Silicon Valley Start-Ups Funding Lopsided

Silicon Valley is in the midst of another start-up boom, but the money isn't flowing evenly to all newcomers.

Investors are piling into fast-growing websites like Facebook Inc., as well as makers of smartphone software, social-networking games and other consumer services. The same isn't true for technology start-ups targeting businesses, where the funding has been more muted.

The disparity is stark. In the first three months of this year, venture-capital investment in consumer tech companies nearly tripled to $874 million from $310 million a year earlier.

Meanwhile, investments in tech firms with business products rose at a slower rate to $2.3 billion from $1.9 billion a year earlier, according to research firm VentureSource. The overall pool of money raised by such companies is larger than that raised by their consumer-oriented counterparts because business-focused firms, which range from makers of networking gear to designers of computer chips, often require greater investments to get their ventures off the ground.

Jeff Tseng, a 32-year-old entrepreneur, last year tried to raise money for his start-up, Kontagent Inc., a San Francisco company that helps videogame companies track how people use their products.

Over five months, Mr. Tseng met with 20 venture-capital firms. But most turned him down, saying they were looking to fund start-ups that target consumers.

"Only a handful of firms that we talked to are really interested" in funding companies that sell to businesses, said Mr. Tseng. While Kontagent finally secured $4.5 million in venture financing, the effort "wasn't the easiest," he said.

The shift away from business-oriented technology start-ups has been gathering steam over the past few years. Venture investment into such companies was $11.9 billion in 2010, down 35% from $18.4 billion in 2006, according to VentureSource. The overall number of financing rounds these companies received also dropped 18% to 1,261 during that time.

At the same time, investments in start-ups targeting consumers surged. Funding for these companies more than tripled to $4.8 billion in 2010 from 2006, and the number of financing rounds rose 68% to 374, according to VentureSource, which like The Wall Street Journal is owned by News Corp.

The numbers don't include so-called angel investments that are increasingly seeding consumer start-ups with hundreds of thousands of dollars.

One prominent networking-gear start-up, Arista Networks Inc. in Santa Clara, Calif., is being funded entirely by co-founders Andreas Bechtolsheim and David Cheriton. "The VCs just gave up on networking," said Mr. Bechtolsheim, who co-founded Sun Microsystems Inc. "People came to believe you couldn't do it and the barrier to entry was too high."

Some business-focused start-ups are still landing big financings, of course. Zuora Inc., a Redwood City, Calif., company that helps online businesses with their billing, in November closed a $20 million round, bringing total investment in the company to $41.5 million. Magnet Systems Inc., a Palo Alto, Calif., firm that helps workers collaborate, said last month it had received $12.6 million in its first round of financing.

But the success of young consumer Web companies like Facebook and Groupon Inc.—and their sky-high valuations—has many tech entrepreneurs and venture capitalists pivoting toward consumer services. There are fewer entrepreneurs and companies coming up with ideas for business products, venture capitalists said.

"We've definitely narrowed our lens in the last two to three years to consumer-focused brands," said Ben Choi, principal at venture firm Maveron LLC, which has offices in Seattle and San Francisco.

Building a successful company that sells to businesses is also tougher than building a consumer Web start-up, investors said.

Whereas $100,000 might be enough for a developer to bring a game for Apple Inc.'s iPhone to market, at a business-focused firm, that amount "will only buy you a month," said Kent Bennett, a vice president at venture-capital firm Bessemer Venture Partners, which is still investing in these companies.

Mr. Tseng experienced that slow road firsthand. While he founded Kontagent in January 2008, it took two and half years to land its first paying customer. "Most of our growth has been in the last six months," said Mr. Tseng, whose clients include Electronic Arts Inc. and Ubisoft Entertainment.

Sococo, a Mountain View, Calif., firm offering technology to help workers collaborate in what it calls virtual office spaces, found no venture capitalists willing to fund the business so it raised $7 million from affluent individuals.

"If you don't have those personal contacts, how are you going to access this market?" said David Van Wie, its chief executive and founder. "You are in a tough spot."

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