From Myspace’s Ashes, Silicon Start-Ups Rise

J. Emilio Flores for The New York TimesFinding new ventures after Myspace: From left are Josh Brooks, Amit Kapur, Chris DeWolfe, Jim Benedetto, Colin Digiaro, Steve Pearman, Josh Berman and Aber Whitcomb.

IT is hardly uncommon for founders and employees of successful companies to cash in their chips and go on to start other successful companies. Perhaps the best-known example is PayPal, the Web payment service whose leaders went on to found and invest in a bunch of other companies — YouTube, LinkedIn, Yelp, Tesla — and to earn the nickname the PayPal mafia.

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In 2007, Chris DeWolfe, left, who was then the chief executive of Myspace, answered questions with Rupert Murdoch of News Corporation at the Web 2.0 conference in San Francisco. News Corporation acquired Myspace for $580 million in 2005 — but sold it for $35 million in 2011.

More recently, the alumni of another Internet company — a social network based in California — have generated an impressive number of spinoffs. But what is notable about these spinoffs is that they have been generated not by a spectacular success, like PayPal or Facebook, but by a distant also-ran: Myspace.

It is easy to forget that Myspace started before Facebook and could have been worth billions, but a variety of miscalculations and missed opportunities turned what was once a nearly $600 million company into an afterthought. By 2011, many of its users had abandoned it, the founding team had departed and its owner, News Corporation, sold it for just $35 million. (It is now reinventing itself as a site for musicians and other artists to connect with their fans.)

Yet from the ashes, a surprising number of start-ups have risen. Almost every member of Myspace’s founding team has begun a new venture, and several are among the leaders of Los Angeles’s blossoming start-up industry, now known as Silicon Beach. That community is growing for a number of reasons — an influx of capital, lots of young programming talent, a convenient nexus with Hollywood celebrity — but the Myspace spinoffs are a factor, too.

“In terms of creating enterprise value, of starting companies that are hiring and generating revenue, I’d say by far this is the most successful aggregation of entrepreneurs that has yet come out of L.A.,” said Paul Bricault, a venture capitalist at Greycroft Partners and a managing director with a digital media accelerator, Amplify.

Until recently, it was conventional wisdom that entrepreneurs in Los Angeles had little choice but to move north to Silicon Valley to finance their ventures, but the rise of Silicon Beach and the Myspace connection have helped alter that thinking. While the businesses started by former Myspacers have yet to produce a big exit or payday, they have amassed more than $100 million in venture capital financing.

Two of Myspace’s founders, Chris DeWolfe and Josh Berman, met as M.B.A. students in a class taught by Mr. Bricault at the University of Southern California. It was in that class that Mr. DeWolfe wrote a business plan for a social network he was then calling SiteGeist. When the site made its debut as Myspace in 2003, Mr. DeWolfe began putting together an unusual team, often basing his hiring decisions more on gut feelings than on résumés.

In early 2005, when Amit Kapur interviewed for a marketing job at Myspace, he was a year out of Stanford and his only work experience was a year in business development and digital strategy at NBC Universal. He met with Mr. DeWolfe and they talked for a few hours, after which Mr. DeWolfe asked Mr. Kapur, 23 at the time, to join the company as head of business development.

“I said: ‘Chris, I don’t really know what I’m doing yet. I can figure it out, but I don’t have the experience,’ ” Mr. Kapur said. “Chris said: ‘I believe in you. We’ll figure things out together.’ ” Although the job was daunting at first, Mr. Kapur said, he was energized by the challenge: “I wanted to prove myself, to make a dent, and Chris recognized that and gave me those opportunities.”

Today, Mr. Kapur is chief executive and co-founder — along with two friends from Myspace — of Gravity, a Web personalization technology company. As Mr. Kapur began to assemble his team at Gravity, which now has 40 employees, he modeled many of his practices on what he had seen at Myspace. “One of things I learned from Chris,” he said, “was to hire people that have the potential to do great things, well beyond what their experience and skill set show.”

At Myspace, Mr. DeWolfe sought to give his team the confidence to try new ideas and, if necessary, to fail. In 2008, Josh Brooks, who was vice president for marketing from 2005 to 2008, wrote a one-page plan for a live music and comedy show for 10,000 American troops at Camp Buehring, a few miles south of the Iraqi border in Kuwait.

Streaming a live show from the Kuwaiti desert, in the middle of an active military base, was a considerable technical and logistical challenge; more than 80 crew members and entertainers had to be flown there. Not many chief executives would have let him run with the plan, Mr. Brooks said, but the show was streamed live on Myspace to an audience of 3.5 million viewers and then became a one-hour special on FX Networks. Today, Mr. Brooks, who founded his own company, On the Run Tech, in 2011, compares running a start-up to being a “smoke jumper” who is “deployed where the hottest fires are brewing.”

Another early Myspace hire, Jamie Kantrowitz, started leading marketing efforts at Myspace in 2004, when she was 26 and had no executive experience. “There was no playbook. It was like riding on a comet every day,” said Ms. Kantrowitz, who went on to help found Gobbler, which offers high-speed file transfer and backup, and to become a partner at a tech accelerator, Launchpad LA.

