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SXSW tech show banks on the buzz: At Austin industry festival, dreams of dot-com riches ease fears of another burst bubble
[March 10, 2006]

SXSW tech show banks on the buzz: At Austin industry festival, dreams of dot-com riches ease fears of another burst bubble

(Dallas Morning News, The (KRT) Via Thomson Dialog NewsEdge) Mar. 10--The parties will be raging, the beer will be flowing and talk of programming code and business models will fill the air.

In many ways, SXSW Interactive, the Web-friendly branch of the music and film festival set to take over the Texas capital for the next week, is a reminder of Austin's dot-com past, that era when foosball tables decorated corporate boardrooms and entrepreneurs hired inexperienced workers by the busload.

The Internet industry hasn't returned to those frenzied days, but the scent of money has begun to waft back into Austin. Some geeks are again beginning to strike it rich, and venture capitalists say they're ready to start exploring new opportunities, looking for the next Google or

Entrepreneurs and investors say, of course, that they'll be much more careful this time around, hoping to avoid the kind of collapse that left Austin's economy reeling five years ago.

But the euphoria is beginning to set in.

"The pendulum always swings from fear to greed, and just in the past year or so, it has swung back over to the greed side," said Chris Pacitti, general partner in Austin Ventures.

In Austin, investors and tech workers still have the memories of the dot-com frenzy and subsequent bust. The ghosts of companies such as, and, among others, still haunt the city's streets. Their lavish parties and fierce competition for employees, ambitious goals and unproven business plans soon led to layoffs and bankruptcies, leaving many tech workers jobless and many investors with heavy losses.

The fever of "1999 will hopefully remain a big anomaly never to be fully revisited, but that's not to say shades of it won't come up," Mr. Pacitti said. In the last year, "some people started making some money, liquidity events started happening, and that sort of feeds on itself."

The renewed interest in the Internet business will be especially noticeable at SXSW Interactive, long a haven for the Web's creative counterculture.

'It's just so weird'

"When more money comes back in, you have more people wanting to pitch their project on stage in a panel. Most registrants aren't coming to the event for that," said Hugh Forrest, event director of the interactive festival. "It's just so weird in this industry how it doesn't seem like there's a healthy middle ground. Either it's full on, or it bursts and we start over again."

Just like the SXSW film festival, which begins Friday, and the legendary music festival, which starts Wednesday, the interactive event brings together the people who bridge the divide between art and commerce. In other words, they turn creative ideas -- a song, a film, a cool software concept -- into money.

In the last few years, though, the Internet entrepreneurs who attend SXSW have grown accustomed to "bootstrapping" their own businesses, putting expenses on credit cards and hoping their ideas catch on.

Now some are finding that they can do more with help from investors who are suddenly more willing to pitch in.

Kyle Mashima and Prescott Lee, co-founders of a Silicon Valley photo-sharing software company called FilmLoop, realized that with outside investors they could make their software more useful. It could send entertainment and sports information to users in addition to photos.

So the co-founders, both Silicon Valley veterans, met with their venture capital contacts. They raised about $5.5 million in funding in January 2005, just as investors were renewing their interest in Internet start-ups.

"Our funding process was very fast. We had multiple offers within a week and a half. Literally, the guys we closed with made an offer the same day we saw them," said Mr. Mashima, a SXSW attendee. "There just seemed to be a hunger for new consumer offerings."

Here comes the money

Venture investors -- the firms that assume heavy risk to fund young companies -- are returning to Austin's software hotbed. Venture firms have targeted the software industry with about one-quarter of their Austin-area investments in the last three quarters, including $17.8 million in four software start-ups in the fourth quarter. The investment levels don't match those of the late 1990s, but they've risen steadily in the last few years.

Why the renewed interest? For one, the Internet industry has matured. It's cheaper to buy the servers, digital storage and other equipment needed to run a Web site or an Internet service. And Google has proven that there is a way to profitably sell advertising online, a challenge that vexed Internet start-ups back in 2000.

Internet users are also ready for new technology. About two-thirds of Internet users now cruise the Web using home broadband connections, allowing them access to more sophisticated material.

"It's just a matter of taking advantage of the fertile ground," Mr. Mashima said.

Industry veterans who remember the old dot-com boom view this new surge of interest with a mix of happiness and dread.

The money will help get new companies off the ground and reward entrepreneurs, said Ben Brown, a former Austin resident who sold his social-networking site, Consumating, to CNet Networks Inc. for "a lot of money" in December.

"Instead of working at a crappy job I didn't like, doing Internet stuff for somebody else, I get paid to work on the thing I'm actually passionate about," said Mr. Brown, who remains with CNet and now lives in San Francisco. "People are still pouring content out for free on the Internet. The time has finally come for people who have been doing that to get properly recognized."

Cash can taint

On the other hand, money can mislead and misdirect, causing young companies to make bad decisions, said Craig Newmark, founder of popular classified advertising site and a SXSW keynote speaker. He has shunned most outside investors and kept most of the site's listings free, following the advice of users.

"Once you make a comfortable living, how much more do you need to make?" he said. "Look at what's happened to Donald Trump and his hair."

Few believe that the heady atmosphere of the dot-com days has returned. But money can change people in subtle ways. It will be interesting to see how people interact at SXSW Interactive, Mr. Brown said.

"People always say SXSW is really great. It's open, you can talk to anybody and share ideas, etc., etc. That's been true the last four or five years because there's been no money," he said. "There's going to be a bit of a chilling effect on the in-person sort of openness that has happened in the past."

Clearly, the next chapter has begun in the Internet industry. For entrepreneurs and investors alike, the trick will be to enjoy the successes without getting caught up in a new wave of hype.

"Everybody's got shared scar tissue related to having seen this movie before and knowing how it ended last time," Mr. Pacitti said.


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