The Cost of Money

FOR MANY CHIEF executive officers, the venture-capital offer sheet would have begged only one question: Where do I sign? But Ryan Peterson had a delicate corporate culture to preserve. He feared a massive infusion of cash would contradict the bootstrapping mentality that defined his company. "Every one of our employees knows what money's worth and knows not to waste it," says Peterson, founder and CEO of TrafficGauge. "If we hadn't fought for this kind of growth, we wouldn't have gotten this far."

Rather than accept the venture-capital offer, Seattle-based TrafficGauge called on a group of local investorsangels, as they're called in today's hope-deprived economy. "With angels, I think there's more control over your own destiny than with a VC," says Eric Meyer, co-president of TrafficGauge. "We had to scrap for every penny." Two weeks later, at the end of May, the company had raised enough for a June 13 product launch. Today, Seattleites can use the compass-sized TrafficGauge to stay informed of traffic jams on King County's busiest highways.

TrafficGauge has learned to do more with less, embracing the new reality. Boeing is in decline, the state ranks highest nationally in company closings, and more than 100,000 jobs have been lost. The past four years have offered a sobering education in economic Darwinism. Startups now have two choices: scrap for every penny or die. The irrational exuberance of 1999 taught the industry that funding is secondary to entrepreneurial tenacity. Here are three Seattle-area companies that have taken that lesson to heart.

NERVANA

"Microsoft in '75, Oracle in '77, PeopleSoft in '87. SAP. Very few good, solid software companies were started during the boom times. Cisco. They're all recession companies." Nosa Omoigui believes he's in the right place at the right time as CEO of Nervana, the company he founded in April 2001, after six years with Microsoft. On July 21, Nervana received an early-stage investment from Bear Stearns that will propel the company into the enterprise software market. After more than two years of covert development, Nervana is poised to come out of "stealth mode" with the imminent launch of its Web site. Early conversations have generated excitement among potential customers in the company's core pharmaceutical market.

Still, it has not been easy for Nervana. The conventional wisdom of how to build a software company has mutated.

"Everything got pulled from underneath me in real time," Omoigui says. "Between VC meetings, the definition of early stage kept changing."

In the 1990s, venture-capital investors gambled on companies that might fail, hoping for lucrative returns from the ones that succeeded. A startup with a strong patent and a large potential market provoked risky leaps of faith. Today's VC investor waits for validation of a company's business model, requiring a finished product or paying customers. With a raised barrier of entry, software entrepreneurs have to do more with less.

BOOTSTRAPPING IS nothing new to Omoigui. He provided seed capital to start Nervana and initially worked from home. In June 2002, he filed a 300-page patent and assembled a six-person team that could execute his vision, thanks in no small part to an angel investment by Nervana board member and former Microsoft executive Scott Oki. Now Nervana can make a run at capturing information technology's Holy Grail.

For years, software companies have pursued an elusive concept known as knowledge management. Organizations that collect massive amounts of datathe CIA, for exampleoften complain that valuable information is trapped somewhere inside the organization, disconnected from the people who need it most. Knowledge management aims to get the right information to the right people at the right time, which is what Nervana's technology purports to do.

"It's called the information nervous systemthat's where the name Nervana came from," Omoigui says of his invention. "How do you define a knowledge user interface? That's extremely difficult. The Web browser was the last big leap in user interfaces. Back, forward, link. What's the equivalent for knowledge?"

The market will ultimately judge whether or not Nervana has answered that question with its innovative software. In the meantime, the company has adopted the type of business model needed to survive in a wounded tech economy.

"You need to be able to break even with 2, 3 million [dollars] max, or you're not going to make it," Omoigui says. "In the past, software companies required 10 to 15 [million dollars] to break even." That means the time frame for succeeding is compressed. "Now you have 18 months, 24 months tops, or you're gonna die."

NEAH POWER SYSTEMS

"The tourists have all gone home," says Dan Rosen, co-founder of Frazier Technology Ventures and chairman of Neah Power Systems. "People who really aren't entrepreneurs at heart but thought it was a great way to make a lot of money in a hurry have learned it's not a great way to make a lot of money in a hurry."

Bothell-based Neah Power Systems is no tourist. After four years of development, Neah is positioned to deliver a consumer-friendly fuel cell.

"What we're trying to do is create a better battery, even though it's not really a battery," says Gregg Makush, vice president of marketing at Neah. "The goal is to create something that works in the form factor of a rechargeable battery, but it's a fuel cell. The difference is that these things don't get plugged into the wall to recharge."