BUT, perhaps predictably, there was a downside to the Myspace chaos. Many of the company’s survivors trace its decline to its uncontrolled growth and its purchase by News Corporation for $580 million in 2005. At its peak, Myspace had 76 million unique visitors a month, but in the post-acquisition period was less nimble and wound up missing opportunities to innovate, according to several early members of that team. As it swelled to more than 1,500 employees, it became cautious, political and bloated, Mr. Kapur said.

“That affected our performance and ability to innovate,” he said. “There were opportunities we just couldn’t take advantage of.”

The advent of YouTube is a good example. When the site started in February 2005, many at Myspace wanted to introduce a similar feature. Travis Katz, who had joined Myspace as general manager of international business just after the acquisition, said he remembered telling News Corporation representatives that they would need to hire 40 developers immediately and 200 the next year.

Self-Finance or Raise Money? A Quandary for Start-Ups

But while Mr. Stanek and Mr. Moore went after roughly the same market at roughly the same time, they differed in one critical aspect: how they financed their dreams. One quickly raised more than $50 million, while the other mostly self-financed, thus creating a rare opportunity to assess the difference venture capital can make and bring new perspective to an age-old debate.

When Mr. Stanek, a Czech entrepreneur, founded GoodData in San Francisco in 2007, he already had plenty of experience with venture capital. He had sold a venture-backed software development tools company, NetBeans, to Sun Microsystems in 1999 for a little more than $10 million. And in 2006, he sold Systinet, a Web-service company, to Mercury Interactive for $105 million.

After financing the first year of GoodData’s software development with several hundred thousand dollars from his Systinet sale, Mr. Stanek began to seek investors. Eventually, he brought in $53.5 million from the likes of O’Reilly AlphaTech Ventures and Andreessen Horowitz. “We spent three years building a product and we are still building big pieces. That was funded by the V.C.’s and myself,” said Mr. Stanek, 47. “It’s like the printing business. I have to spend money on my printing machine. There’s an initial large investment, and then once you have the printing press running, it’s very predictable. So if we wanted to create a dominant large company, we didn’t have a choice.”

By contrast, before starting RJMetrics, the co-founders, Robert Moore and Jake Stein, worked as junior analysts at a New York venture capital firm, Insight Venture Partners, where they came across entrepreneurs who had built profitable businesses without a lot of capital and put off fund-raising as long as possible. “What happens in those situations is those entrepreneurs do extremely well personally,” said Mr. Moore, 29.

When they started RJMetrics in late 2008, Mr. Moore and Mr. Stein invested $10,000 of their own money. Mr. Moore wrote the first version of the company’s software in his attic in Collingswood, N.J. They did not hire their first employee until 2010, and they moved to an office in Philadelphia, where costs are far less than in New York or San Francisco.

By the time they did raise some money, in early 2012, they had 100 customers and annual revenue of about $1 million. “That put us in excellent negotiating position, because we had a proof point that other companies at our stage didn’t have,” Mr. Moore said. The owners raised $1.2 million, almost all from RJMetrics customers.

The two approaches have created very different companies. RJMetrics signed its first paying customer to a rudimentary prototype just three months after it started. To build revenue, it had to hope for good word of mouth (which it got) because it did not have a sales staff. But bootstrapping, or self-financing, did allow the founders to keep a large percentage of the company’s equity and to avoid the distortion that can come from having money and the demanding investors who supply it.

The venture capital industry views bootstrapping in the face of a big market opportunity as false economy. John O’Farrell, a partner at Andreessen Horowitz, said that it generally took an investment of $75 million to take a software company from start-up to initial public offering. “If you want to capture a big open market, you want to bring in money to grab land,” he said. “If you bootstrap, the tendency is to try to get profitable early so you don’t need to put in more money, but you end up missing a big opportunity.”

GoodData’s war chest allowed Mr. Stanek to staff up for the land grab. The company now has about 250 employees, half dedicated to the product and half charged with sales and marketing. RJMetrics, on the other hand, has 26 employees, more than half of them working in product development and only four on sales and marketing. The company’s first director of marketing started in February.

Inevitably, the companies have gravitated toward different markets. While RJMetrics has gone after small and midsize companies, GoodData has pursued Fortune 2000 clients that demand robust products and have the money to pay for them. RJMetrics had about $1 million in revenue in 2011 and about $2 million in 2012, according to Mr. Moore. Mr. Stanek declined to specify his company’s revenue, but he noted that last year GoodData signed 42 contracts that were each worth more than $100,000 a year, which would suggest an annual run rate of at least $4 million.

DealBook: Entrepreneurs Help Build Start-Ups by the Batch

Peter DaSilva for The New York TimesRon Palmeri and Allison Rhodes Messner of MkII Ventures.

Just two years after its conception, Prism Skylabs has made enormous strides.

The 20-person company, based in San Francisco, uses video surveillance equipment to give retailers Web-like data on customer behavior in their brick-and-mortar stores. It has secured more than $8 million in financing from investors like Pacific Partners and Andreessen Horowitz and has contracts with 70 retailers.

