Webvan co-founder thinking big, spending small

SAN JOSE — Peter Relan has known the thrill of watching a startup land tens of millions in venture capital and go through a spectacular initial public stock offering to become an overnight sensation.

And boy, he doesn’t want to go through that again.

So Relan — co-founder of Webvan, the online grocery service that became the symbol of dot-com excess — is trying a new way of starting tech firms. And his model couldn’t be further from that of Webvan, which thanks to the likes of Goldman Sachs and Sequoia Capital launched a $375 million IPO within months of opening, then crashed when revenues couldn’t sustain its spending.

Relan is seeding Web 2.0 firms for a mere $100,000 apiece. “They’ve got to stay hungry,” he says of his young entrepreneurs, who have founded a cluster of gaming and mobile technology firms inside an old bank building in Burlingame.

Time frame

He gives them three months to develop an idea and take a product to market. If it flops, they get more chances, but should a year pass with no wins, Relan waves goodbye. If a company meets success, YouWeb takes 50 percent.

Relan insists it’s a more equitable arrangement than many early-stage funders offer. “People told me you need 70 to 80 percent of the company for the economics to work, but I don’t want anybody to feel like an employee,” he said. “I’m a partner.”

The New Delhi-born Relan came to the valley after graduating from UCLA in the early 1980s to work at a startup that was later acquired. “I thought, ‘his is cool,'” he says, “but I had no idea how to do my own startup.”

Dream funders

YouWeb aims to give young people with similar dreams know-how, resources and access to funding. As the Atherton resident observes: “It’s not like you can call Kleiner Perkins and say, ‘Hey, I’m this dude, I wanna form a company.'”

Relan, 48, could write a book on the right and wrong ways to start a tech firm. As he tells it, after stints at Hewlett-Packard and Oracle, he had been tapped by Larry Ellison to take over Oracle’s business-applications hosting service in 1997 when friends at Benchmark Capital urged him to meet with Louis Borders, who’d founded the Borders books chain and wanted to start a massive grocery business.

Relan says Borders eventually sold him on the engineering challenge. “We were delivering ice cream, unmelted, within a 30-minute slot,” he says. But he struggled to understand the wild-eyed enthusiasm of the company’s financiers when Webvan was barely out of proof-of-concept phase. With the operation up and running post-IPO, Relan decided the business was better left to people with expertise in retail, and he left Webvan nearly a year before its painful 2001 bankruptcy.

For his next trick, Relan used $100,000 of his own to woo angel funding for a company that dealt in online security. It eventually garnered $10 million in venture capital and was sold for five times that amount.

The experience convinced Relan that the notion of a $100,000 startup was viable. YouWeb was born a few years later, in 2007, seeded with $700,000 from Relan and three friends: Silver Lake Partners co-founder David Roux, former Kleiner Perkins partner Dave Whorton and Praful Shah, a veteran of Oracle and WebEx.

Adding up

Today, Relan estimates, the four companies in YouWeb’s stable could be worth a collective $1 billion.

Colin Sebastian, an analyst with Lazard Capital Markets, calls that estimate “not outside the realm of possibility,” given the skyrocketing valuations of private companies like Zynga, which plays in the same online gaming space as YouWeb’s CrowdStar.

Relan admits that incubators acquired a taint in the dot-com bust, as operators such as idealab and CMGI imploded. Part of the reason, he says, is that there wasn’t enough focus on the entrepreneurs. “We don’t accept business plans or teams or ideas or products,” he says. “All I’m interested in is, ‘Is this the next Zuck?'”

He’s not the only one in the market: Just last week, former PayPal executive Dave McClure announced a small-business “accelerator” called 500 Startups. And Russian investment giant DST created a hubbub with the recent announcement that it will offer $150,000 to each startup in Mountain View’s Y Combinator.

One of YouWeb’s startups, a mobile gaming platform called OpenFeint, has raised $12 million from outside funders. But CEO Jason Citron displays a touch of envy when another of Relan’s entrepreneurs, Rajat Gupta, says he’s already getting acquisition feelers for his 10-month-old company, iSwifter. Its software lets games and applications written in Flash work on iPhones and iPads, circumventing Apple CEO Steve Jobs’ ban on Adobe’s Flash.

The feud between Jobs and Adobe Systems is what Relan calls a “disruptive event” — a sudden change in the tech landscape that sparks opportunity. The rise of Facebook was another, giving companies like game maker CrowdStar a base of potential customers.

Relan says CrowdStar is the second-largest purveyor of Facebook games behind Zynga — which is a bit like calling somebody the second-greatest boxer named Muhammad Ali. Still, says analyst Sebastian, “They have a lot of potential.”

Contact Peter Delevett at 408-271-3638.