Without a lot of VC, startups get by

Kijubi, a tiny startup, was just about to raise its first round of funding last year when the stock market crashed, and its angel investors cut its $4 million valuation in half. Kijubi’s founders then backed out of the investment.

“We’re now borderline profitable and we’ve held tight,” said President Kiley Reinfeld. “A lot of angels were dropping out themselves then, too, and that was the biggest reason for us to back off.”

Kijubi operates a travel website that helps people find exotic and unusual travel experiences, such as skydiving trips and eco-tours.

Reinfeld said that the company will look for outside funding again one day. But he’s one of many entrepreneurs who’ve been forced in the meantime to find creative ways to survive on less cash than they would have when times were better.

Indeed, Internet startups at this year’s TechCrunch50 conference, held in San Francisco last week, face a financial climate in which venture capital has dried up, forcing them to turn to friends and family for financial assistance to get their startups off the ground.

For example, Dan Olsen, a Stanford University graduate, said he couldn’t find any venture capital for his company, a search engine called YourVersion, which allows users to find and share Web content with their friends,

So he turned to his friends, and their willingness to work for food.

“My friends come over and code all day on Saturday and, at the end, we have a barbeque and beers,” he said. “I give food equity.”

Life360, a startup that provides family safety and security services online, struggled to raise funding until it hit a jackpot—prize money for developing a mobile phone application for Google Inc.

“We won the Google Android Developer Challenge and got $300,000,” said co-founder Chris Hulle. “That is what got us going.”

Not every startup is in the same position. As of press time last Thursday, Oakland, Calif.-based PureSense, which develops software to help farmers manage water usage, reportedly was in the process of raising a Series B funding round (see story, page 11).

Some entrepreneurs can avoid seeking funding for years. Mark Piller, the founder of CloudPuncher, a developer of software integration that recently launched a new tool for stress testing websites, has avoided VC funding for seven years, although he’s starting to look for capital now.

CloudPuncher is profitable, he said. “I was too busy in the beginning to look for financing,” he said. “I was having too much fun.”

The number of venture capital-backed investments in the second quarter of this year dropped to levels not seen since 1996, according to the MoneyTree survey from PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters (publisher of PE Week). Many predict that the third quarter investment statistics will similarly reflect the cautious times.

“Many are speculating that the year 2009 represents a fundamental turning point for the venture capital industry,” wrote Bill Gurley, a general partner at Benchmark Capital, in a recent blog posting.

Like many venture capitalists, he believes the industry could shrink by half as a large number of venture firms call it quits over the next five years.

Christina Jenkins, a former Kauffman Fellow at New Enterprise Associates, and who recently founded a startup called HealthyWage, a Web-based health care company, said she eventually plans to seek funding for her company, which rewards people for getting healthy by paying them small amounts of money.

“We’ll seek financing when it’s time,” she said.

Meanwhile, there are benefits to starting a company in a recession.

“There are fantastic people available,” said David Roddenberry, co-founder of HealthyWage. “And we’ve hired them at prices we can afford.”

David Lawsky of Reuters contributed to this report.