DOT-COM ON THE CHEAP / Startups shun forebears' excesses, and some workers even bring their own chairs

FINDS/C/21JUL94/HM/CS Before shot of ratty, old chair. Chronicle photo by Chris Stewart FINDS/C/21JUL94/HM/CS Before shot of ratty, old chair. Chronicle photo by Chris Stewart Photo: Chronicle Photo By Chris Stewart Photo: Chronicle Photo By Chris Stewart Image 1 of / 8 Caption Close DOT-COM ON THE CHEAP / Startups shun forebears' excesses, and some workers even bring their own chairs 1 / 8 Back to Gallery

It took backbone to launch a new company six years ago amid the mounting wreckage of the technology bust.

With no venture capital funding, Jay Borenstein and his fellow founders of Palo Alto's Integration Appliance Inc. knew they would have to stretch every dollar.

So they came up with a "bring your own chair" hiring policy. New employees might have developed poor posture, but they also learned the company's Spartan mind-set.

"It was kind of a litmus test for people who were thinking about joining us," said Borenstein, Integration Appliance's CEO.

Gone are the Herman Miller Aeron desk chairs and the other technocrat excesses of the late 1990s when dot-coms burned through money and hype, throwing lavish launch parties, staffing up quickly and spending millions on Super Bowl ads.

Emerging in their stead is a post-crash generation of stingy startups using ingenuity to minimize the cost of turning raw ideas into viable businesses.

They hire slowly and avoid using recruiters. They take advantage of plunging technology prices. They generate buzz by word of mouth. They establish overseas operations to lower labor costs. They scrounge computers and furniture from the free section of community Web site Craigslist. And, when they raise venture capital, they hoard it, fearful of blowing their shot at making it.

Statistics bear out this trend. Bay Area startups are raising less money these days -- an average of $8 million a pop, down from $11 million in 2000, according to research firm VentureOne. And they are making the money last longer, an average of 17 months, up from 10 months in 2000.

"Startups today just hole themselves away to code and code and code," said Jessica Livingston, co-founder of startup venture firm Y Combinator and author of a new book, "Founders at Work: Stories of Startups' Early Days." "They spend money where it matters, but nothing in excess. They know that no matter how much they raise, be it $100,000 or $10 million, this is not funny money. It's what's keeping them alive. ... It's much more important to them to focus on getting users and building a product that people want."

That nouveau parsimony means this technology boom may have a softer landing than the last, when dot-coms went from flush to flat broke faster than a high-speed connection could download "Who Let the Dogs Out" and left hundreds of companies out of business and thousands of people out of work. Many startups will fail this time around, too. But with thriftier spending habits, they will last longer than their dot-com forebears.

"One of the sharpest differences between 1999 and 2000 and now is the lack of excess spending across the board," said San Francisco venture capitalist Peter Thiel.

Take Munjal Shah, who raised $60 million for his first company. He has barely touched the $19 million he raised for online shopping service Like.com, which his company Riya launched a few months ago.

More than half of Shah's employees work out of an office in Bangalore, and he pays a significant percentage of the rent for his San Mateo office with stock. He hired all but one of his employees from the social networking site LinkedIn, Craigslist and technology blogs. And, instead of throwing a splashy launch party in November 2005, Riya bought $2,000 worth of pizza and beer for a lower-key bash in the leafy backyard of TechCrunch blogger Michael Arrington's Atherton home.

Perhaps most important, Shah created sophisticated technology -- a program that searches Web images for goods on a shopper's wish list -- on a shoestring startup budget, a path that would have been unthinkable just a few years ago.

No expense is too small to escape scrutiny in this ascetic age. "Someone said the other day, 'Let's get T-shirts.' And I said, 'You know, let's not,' " Shah said.

San Francisco entrepreneur James Currier welcomes the revival of the old-school Silicon Valley ethos, scrappy garage-dwellers cranking out revolutionary ideas in cramped quarters. Currier started Tickle -- the Internet company he sold in 2004 for $100 million to Monster.com -- in a dank, drafty basement in Cambridge, Mass., with a computer server perched on bricks to stay dry during rainstorms.

After moving to San Francisco, Currier rented offices in the Tenderloin that were cushy by comparison. There his employees used old oak doors salvaged from a demolished apartment building as desks. Currier said the hardened neighborhood made it easy during job interviews -- conducted over a no-frills $5 lunch at the nearby Vietnamese hole-in-the-wall Tu Lan -- to sort the believers from the opportunists.