But like many start-ups finding success in Silicon Valley and across the country, Prism Skylabs is not the brainchild of a rookie entrepreneur who risked everything. One of its founders is Ron Palmeri, a longtime Silicon Valley executive. He is among a growing group of professed company builders who are parlaying past successes — along with their own capital and thick Rolodexes — into operating companies and venture funds that work on multiple companies at the same time.

“There’s a group of us who are serial entrepreneurs who know a lot about building something and scaling it,” said Mr. Palmeri, who previously worked with CNET’s founder, Halsey Minor, at Minor Ventures. Minor Ventures used this model to build companies like GrandCentral, now Google Voice, and OpenDNS.

In 2010, Mr. Palmeri started his own operating company, MkII Ventures, with Allison Rhodes Messner, formerly of OpenDNS. The company is working on building out four different ideas.

The concept — often referred to as parallel entrepreneurship — is not entirely new. Back in the dot-com days there was CMGI, which once had a market value of more than $40 billion before dying a slow death and eventually being absorbed by one of its portfolio companies. Idealab, based in Pasadena, Calif., has been doing this for more than a decade, though with mixed results.

What is new is the number of prominent entrepreneurs and investors who are now going this route rather than staking their fortunes on single follow-up acts or taking less active roles as angel investors or venture capitalists.

“Venture doesn’t allow us to explore, only to accept and deny,” said Michael Jones, chief executive of Science, a builder platform in Santa Monica, Calif. He and a longtime entrepreneur, Peter Pham, started Science in 2011 with $10 million in venture backing, followed by $30 million from the Hearst Corporation.

Most of these investors-cum-inventors are motivated by personal passion to create companies. Under this model, entrepreneurs often tap their own networks and wallets to finance their ideas.

“I don’t have any hobbies,” said Max Levchin, a co-founder and former chief technology officer of PayPal. “This is what I do.”

His first version of this model, MRL Ventures, helped start the mobile business-rating platform Yelp and created Slide, a personal-media sharing service that Google bought for a reported $182 million but has since shut down. His new project, called Hard, Valuable, Fun, or HVF, will focus on a few big ideas with longer time frames.

Like Mr. Levchin, many of the builders came out of the recent wave of technology successes. Garrett Camp, a co-founder of StumbleUpon and Uber, has started Expa to develop new products and services and build teams to scale them. In Chicago, two Groupon founders, Brad Keywell and Eric Lefkofsky, put $200 million, primarily their own money, into Lightbank, an operating company. Lightbank has a staff of 20 and 60 projects in its portfolio, including Belly, a loyalty platform, and Frank & Oak, an online men’s clothing retailer.

Company builders say they provide a missing link in the life cycle of start-ups and do so more effectively than incubators. “The primary difference is focus,” Mr. Camp said. “I plan on creating just a couple companies per year, and spending significant time with all of them.”

Hunter Walk, a former director of product management at Google, said, “What’s often needed at the early stages isn’t more capital in a vacuum, but people with operational experience who can give their full attention to these companies.” Mr. Walk is raising a venture capital fund, called Homebrew, with another former Google executive, Satya Patel.

Once an idea gains traction, builders typically turn to venture capital firms for additional financing while gradually giving individual teams more autonomy. “It’s like raising children,” Mr. Palmeri said. “There’s a point where they eventually need their own space, but you’ll continue as a trusted adviser.”

Some company builders invest in a mix of their own ideas and early-stage concepts that fit a particular theme. Others, like Mr. Palmeri’s company, focus almost exclusively on homegrown projects, though they will recruit co-founders and teams to expand the companies into independent entities.

“It’s a highly collaborative process,” Mr. Palmeri said. “By the time we look for outside funding, the idea may have taken many different shapes.”

This approach resembles product development at large companies, like Apple or Google, only on a smaller scale. “The cycle of entrepreneurship can be pretty slow, so why not work on several ideas at one time?” said John Borthwick, chief executive of Betaworks, which was founded in early 2008 and is based in New York. (The New York Times Company is an investor.)

“Over time, you can build common tools, databases, analytics — all the things that give each idea a head start in the marketplace,” Mr. Borthwick said.

One of the biggest advantages to working on several companies simultaneously is the ability to share resources.

“The dollars used in the early stages of start-ups are often highly inefficient because you spend a lot of time and money just to get the business going,” said Mr. Jones at Science. His operating company has 25 people on its staff, specializing in areas like human resources, marketing and real estate.

“The early days of a company should be spent thinking about strategy and technology, not worrying about negotiating leases,” Mr. Jones said.

When start-ups fail, he said, often it is not because the ideas are flawed but because management did not have the tools or resources to execute the idea, were pulled in too many directions or did not move fast enough. Mr. Keywell and Mr. Lefkofsky noticed the same pattern in previous companies they had started or financed.

“We decided to bring those competencies inside of Lightbank,” Mr. Keywell said. “The whole model is designed to reduce risk and increase reward.”

Though some of the large venture capital firms have invested in ideas hatched by company builders, the concept has its skeptics.

