Micro start-ups make money in downturn

MOUNTAIN VIEW, US: Venture capitalists searching for the latest thing saw it this week in presentations by micro start-ups that engineer their companies to generate revenue from day one and profits soon after.

Two dozen companies displayed their wares on Wednesday in brief talks that are the graduation ceremony at Y Combinator, which invests up to $20,000 in Silicon Valley entrepreneurs and nurtures them through a three-month boot camp.

Some of those tiny companies included Bump Technologies, which helps people exchange information by literally bumping their smart phones against each other, JobSpice, which allows users to create resumes on the Web for free, FanChatter, which lets people take pictures and post them almost instantly on big screens at sporting events, and Mixpanel, which tracks and analyzes Web use in real time.

Venture capitalists said they detected something new as they listened on folding chairs at a Spartan one-story building, which uses rugs to warm a concrete floor and nothing to hide the plywood-lined roof.

The newest crop of Y Combinator companies, all just weeks old, are a far cry from traditional venture-backed start-ups that take years to find revenue and profits.

"They are making money in a downmarket" said Andrea Zurak, a venture capitalist in XG Ventures, which is made up of former Google employees. Speaking of a company whose presentation was off the record, she said: "They are adding immediate value."

A San Francisco venture capitalist said the phenomenon applied to many of this crop of Y Combinator companies.

"More of the start-ups this year are actually producing revenue. I find that interesting," said Mark Jacobson of O'Reilly AlphaTech Ventures.

One example is RentHop, which says it is a better way to find apartments in Manhattan than Craigslist. It opened for business only last month.

"We are profitable," said Lee Lin, one of two founders, who came to Y Combinator for mentoring, advice and support. They are paid by landlords who list with them.

Venture capitalists said the latest crop of entrepreneurs at Y Combinator's boot camp, which is headed by Paul Graham, had more focus than in years past.

"They were very good about saying what the problems are and how they solve them," said Manu Kumar of K9 Ventures.

FlightCaster, which opened for business the night before graduation and was already generating revenue, showed that in its dramatic presentation.

"We can predict up to six hours in advance that a flight will be late," said founder Jason Freeman, adding that at that moment, passengers at St. Paul International airport were being told Northwest Flight 1421 was on time.

He showed FlightCaster's live Web site and confidently predicted the flight to New York would be delayed. Later, Y Combinator head Graham stood up between presentations to say: "Northwest has announced the flight will be delayed."

FlightCaster is free on the Web, and sells mobile versions for the iPhone and Blackberry at $10 each.

"I was impressed with FlightCaster. It's an interesting combination of expertise on a team and a real problem that has to be solved -- a problem that costs people money," said Peter Ziebelman, a venture capitalist with Palo Alto Ventures.

As impressed as the venture capitalists were, they did not believe that all of the companies had investment potential. VCs look for companies that ideally would match the few rare mega-hits, such as Google, Intel, Cisco or eBay.

"I see a lot of companies here today that are more an application than a company," said Ted Driscoll of Claremont Creek Ventures. "They are not something that would scale for ventures."