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Young entrepreneurs cash in on ring tones: West Coast VCs have big plans for local Web startup

July 10, 2006

As students at Warren Central High School just a few years ago, Michael Slate and David Hosei used to dream about becoming entrepreneurs. They started like many of them: cutting grass and selling candy door-to-door.

Today, they rub elbows with West Coast venture capitalists.

In April, the pair announced that Silicon Valley-based VantagePoint Venture Partners had invested in their Internet startup 3GUpload, a Web portal for the exchange of cell phone ring tones. Founded in a Purdue University dorm room in 2000, 3GUpload had grown-without outside capital-to 40 employees and annual revenue of $8 million.

VantagePoint devoted $20 million to a deal that united 3GUpload with a smaller rival called Mophone. With $2.8 billion under management, VantagePoint is among the biggest venture capital firms in the country. It was one of the primary investors behind the popular virtual networking site MySpace.com.

The combined company relaunched June 20 under the new brand name Mixxer. Its headquarters is in Seattle, but Mixxer maintains 3GUpload's old operations here. Slate, now Mixxer's director of search engine marketing, is just 24 years old. Hosei, its director of community and content creation, is 23.

"We're going to be entrepreneurs our whole lives," Hosei said.

The story began in the late 1990s. Slate was working as a part-time Circuit City clerk. He purchased one of the first cell phones with a color screen on the market. Frustrated that he couldn't buy any content for it, he started writing his own software.

"It was really only me at that time, skipping class and coding the Web site," Slate said.

In a few months, 3GUpload had logged 3 million hits. Soon after, the total topped 20 million. Slate lost his Circuit City job, but didn't care. The Web site's sales grew from $200 a day to $1,500 a day, and kept doubling every month. He called Hosei, then an Indiana University student, and began talking about how to formalize his hobby into a hit business.

"We didn't really understand music licensing or anything," Slate said. "We were just a couple of kids trying to figure it out."

They approached Purdue's technology incubator and asked for help. Purdue referred them to attorney David Millard, a partner with Barnes & Thornburg LLP.

"They just looked so young. I've got a son who's now 30 years old, and they looked like they could be his kids. They hadn't been around the block once before," Millard said. "But boy, as you got into the conversation, you could tell these guys knew what they were doing."

Slate and Hosei wondered whether they should seek outside investors. Millard advised against it. He said 3GUpload was throwing off so much cash, there was no reason to.

"This thing took off like a rocket from Day One," he said. "We made the decision, 'Let's pour the coal to it and not get distracted trying to raise money.'"

Still, the fast-growing business attracted attention-and offers. Venture capitalists and other players in the cell-phone-content sector started nosing around.

"Every company that ever thought about mobile was saying, 'Hey, we want to buy you,'" Hosei said.

Strangely, nobody local ever picked up the scent, Slate said. But Millard wasn't surprised.

"I would have people call me once in a while and they wouldn't even pronounce the name right. That's how unknown they were in the local marketplace," he said. "Our financing sources don't tend to be very proactive. Most of the time, it's somebody approaching them, rather than them trying to dig around out there and find the neat new opportunity."

"I suppose when you get 400 business plans a month, you just look at those and you don't go try to discover," Millard added.

With 4 million registered users, Mixxer already has a firm foothold in the cellphone-content marketplace. It's in the process of moving from a subscription service to an advertising-driven site. VantagePoint officials believe it can become the biggest thing online since MySpace. They see Mixxer as another permutation that can tap into the popularity of Web networking. Now much more than a ring-tone exchange, Mixxer also provides games, screen savers, photo exchanges and more.

"We saw community and social networking take off firsthand from our experience with MySpace," said VantagePoint Managing Director Eric Ver Ploeg. "The next phase is to extend this concept to the mobile platform."

"3GUpload has managed to create a thriving mobile entertainment business with no outside investment," he added. "By augmenting their impressive entrepreneurial team with proven management and the financial resources to grow the business, this company can maintain its leadership in the mobile entertainment and community space."

Tole Hart, an analyst for Stamford, Conn.-based technology research firm Gartner Inc., said the Internet is crowded with small companies trying to capitalize on the demand for cell phone content. Most are dependent on the strength of their agreements with larger carriers.

Few will ultimately stand on their own, Hart said. More likely, the majority of cell phone content providers will be bought out to become extensions of established online communities, like MySpace.

Which suits Slate and Hosei just fine. After a few years working for Mixxer, they plan to start all over again and build new companies from scratch. The only question is whether they'll do it in Indiana.

"These guys will get back on for another ride," Millard said. "After the first one, you're playing with the house's money. It's a lot easier to take the risk the second, third and fourth time."
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