“It’s very difficult to manufacture innovation,” said Andy Rachleff, a lecturer at the Stanford Graduate School of Business, former general partner at Benchmark Capital and chief executive of Wealthfront, an online financial advisory firm. “The reason most start-ups are successful is they had great insight, and the likelihood of having that killer insight more than once in a career is exceptionally low.”

While this approach allows individual teams to focus on ideas without having to worry about the nuances of running a business, it can pull the company builders in too many directions.

In 2011, Evan Williams and Biz Stone, who founded Twitter, and Jason Goldman, another former Twitter executive, restarted Mr. Williams’s Obvious Corporation as a builder platform. Recently, however, they said they would each focus more on individual ideas rather than work on several ideas at once.

“Turns out, we like focus,” Mr. Williams wrote in an explanation on the company’s Web site.

Nevertheless, proponents of parallel entrepreneurship argue that the odds are better for those who pursue multiple ideas. “The percentage of companies that are successful should be greater than the traditional portfolio,” Mr. Jones said.

Venture partners can regard company builders as “a monstrous insurance policy,” he added. “If something goes wrong with one of our portfolio companies, we can quickly dive back in and make things work.”

Case Study: A Start-Up’s Dilemma: A Lack of Capital, or Lack of Control

THE CHALLENGE Running low on inventory early in 2011 and lacking the money for another production run to fulfill orders to her Web site and restock her Manhattan retail accounts, Ms. Rosshandler feared she would have to shut down her start-up. She had been rejected by bank after bank (some citing her lack of American citizenship). She had decided against asking friends for money — or her parents, who had already helped at the outset — and she had come up dry with venture capitalists. As her prospects dimmed, she started interviewing for jobs.

THE BACKGROUND Ms. Rosshandler was working at a Manhattan events and interior design company when, on New Year’s Day in 2007, she decided that like her father, a successful plastics industry entrepreneur in Australia, she would prefer to work for herself. Her idea: to improve upon a South African product called Odor-Go that she had seen in her native country but nowhere in the United States. Her product would have gel caps to be swallowed, similar to Odor-Go, but it would package them with follow-up mints to be sucked. Plus, her breath-freshening duo would be gluten-free and vegan. “I wanted to be able to take my own product,” she said, explaining that most gel caps are made using meat byproducts. She filed to trademark the name Eatwhatever.

It was her understanding that the way to vanquish bad breath caused by oniony, garlicky foods was to go to the source of the problem, the stomach. Having studied acting and law, not chemistry, Ms. Rosshandler left the product formulation to a contract manufacturer. “Parsley has been used for generations to freshen breath,” she said. “People know, just from everyday life, that freshening the mouth only — especially after consuming pungent foods — doesn’t get rid of the smell that comes from within the stomach. We found that the combination of concentrated organic peppermint and parsley oils, when dissolved in the stomach, provides this fresh feeling from within. Your breath actually smells good, from deep inside, not just superficially from the mouth.”

She hired a package designer and prominently displayed the tagline: 2 Steps to Kissable Breath. Also on the packaging was a cheeky instructional mash-up of the two operative steps (swallow and suck). She was, after all, seeking a young demographic. “I had no idea what I was doing,” said Ms. Rosshandler, laughing.

She began her sales efforts in 2008 by walking into the C.O. Bigelow flagship apothecary store in Manhattan and asking, “Who does the buying here?” She left with a sale. A month or so after Eatwhatever’s debut, a friend in public relations helped her get a mention on DailyCandy’s main page. That brought $20,000 worth of orders to her Web site in 12 hours and generated plenty of buzz. With the help of a distributor, Eatwhatever soon cracked New York retail outlets like Ricky’s, Joe Coffee and Zitomer, a specialty department store; Ms. Rosshandler even opened retail beachheads in Paris and Sydney.

But lacking contracts with mass merchants, sales volume remained low. The company’s annual revenue failed to top $40,000 in 2008, 2009 and 2010. Squeezed for cash, Ms. Rosshandler could not pay for marketing or, eventually, even for her next production run. That is when she interviewed for a job selling high-fashion hair accessories.

THE OPTIONS And then in rode her white knight. Or was he? She had networked her way to Arthur T. Shorin, an investor and former chief executive of the Topps Company, a confectionary company known for its baseball trading cards, who promised candy industry expertise and contacts and an immediate infusion of $250,000, with more to come if justified. But Mr. Shorin’s nonnegotiable terms were stark. In return, he wanted 75 percent of the enterprise. Ms. Rosshandler would retain 25 percent with the opportunity to earn back another 15 percent should certain benchmarks be met. The offer included a salaried job in Mr. Shorin’s New York company, Artuitive, an incubator for start-ups.

Friends advised Ms. Rosshandler against the deal, citing the tough terms, even if she were to rebuild her stake to 40 percent. But Mr. Shorin had impressed her in their exploratory meetings, and she asked herself this question: Isn’t 25 percent of something better than 100 percent of nothing?

