Startups get smart

The dot-com crash is raising a new kind of start-ups, ones who follow a conservative strategy while pursuing their goals of expansion through forming alliances and reselling partnerships.

New companies look to achieve critical mass through resellers.

The dot-com crash has inspired caution among start-ups. Tight funding has encouraged a return to more traditional business practices and made growth through partnerships more attractive.

No longer opting to throw funds at broad, mass-marketing campaigns, startups are becoming more strategic. "We learned to be conservative with growth projections and be stingy on how resources are spent and pay attention to existing channels that have been built up over the past 20 years," says Naseem Tuffaha, who directed Microsoft's developer programs on Web Services before starting CheckSpace with other Microsoft veterans last March.

CheckSpace offers hosted electronic payment services for small businesses. The company is the exclusive electronic check provider for Bigstep.com and can send electronic payments from within Intuit's QuickBooks. "Our strategy is to integrate with banks," says Tuffaha.

CheckSpace hopes to achieve critical mass through resellers and other allies.

Other startups, like gateway provider Bluetrain, have similar alliance strategies. "A lot of folks are finding out that the laws of physics can't be suspended for an indefinite period," says CEO Jack Weixel. "Core to this is a distribution channel."

The company recently signed 16 software companies to offer hosted application services through its Passport application gateway and another eight national and regional ISPs to distribute them. Bluetrain launched itself as a VPN provider in 1998 and switched to application software the following year--it targets small and medium businesses with financial services, customer relationship management, and e-commerce and other offerings. The company also is preparing to close a third round of funding.

Bluetrain's Passport aggregates billing data for its distributors and allows its users access to all its services with a single password. The gateway tracks changes in users' accounts, letting them add applications through Passport on-the-fly, and allows applications to share data via XML. Weixel expects that the ASP business ultimately will aggregate to large ISPs and telcos, but thinks smaller ISPs and integrators will act as resellers. "At the end of the day software is dead," he says. "What matters to users is services."

For startup Scale 8, company founders realized that creating hot technology and building a business are different skills. Last December, founder Josh Coates replaced himself as CEO with Hewlett-Packard veteran Dick Watts. Watts headed worldwide sales and distribution during a 30-year career with HP. Scale 8 offers storage services to companies sending rich media over the Internet and is based on massively parallel computing technology Coates developed while at UC Berkeley.

Scale 8 is pursuing the concept of "warm storage" (with hot storage being rapid access to a database and cold storage being slower access to tape). The company's MediaStore service serves files from origin servers sitting in storage centers on the East and West coasts (with Europe and Asia coming soon). Customers have the option of installing Media Ports on their LANs to cache files. The ports have a single global view of the Scale 8 storage centers' file system, which sits across hundreds of Intel servers and thousands of IDE disk drives and figures out the most efficient way to serve files. It also scales to handle files in high demand. "Unlike databases, we encourage hitting on the same file at the same time," Watts says. "When Madonna is less popular, we flush the caches."

Akamai both resells and uses Scale 8's service, and Watts plans to sign content distributors, integrators and Web hosters as partners. However, he says he is not in "full-bore recruitment mode" because building a channel takes time.

For angel-funded Ipedo, plans are to seek partners for its directory caching software, which focuses on rapid delivery of user profiles to portals and ASPs and B2B exchanges.

Ipedo's cache is the first of several products the company plans to make Internet and wireless applications easier to use. The cache is written in Java and connects to directories through LDAP version 3. Ipedo also has partnered with Bowstreet on DSML (Directory Services Markup Language), which aspires to be a standard for representing directory services in XML, and has developed technology that disperses data across data and application tiers to improve delivery. Ipedo is raising its first venture round, says cofounder Tim Matthews.

Startups are seeing the light. Now they have to execute on alliances.