• by Paul Woolmington , March 29, 2007

The sky turned an ominous orange as we walked up University Avenue looking for our restaurant. Naked is doing some work for a tech start-up in Palo Alto, Calif., and we were going to dinner after spending a day fine-tuning a communications plan to help launch their revolutionary new product.

University Avenue, which runs through the heart of Palo Alto, is home to countless mansions built by successful tech-related IPOs and venture capital deals. It also contains quite a few restaurants to choose from, so I was a bit surprised that we had made reservations. It was a rainy Monday night, after all. How crowded could it be? But sure enough, every single place we passed was packed.

Only moderately wet, we found our restaurant, and it, too, was crowded. What's the deal, I asked my client? Why are there so many people out on a Monday night?

Venture capital, he replied. This town runs on it. Indeed, the VC market is rebounding from the Internet bubble burst of 2001. According to the National Venture Capital Association, some $26 billion was invested in 2006 through VC channels; more deals were done than in any year since 2001.

But the market hasn't quite climbed back to the fearless heights of 2000, the most prolific VC year by far and the height of the Internet boom. Nowhere close, in fact: 2006 saw less than half the number of deals as in 2000 - 3,416 compared to 7,812 - and the $26 billion invested was only about a quarter that of 2000. Even more telling, the average price of each deal has been halved.

What do these numbers mean? I'm no expert in the machinations of the VC world, but it appears there's more caution in Palo Alto today than in 2000.

I'm not just talking about the money side of things; I'm talking about marketing as well.

Earlier that afternoon, one of the recurrent debates was the degree to which product evangelism - old-fashioned word-of-mouth - will accomplish our marketing goals. If we truly believe in the product, if the product is as revolutionary as instinct and focus groups tell us, then it stands to reason that others will like it too. More importantly, they'll like it enough to tell their friends. Word-of-mouth will sell the product and we'll have to spend little of our precious marketing budget to make our numbers.

It's an old story, strongly reminiscent of the heady days of the Internet boom, when planning and caution were thrown to the dogs of - to borrow from Alan Greenspan - "irrational exuberance." But this perspective may well be right. After all, when it does happen, it becomes the stuff of legend. Take Craigslist, for example, which began as an e-mail newsletter about San Francisco-based events. It now serves 450 cities worldwide. Or YouTube, launched in May 2005 with some of the founders' personal video clips, and ended up serving 30 million videos daily by the end of last year.

Another example is Photojojo, a homegrown newsletter that helps subscribers better use their digital cameras. A healthy dose of personality and creative projects - turn a photo into a mural, print your friends' faces onto cupcakes - fueled word-of-mouth. Subscriptions jumped to 19,000 just six months after its 2006 launch.

But when meeting with our client, a cautious outlook on our plan emerged. Our product comes with a price tag, unlike Craigslist. What if word-of-mouth alone fails to convince a customer to consider the product, much less buy it? We needed a solid plan using a mix of communications channels, in case word-of-mouth fails us.

This debate is one example of how newfound caution is creeping into Palo Alto. Word-of-mouth is not magic - no one channel can work in every situation. And it turns out that while word-of-mouth is popularly given credit for the launch successes of certain brands, other channels often did some heavy lifting behind the scenes. MySpace now has more than 150,000 new users signing up every day, but in its early days it relied on direct e-mail marketing and cost-per-acquisition campaigns.

What's right for our client? There's no way to know for sure. But the fact that we're even having the debate is telling - the "New Next" in Palo Alto is exuberance tempered with planning and due diligence. Rather than blindly reaching for old marketing crutches, tech start-ups will be debating about which channels truly work best for their particular businesses.