WHAT OTHERS SAY Steve Schuster, founder of Schuster Products in Milwaukee, maker of Blitz mints: “Ms. Rosshandler finds herself in a precarious cash-flow position and — typical of many start-up entrepreneurs — may not completely grasp how much money she actually will need to grow her brand to a reasonable level of distribution. Arthur Shorin presents a very shrewd and unique proposition. Basically, he is her lifeline. Shorin, who made a staggering amount of money selling Topps to Michael Eisner’s private equity company, has great knowledge of the candy industry. It is imperative for Ms. Rosshandler to move forward with this proposition.” 

Josh Kopelman, a partner at First Round Capital, Philadelphia: “I believe that entrepreneurs, not investors, create great companies. In my experience, if a founder doesn’t retain meaningful equity at the seed stage, it greatly reduces their motivation and creates a real misalignment between investor and entrepreneur. I’d encourage Ms. Rosshandler to keep looking for alternatives, including the possibility of raising money from her friends. If she believes the company is going to create value and be successful, then she is actually doing her friends a favor by letting them invest — assuming she is candid about the extreme level of risk and that they don’t invest money they aren’t prepared to lose. I’d encourage her to consider tweaking the branding to make it more PG-13 than R-rated, as it might reduce some investor’s unease. I know it’s hard to turn down money — especially when a company really needs it.”

Adeo Ressi, founding member of TheFunded and head of The Founder Institute, an early stage business accelerator based in Silicon Valley: “Ms. Rosshandler should definitely not take this deal. First, she loses complete control of the company, and she can be removed or wiped out of her equity at any moment without notice. Second, the deal is very unusual, so she will never be able to attract other investors again. Third, the round values the operating business under $75,000, around two times revenue. As the terms indicate, she will be an employee of Artuitive, so this deal resembles a generous employment offer rather than a viable investment. This is an angel investment opportunity, and there are the largest number of angel investors in history. The volume of investors is both good and bad. On the positive side, if Ms. Rosshandler dedicates four months and meets with a lot of angels, she will raise $500,000 with a seven-figure valuation. On the negative side, she will need to meet with over 150 angels and waste a lot of time pitching to people that will try to take advantage of her, like Arthur Shorin.”

THE RESULTS Offer your thoughts on the You’re the Boss blog at nytimes.com/boss. Next week, on the blog and on this page, we will give an update on what Jacqui Rosshandler decided to do.

DealBook: Brazil Steps Up Investments in Overlooked Tech Start-Ups

André Vieira for The New York TimesMarcio Spata, left, head of the Criatec investment fund at BNDES, Brazil’s state controled development bank, and Eduardo Klingelhoefer de Sa, the bank’s director of investment funds.

RIO DE JANEIRO — For the last few years, Brazilian start-ups have begun to successfully draw blue-chip Silicon Valley venture firms. But in the process, promising technology segments have been ignored.

Although private firms are readily investing in e-commerce and other hot areas, fields like nanotechnology, robotics and information technology — considered critical to transforming Brazil’s commodity-export, consumption-dependent economy — are falling by the wayside.

Rather than leave innovation financing solely to private investment firms, Brazilian officials decided several years ago to step in and shepherd nascent companies. And in 2007, Brazil’s national development bank, BNDES, started Criatec I, a 10-year venture capital fund of 100 million reais, or about $48 million, aimed at start-ups. Foreign venture capital firms have been welcome to make follow-on investments. To date, not one has.

Instead, Brazil has doubled down on its goal of promoting technology growth. This week, the bank awarded a new fund of 186 million reais, or $89 million, to Icone Investments. BNDES is providing most of the capital, with contributions from regional public banks.

Though the government has been taking the lead, it has not been for a lack of interest from private venture capital. Over the last two years, Redpoint Ventures, Accel Partners and Sequoia have become active here, as have Peter Thiel, Dave McClure and European and Israeli investors. But BNDES believes a huge void remains in early-stage financing.

“They are voraciously investing in all the paste-and-copy stuff, the copycats. They are not really into technology innovation,” said Robert E. Binder, whose private firm, Antera Resource Management, comanages the initial Criatec fund with São Paulo-based Inseed Investments.

Innovation is an urgent matter in Brazil, economists say. According to the Research Institute for Industrial Development, this year through September, the country ran a $38.7 billion trade deficit in technology-intensive goods, an increase from last year. Brazil’s economy is highly vulnerable to global economic uncertainty, which is reflected in the country’s recent third-quarter growth figures.

A looming demographic shift is also a concern. In 2030, Brazil’s population is expected to decline and get increasingly older, potentially straining government resources.

Venture capital firms investing in Brazil’s start-up boom regard Criatec as well intentioned. Eric Acher, a founding partner at Monashees Capital, called it a “great learning experience to focus on innovation.”

Anderson Thees of Redpoint e.Ventures also praised the fund. “They are probably tapping into very good opportunities early,” he said.

Yet these and other venture funds have yet to team up with Criatec on investments.

For instance, Criatec looks for companies developing technology and with clear intellectual property that can be licensed or retained, Mr. Thees said. “Silicon Valley is less interested in this,” he said.

