies—they so desperately crave. Says Fagnan of Atlas, "A lot of the best technology companies were actually built in an economic downturn."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

With Aaron Ricadela in Silicon Valley and Catherine Holahan in New York.