When it comes to cash, Internet start-ups call the shots

Here’s our story today in the Merc (free registration) about three examples of the modern Silicon Valley Internet start-up, and how they are built so cheaply that they don’t need all the cash VCs are trying to stuff into their hands.

Of particular note is SugarCRM, the open source company that provides businesses with a way to manage their customer relations.

founders_bw.jpgShrewdly, Chief Executive John Roberts (left in this photo) decided to take cash from someone who would be really useful to him. He tells us (read the story) that he didn’t really need the latest round of $18.77 million of venture capital, as he’d barely touched his previous second round of funding. But this time, it was Scott Sandell, partner at New Enterprise Associates who contacted him, saying he wanted to invest. For Roberts, this was sweet. Sandell, of course, was an investor in Salesforce.com (see his profile; there is no direct link, but it can be reached with one click from here), precisely the company SugarCRM wanted to take on.

We asked Scott Sandell about his apparent hedge bet. He declined to comment on whether or not he still owns shares in Salesforce.com. He did say the following: “There’s a lot of room in the market for both of these companies, because Salesforce is a great company. They’re used by most of our portfolio companies.” He explained that Salesforce, like SugarCRM today, started at the…

ssandell.jpg…low end of the market. But it found that cost of its sales and marketing efforts to gain customers at the low end was too high. It would work hard to sell its product to a company requesting only ten licenses, and it would only get $100. So Salesforce has moved up market and focused on bigger companies, where it can undercut the older company Siebel, says Sandell (pictured here). “I think they’re killing Siebel.”

So SugarCRM can go after the smaller companies. “That’s where the opportunity is for Sugar, their cost of sales is so low.” Moreover they’re well positioned to sell in places like China, where companies are prone to buy on the cheap.

Sugar’s Roberts, though, says his company is moving into bigger company territory. Before, late last year, buyers of Sugar had an average of five to 10 users. Now the average size is 15 to 30, he tells us, and he’s starting to see large buys of between 400 to 600 users.

And thus, the Darwinian process of natural selection continues.

Cheap and open Web technologies are allowing entrepreneurs to build their initial products quickly and for $100,000 to $200,000. So they really only need to boost their cash holdings later in their development. That gives them more power earlier on, vis-a-vis VCs. Obviously, there are exceptions. The companies with the most power are those whose founders have a convincing idea, and ideally, a workable prototype. The companies with no power are those that haven’t gotten that far.

Oh, and in case you’re wondering why we classify Sugar as a modern Internet company, here’s why: Sugar is a web application, and may be one of the more modern business applications written in the last five years. It was developed last year, has modern language like PHP, works off the open source stack, LAMP, and fully supports good ol’ AJAX.