Mr. Acher agreed: “I don’t think at the moment Silicon Valley is looking for technology innovation in Brazil,” adding that the return did not yet justify the level of risk involved.

BNDES expected such risk aversion when it created Criatec.

“Not even Brazilian funds were showing interest in early-stage companies,” said Eduardo Rath Fingerl, one of the fund’s architects. “We knew it would have to be entirely a BNDES effort.”

BNDES, short for Banco Nacional do Desenvolvimento (the National Development Bank in English), has long played an important role in Brazil’s rise. Formed in 1952, the development bank initially financed major infrastructure. Its scope and size grew considerably under former President Luiz Inácio Lula da Silva, who thought Brazil needed brand-name multinationals to gain respect overseas.

In 2003, the bank disbursed $11.7 billion, but by 2010, that figure had skyrocketed to $96.3 billion. It has provided subsidized loans to most large Brazilian companies, including the oil giant Petrobras and the mining concern Vale. The bank has also supported foreign companies, including $3 billion to American Airlines to buy planes from Embraer, a Brazilian manufacturer.

Its dominance here has drawn criticism. Some contend the government bank has the wrong priorities, including financing mergers and acquisitions, which some contend should be left to the private sector.

“Long-term credit is still a problem in Brazil,” the Brazilian economist Mansueto Almeida said. However, “Brazil today is very different from what it was 20 years ago. It has very active capital markets.”

Criatec, however, is one of the bank’s smallest and least-controversial programs. Mr. Almeida said that with this initiative, “it is trying to do the right thing. That’s exactly what one expects from a development bank.”

Criatec I has had a slow track record of success. Usix Technologies, an insurance market exchange technology firm that received backing from Criatec, was acquired by the publicly traded Ebix in 2010. It has also backed companies with promise, like Amazon Dreams, which has developed patented techniques to produce açai and other berries with higher antioxidant content.

Some foreign investors are starting to look at the Criatec I portfolio. Intel Capital, the venture arm of the chip maker Intel, is evaluating the location intelligence software company Geofusion, according to a person briefed on the talks, who asked to be anonymous because the discussions were ongoing.

Kleiner Perkins Caufield & Byers showed interest this year in the agro-pesticide company Bug Agentes Biologicos but said the start-up first needed $10 million in revenue. Now that company is discussing a strategic partnership with Israel’s Bio-Bee Biological Systems. But such potential deals again indicate that foreign venture capital firms are still not courting the smaller start-ups.

“They all want to find these companies with $10 million to $15 million in revenue, but there just is not deal flow at that size,” said a person familiar with Kleiner Perkins’s outreach plans, who also asked to remain anonymous as the talks were private.

Based on 2012 estimates, only one Criatec I company of the 33 in business will cross $10 million in revenue.

Amazon Dreams’ revenue, for example, is still negligible despite the health craze in the United States for açai berries.

BNDES also established the fund to help out academics who have great ideas but don’t have the same success in obtaining the private sector financing that entrepreneurs do.

“Brazil has a lot of intelligence,” said Mr. Rath Fingerl, who retired from BNDES last year, but “the great difficulty is bridging the divide between the scientific and business communities.”

The fund also has limitations. For example, the bank holds veto power on most company decisions even though it is a minority shareholder. Yet, it appears quite flexible as it seeks co-investments.

BNDES’s political influence in Criatec companies “is totally negotiable,” said Marcio Spata, head of the Criatec fund at the development bank. “We are always open to changing our rights” for appropriate offers.

Eduardo Klingelhoefer de Sa, head of the department of funds at BNDES, said, “We would be very happy if private investors come so that our stakes are reduced.”

Tech Start-Ups Find a Home on the Prairie

Eventually, he coaxed $1 million from a pair of local investors. His app, Dwolla, has since attracted more than 100,000 users, and now moves $30 million to $50 million in transactions a month.

So when he decided to seek a second round of financing last year, Mr. Milne, a 29-year-old college dropout, had an easier sell. This time investors courted him. This year, he announced that Dwolla had drawn $5 million more in capital from investors on both coasts, including Ashton Kutcher and a firm with Twitter and Foursquare in its portfolio.

From Des Moines to Omaha to Kansas City — a region known more for its barns than its bandwidth — a start-up tech scene is burgeoning. Dozens of new ventures are laying roots each year, investors are committing hundreds of millions of dollars to them, and state governments are teaming up with private organizations to promote the growing tech community. They are calling it — what else? — the Silicon Prairie.

Although a relatively small share of the country’s “angel investment” deals — 5.7 percent — are done in the Great Plains, the region was just one of two (the other is the Southwest) that increased its share of them from the first half of 2011 to the first half of this year, according to a report commissioned by the Angel Resource Institute, Silicon Valley Bank and CB Insights.

Fifteen to 20 start-ups, most of them tech-related, are now established each year in eastern Nebraska, a more than threefold increase from five years ago, according to the Omaha Chamber of Commerce. Today, there is more than $300 million in organized venture capital available in the state, as well as tax credits for investors; six years ago there was virtually none, according to the chamber.

