The new map of Silicon Valley

Silicon Valley is expectant. A fresh new wave of internet-based startups are attracting investor’s attention and changing the way we do business online. Rita Lobo takes a closer look at the companies in demand

Not many people were paying much attention to Instagram a year ago. The photo-sharing app was something teenagers used to take vintage-looking pictures of themselves and share via social media. But when Facebook bought the startup for a $1bn, no one was thinking of trendy teens any more. And the deal has reignited interest in numerous internet-based startups.

Two years ago a couple of San Francisco software designers managed to raise $500,000 in seed money and launched the program on Apple’s App Store. The simple software applies vintage photographic filters to pictures captured by the smartphone’s own camera, and allows users to share them on multiple social networking sites, including their own. The product came out in October 2010, without a marketing budget at all. By December the app had a million users.

The meteoric rise of Instagram is a lesson to internet-based startups everywhere. And it has whetted investors’ appetites for these companies. But as well as being potentially very profitable, many of these companies are looking for more then just cash. They are looking to revolutionise the way we interact on the internet, like Facebook and Twitter before them.

Silicon Valley is buzzing once again like the good old days of tech startups and exciting opportunities. The industry is flooded with internet-based companies competing for the attention of investors. Despite Facebook’s lacklustre debut on the trading floor, interest in these businesses has not waned and investors are sniffing around for the next big thing. But in the Valley’s startup scene it can be hard to tell which companies are worth looking into, and which are just passing fads.

Nowadays it is not many startups that will take on the mighty Google on in a fight, but Dropbox have done just that. On the day the Google launched its new Drive service that allows users to store their files online and synchronise them across platforms, Dropbox’s CEO tweeted: “In other news, @Dropbox is launching a search engine. :)”.

The reason for the rather derisory remark was that Dropbox provided the same services Drive was launching, but for over fours years with monumental success. Drew Houston has a reason to be cocky. In 2009 Steve Jobs made a bid for Dropbox, but failed to secure a deal. Apple went on to produce the iCloud and Google was left behind, until the late introduction of Drive.

But Dropbox is not threatened by these Goliaths. Its file sharing services solved a problem that everyone had: how to access files, photos, and music across countless personal devices. Dropbox replaced the unreliable method of storing files in inboxes, by providing a digital clutter box. Simple, useful and extremely successful. Last year, shortly after its third birthday, Dropbox had 50m users, three times as many as the year before.

The company is still growing. As long as people continue to produce files that need sharing, Dropbox will remain useful. It is particularly appealing for people that have competing software in each of their gadgets. And if users are interested, investors are interested. Last October, interested parties rallied around Dropbox and raised $250m in a fresh wave of investment. Today the company is valued close to $4bn.

As far as internet starups go, Quora is of noble birth. Founded by two Facebook alumni in 2010, things are looking good for the company right now as it prepares to raise more capital in a second investment round. At face value it might look like a simple question-and-answer forum, but it is much more than that. The website counts former US Treasury Secretary Larry Summers, Ashton Kutcher and even Mark Zuckerberg as some of the 50m users who are asking and answering questions on Quora.

It is simple to use and questions vary from the inane: “How do I boil meat?”, to the rather more sophisticated: “What did Neitzsche think of Kant’s metaphysics?”. Users are identified by name and profession or qualification, and answers are ranked by readers. It is not hard to lose a few hours getting answers to some of life’s most fundamental questions like: “What came first, the chicken or the egg?” But perhaps Quora’s biggest feat is that it has not become a stomping ground of spam answers and internet trolls, like Yahoo Answers, another popular Q&A site.

Because Quora has managed to maintain an extremely high level of discussion, it is a prime platform for ads with target questions (“What is the best French cheese?”), and that could offer a great business opportunity for the firm. However, there are still challenges ahead for Quora. Founders Adam D’Angelo and Charlie Cheever will have to be quick on their feet if they want the company to » continue  to grow without sacrificing its simplicity and cleverness. But investors are confident; Benchmark Capital, a Silicon Valley regular, invested $11m in 2010 and Quora was valued at $86m. It is now said to be gearing up to raise more cash at a $400m valuation.

Unusually, this Silicon Valley startup produces an actual piece of equipment, rather than online buzz. The little square plastic box allows merchants to accept debit and credit card payments from their smartphones or tablets.