"Starting a business is an adventure. It can build your character as you build the business in that Joseph Campbell 'The Hero With a Thousand Faces' kind of way," Currier said. "Having an austere environment helps get your team into that mind-set."

That mind-set is in full force at meebo Inc. in Mountain View. In September 2005, Seth Sternberg, Elaine Wherry and Sandy Jen used their credit cards to fire up the instant messaging service. Ever since, they have grown the business cautiously, spending about $160,000 a month on the 12-employee operation. Meebo, which raised $3.5 million in venture funding in December 2005, announced that it has raised another $9 million this week as its registered users doubled to more than 1 million. Despite its early success, meebo remains miserly. The holiday party consisted of chips and soda served up in the company parking lot.

But meebo gets some of the biggest bang from not spending its bucks. In another sign of the increasingly collective nature of the Internet, the company has deputized fiercely loyal users to find and fix bugs in the software, answer each other's questions in a help forum, and identify and delete spam. This significantly reduces day-to-day business costs and frees up meebo employees to focus on the big picture.

Users even help create new features. They set up a group Web page to translate meebo into 69 languages, including Creole, Swahili, pig Latin, Klingon, "Bork Bork Bork!" (the Swedish Chef language from the Muppets) and Leet (online gaming slang).

"This is way better than the stuff we could have ever paid for," Sternberg said.

That cross between inventiveness and frugality is becoming as cultish as the iconic dot-com sock puppet. The only thing conspicuous about San Francisco startup Rapleaf is the lack of consumption, even of something as basic as square footage.

Founder Auren Hoffman squeezes his seven-person posse into 1,800 square feet he splits down the middle with another startup. For his share of the South of Market digs, he pays about $1,500 a month in rent, a San Francisco real estate bargain. He did not even spring for a sign on the office door because the landlord charges $230 a pop.

"It's a different take on being stealth," Hoffman said.

Roy de Souza, founder and CEO of Zedo Inc., also shares inexpensive offices with two other startups, upstairs from a "spa" that had been shuttered after being raided by federal agents.

Penny-pinching is a bit incongruous for the San Francisco Internet and advertising company that runs Zebo.com, a Web site devoted to young people making lists of all the possessions and brand names they have or want. But de Souza credits that frugal guiding spirit with keeping the 7-year-old Zedo afloat when the dot-com bubble burst.

De Souza relies on friends for everything from business leads to free furniture. He hires college interns who need experience more than money. "You want to invest in the technology and the product, not in furniture and white boards," de Souza said.

No one boasts more frugal beginnings than Xuqa, the popular online game. Like the game's players who collect credits called "peanuts," Ali Moiz, Murtaza Hussain and Prosper Nwankpa started their business with not much more.

Moiz and Hussain were students and Nwankpa had just graduated from Williams College in Massachusetts in spring 2005 when they began. Their first server was cobbled together from spare parts stripped from old equipment in the campus computer center, where they built a site secretly hosted on the college's fast Internet connection. They raised money to buy new servers by trading dining hall meals back to the college for cash.

Often sleeping in the computer center, they brought in pillows and blankets on chilly winter nights. Campus police even mistook them for homeless people one morning and almost threw them out.

A year ago, they put their college education on hold to move to San Francisco, where they bunk together in a two-bedroom apartment, subsisting on a fast-food diet. They squatted in their venture firm's offices until the investors gave them more money to find their own office. They keep a lid on expenses by maintaining an office in Karachi, Pakistan, where most of their employees work.

"We keep the company lean and mean," Hussain said.

Borenstein credits thrifty startup policies, such as bringing your own chair, with Integration Appliance's success. For months, Borenstein parked himself in an ergonomic nightmare, a family hand-me-down with a lumpy, foam-shedding cushion that he couldn't stand for more than a few hours at a time. Another chair was nicknamed "the back-stabber."

They scavenged old printers and fax machines from their lawyers and customers, and played to determine who would get a voice mail box on the company's $14.99 answering machine from Fry's. A "recycling mound" in the middle of the office provided old parts employees could use to patch computers or build new ones.

Today, Integration Appliance is profitable, with 50 employees, steady revenue and 20 Fortune 500 customers from Citigroup to Chiron. Borenstein may have a more comfortable chair, but he holds firm to his cautious way of spending and thinking.

"If you have an idea you really believe in," he said, "you're willing to do whatever it takes to make sure that overhead and expenses don't get in the way."