Google Fiber’s first ultrafast Internet connection drew about a dozen start-ups to a neighborhood in Kansas City, Kan. And over the past seven months, about 60 start-ups have presented their ideas in Kansas City at weekly forums organized by Nate Olson, an analyst with the Ewing Marion Kauffman Foundation. In Iowa, Startup City Des Moines, an incubator financed with $700,000 in public and private money, including a quarter-million dollars from the state, received applications from 160 start-ups over the past two years. It has accepted 9 so far.

“Traditionally, you’d say, ‘Hey, if I want the safe lifestyle, I’ll stay here and I’ll do what generations before have done,’ ” said Jeff Slobotski, an Omaha native who four years ago started Silicon Prairie News, a Web site covering the region’s tech scene. Now, he continued, “there is a newer potential in terms of what can take place here and not having to hop on the first plane out of here — saying, ‘Hey, I’m going to set up shop in the Midwest in our cities and make a go at it here.’”

Still, the region’s entrepreneurs insist that they are not striving to replicate Silicon Valley or other well-known tech hubs like Boston.

“We’re creating different types of start-ups using local ingredients,” said Christian Renaud, a principal at an information technology start-up incubator here.

Among the companies that have started in the region over the past few years are Ag Local, a firm that created an online marketplace for trading meat; EyeVerify, which verifies people’s identities through eye-vein patterns; and Tikly, which created a platform for bands to sell concert tickets. But there also are many start-ups outside the information technology realm, focusing on fields like biotechnology, advanced manufacturing and medical devices.

Many entrepreneurs credit Silicon Prairie News for the region’s start-up growth. In addition to writing about start-up activity, The News also organizes conventions that connect entrepreneurs and investors. In the four years since its creation, Silicon Prairie News has covered the emergence of more than 80 companies in the region and more than 50 additional endeavors that spawned mobile or Web apps.

The Silicon Prairie still lags in national recognition as a start-up hub, however. Capital remains relatively sparse, and software engineers are in shorter supply than on the coasts.

“We’re just not aware of, potentially, the opportunities that exist in a variety of places in the middle of the country,” said Stephen T. Zarrilli, the president and chief executive of Safeguard Scientifics, a Philadelphia venture capital firm that has invested in companies across the country but not in the Great Plains.

Tech enthusiasts in the region are hoping to change that by pointing to other strengths: lower costs and a work force focused more on building strong companies than moving on to the next big thing, they say.

“In Nebraska and the Midwest in general, because the work ethic is so strong, you will find people that will work like they worked on the farm,” said Gordon Whitten, the chairman of VoterTide, an Omaha start-up that tracks and analyzes social media trends for campaigns, media companies and others.

Dwolla exemplifies both the potential and the challenges for the region’s start-ups.

Business owners here said that few people in Des Moines seemed familiar with Dwolla, which allows real-time money transfers that are less costly for merchants than credit card fees. Yet the fast-talking, matter-of-fact Mr. Milne, in his jeans and untucked shirts, has proved to be a savvy ambassador for his company and the region. He always pays with Dwolla when he can.

“How much do I owe you?” he asked a barista at a coffee shop he frequents in Des Moines, his hometown, before tapping his iPhone and watching his payment register on the shop’s touch screen.

He eagerly rattles off the advantages of building Dwolla here, where his headquarters boast all the trappings of Silicon counterculture: beer-stocked refrigerators, neon orange accent walls with well-used whiteboards tacked to them, and a legal counsel who comes to work in flip-flops.

One of the biggest boons, he said, was siphoning the expertise of executives in the city’s robust financial services sector. They advised him on structuring the company so it would not have to hold customers’ money, saving millions of dollars in licensing and bonding costs. That structure also led the company to create a unique system for transferring money without the usual days of processing delays.

“I don’t know if we would have found that relationship in the Valley,” Mr. Milne said. “We just hit so many golden-nugget opportunities in Des Moines and golden-nugget pieces of feedback.”

DealBook: Wilson Sonsini Retools Strategy to Land Internet Start-Ups

Peter DaSilva for The New York TimesYoichiro Taku, left, and Todd Carpenter of the Wilson Sonsini law firm, which opened an office for start-ups in San Francisco’s SoMa neighborhood.

SAN FRANCISCO — The ground floor of 139 Townsend Street has all the markings of a start-up: exposed lighting, long communal tables and an odd assortment of knickknacks, including a fire-engine-red British telephone booth.

But the brick industrial building, in San Francisco’s SoMa district, is not the home of Twitter, Zynga or another up-and-coming Internet company. It’s the office of Wilson Sonsini Goodrich & Rosati, the half-century-old law firm.

“There’s a marketing benefit,” said Yoichiro Taku, a partner at Wilson Sonsini who represents many early-stage companies. “It definitely makes us hipper.”

Wilson Sonsini’s new outpost reflects the firm’s evolving mind-set as lawyers jockey for the attention of start-ups. In an effort to build credibility among new technology companies, Wilson Sonsini and others are employing a broad set of tools, including offering free services, cozying up to incubators and writing blogs.