The little gadget is no more then a card reader that connects to the phones and tablets through a headphone jack. Square then process the payments with a flat rate of 2.75 percent of the sale, and deposits the money in your account the next day. It has allowed small enterprises of all sorts to expand their business by accepting card payments.

The man behind Square is Jack Dorsey, of Twitter fame, who recruited Keith Rabois, formerly of PayPal. The men claim that Square is the fastest growing startup ever. In less than two years the company has attracted over one million small businesses who use Square to process their card payments in the US. What makes it even more remarkable is that Square achieved this with no business-development team or sales force; it was all word-of-mouth.

In the US the service is popular with everyone from market-stall holders, to therapists and babysitters. The little device has also been making the rounds at political campaigns, as volunteers canvass the streets for votes and donations, processed swiftly on their iPads. Square is on track to process over $5bn in payments this year.

Right now the system is only available in the US, but the potential for global growth is enormous. This year the company is expanding to Latin American, then Europe and Asia. International investors have been flocking in, most notably British entrepreneur Richard Branson. After raising an initial $100m in financing less then a year ago, the company is thought to be raising an additional $250m. All in, Square could be worth well over $4bn right now.

Pinterest may have gotten off to a rocky start; four months after its launch, the social networking site was languishing with a mere 200 users, all from Utah and Iowa. No-one in California was talking about it; no-one wanted to invest in it. But the signs of a surge were there; the number of users was growing between 40 and 50 percent every month, “it’s just that the number started so low that it took a while to get going,” says founder Ben Silbermann. There is the assumption in Silicon Valley that if a company is not successful immediately, it’s a dud. But Silbermann refused to admit defeat. Today, Pinterest  has 10m registered users.

The company is a virtual pin board where users can share images they like from around the web. Users can visit each other’s ‘pin boards’ and can click on images they like. They share recipes, decoration ideas, holidays pictures and so on. More then a social networking site, Pinterest is a site that allows people to converge around shared interests rather then social connections, so the site has become a hit with e-commerce and target advertisers.

The other interesting thing about it is that 85 percent of its users are women, and they are big online shoppers. Research from SteelHouse reported that Pinterest users were 79 percent more likely to purchase something they saw on the site than Facebook users. Pinterest also made sure it was integrated with Facebook from the very start. When a user ‘pins’ something on their board it shows up on their Facebook feed, and all their friends can see what they are interested in.

Like no other social networking site, Pinterest interacts with the world outside the internet. The idea is to get inspired by images and things posted online, then to go out and experience them, with the help of some of the site’s advertisers. Silbermann is not shy about it, “I think we knew from the beginning that we were building a very different kind of product.” It might have taken a while, but it seems that investors are finally paying attention. In May this year, Pinterest raised $100m in financing and is now valued at $1.5bn.

When Airbnb was launched in 2007, most Silicon Valley investors passed on it. It seemed like a pointless idea; an app that allowed people to rent out their spare rooms to travellers. Investors could not see why anyone would want to open their house to strangers. But apparently they do. Today, Airbnb has about 1,000 new homes listed on its site every day.

In the meantime, the site has developed into a community marketplace; listings can be anything between a $4000 a night luxury yacht in Cannes to a seven dollar-a-night bunk bed in Chicago. Reviews and social networking site profiles work to build up trust between users. Over five million reservations have been made through their site to date, according to Airbnb.

A minor PR scandal involving a ransacked home rented through the site made Airbnb rethink its strategy and customer service in 2010. They invested in a $1m Host Guarantee insurance policy and have never looked back. That year, despite the setback, Airbnb grew 800 percent. Investors were quick to see the error of their ways, and flocked to the startup.

Founder Brian Chesky led a round of investments last year that culminated with Airbnb raising over $100m, pushing the company’s value up to $1.3bn.  Airbnb have no plans to slow down despite already being present in over 186 countries. In March, they announced the acquisition of UK rival startup Crashpadder, and cornered the market for short-term rentals for the London 2012 Olympics. “We knew that London was going to be a major focus for us in 2012 with the Olympics on the horizon,” Chesky said in a statement. “Now, with the addition of the Crashpadder community we are making huge strides to ensure that thousands of Olympic visitors will have a unique and local experience as Londoners open their door to the world during the games and beyond.”

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