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THE NATION

Fears of Dot-Com Crash, Version 2.0

Venture spending soars, especially for Web video. Some say it's a lot of cash chasing too few ideas.

July 16, 2006|Chris Gaither and Dawn C. Chmielewski | Times Staff Writers

The "online dress-up and makeover community" Stardoll.com, for example, is on the prowl for sponsors. Liisa, a Finnish artist, began the service, originally known as Paperdoll Heaven, in 2004. It began to catch on among girls ages 8 to 17, who liked to dress virtual dolls of Johnny Depp, Madonna and other celebrities, said Danny Rimer, the company chairman.

Rimer, a partner at Index Ventures, invested $4 million last year and recently joined with Sequoia Capital -- the firm that backed Google and Apple -- to inject $6 million more in Stardoll.

"You're assembling the key things girls seem to be interested in at that age: namely fashion, music and celebrities," Rimer said. "While it was a wacky-sounding idea, the beauty of the Internet is you actually don't decide what's wacky or not -- the community does."

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Networking for dollars

Many young tech companies rely on venture capitalists to supply the cash they need to grow. Here's how the process usually works:

* A firm establishes a fund, often with a theme: consumer Internet, alternative energy, biotechnology. Limited partners -- including pension funds, colleges, wealthy individuals and companies -- provide most of the investment capital.

* The venture capital firm hunts for promising companies. The companies get money to hire employees, market services and buy equipment; in exchange, the firm gets a stake in the companies and some say in strategy.

* To cash in on its investment, the firm needs what's called a "liquidity event": a sale of its stock through an initial public offering or a sale of the entire company.

* Most young companies fail. As in the movie business, one big winner in a portfolio can more than offset a dozen losers.

* When the returns from all the companies in its portfolio are tallied, the firm divvies up the proceeds and distributes them to its partners. Returns of 20% a year are not uncommon.

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