Such efforts are critical. While early-stage ventures represent just 20 percent of the firm’s business, those companies can generate hefty fees as they mature. Wilson Sonsini and other firms also make small investments in young start-ups, which can pay off in later years.

“Small deals would not have interested these firms a few years ago,” said Joseph A. Grundfest, a Stanford law professor. “Now, it’s the new normal.”

For years, Wilson Sonsini dominated Silicon Valley, shepherding young technology companies like Apple, Netscape Communications and even the ill-fated Webvan. In 1998, Lawrence W. Sonsini, the firm’s patriarch, introduced two Stanford graduate students to Sequoia Capital and Kleiner Perkins Caufield & Byers, two top venture capital firms. Six years later, Wilson Sonsini helped their company, Google, go public.

Today, the firm plays in an increasingly crowded space. In the 1960s when it was first founded, only a handful of law firms had offices in the region. Now scores blanket the Bay Area.

“We were left alone in this market for an absurdly long period of time in the ’80s and ’90s,” said Steven E. Bochner, a partner at Wilson Sonsini. “Everyone is here now.”

According to Dow Jones VentureSource, the firm represented the most venture capital deals in the first half of this year, with 157 transactions, nearly double its closest competitor. But its once-absolute grip on the market has slackened.

In the last wave of Internet initial public offerings, the law firm picked up LinkedIn’s prized sale, as well as those of Splunk and Palo Alto Networks. But it did not land Zynga, Groupon or, most significantly, Facebook, which went to its rival, Fenwick & West.

While no one at Wilson Sonsini is exclusively focused on start-ups, a few lawyers have emerged as leaders in this area. Mr. Taku, 44, a native of Japan who joined the firm 16 years ago, has helped broker partnerships with several incubators like AngelPad and Founder Institute, which help Wilson Sonsini get a first peek at fledgling start-ups. And he runs startupcompanylawyer.com, a personal Web site where he muses on topics like incorporation and financing. Mr. Taku often collaborates with Todd Carpenter, who helped lead the effort to open the SoMa office. And Mr. Sonsini still tries to meet with one or two start-ups a week.

For big law firms, courting young companies is something of a balancing act. On the one hand, a firm wants to reach the highest number of top-shelf start-ups. But it has limited resources, so it has to be choosy.

To that end, many have taken steps to reduce the cost of early-stage venture financing for entrepreneurs, while automating the process to make it easier for lawyers. Fenwick & West has been at the forefront of this trend. Two years ago, the law firm created and posted standardized deal documents online for free downloading.

Earlier this month, Wilson Sonsini teamed up with Angelist, a network for investors and entrepreneurs, to also offer free standardized deal documents online. Although start-ups can use any law firm to process the forms, Wilson Sonsini has offered to do it pro bono if a start-up becomes a client.

“We’re trying to show we can add value to the community.” said Mr. Carpenter, who worked on the Angelist project with Mr. Taku and Mr. Bochner. “So hopefully, when these start-ups need a lawyer, they think of us.”

Jack Smith, a recent London transplant and co-founder of Vungle, a video advertising platform, met Mr. Taku through AngelPad. Mr. Taku offered to defer legal costs up to $5,000. Mr. Smith, who had read Mr. Taku’s blog, was sold. He was also able to wring out additional hours with Mr. Taku, known as Yokum, who often holds free office hours at AngelPad.

“Yokum was kind of a celebrity for us,” he said. Months later, the start-up remains a client, but it now has to adjust to a more normal fee structure. “They are charging us more — you quickly learn what you can bother your lawyer with.”

The initiatives aim to be founder-friendly. In August, Mr. Taku worked with Adeo Ressi, the founder of the Founder Institute, to create a financing alternative to convertible debt, which has been popular among entrepreneurs but can burden start-ups with debt. Mr. Taku and Mr. Ressi came up with standardized convertible equity documents. Convertible equity solves some of the problems of debt financing by eliminating the interest rate and the need for repayment.

Like the Angelist program, those documents are available free online. The initiative set off lively debate, prompting blog posts from several influential venture capitalists, including Fred Wilson of Union Square Ventures and Mark Suster, a partner at GRP Partners.

Several of Wilson Sonsini’s competitors said they were skeptical that these broad efforts would amount to much. Indeed, some initiatives have been expensive ones.

Earlier this year the firm signed a five-year lease on the SoMa locale, shorthand for the neighborhood South of Market Street, a mile away from the company’s flagship San Francisco office. While four partners work out of the SoMa office, it’s also intended to be an open, collaborative space that can be used by start-ups and entrepreneurial organizations.

On a recent Tuesday, the office was co-hosting a pitch event for 30 new start-ups, a chance for companies to present their products to potential investors and win entrance to a coming technology conference.

Although the event was organized by DEMO, a technology conference business, Wilson Sonsini provided free pizza and Trumer Pils, a popular beer brewed in nearby Berkeley. At other times, the firm has held seminars on hiring, employee liquidity events like an I.P.O., and data privacy, which featured regulators from the Federal Trade Commission.

“Being a mile away can be a huge difference,” said Mr. Carpenter.