"It has become challenging to break out at SXSW because there's so many great startups competing for the attention of thought leaders here," said Kleiner Perkins Caufield Bowers partner Chi-Hua Chien.

"There's too much noise," said Kip McClanahan, an early-stage investor at Silverton Partners in Austin.

"I counsel my startups not to use it as a launching ground because it's so crowded as a place for launches," said Joe Kraus, a partner at Google Ventures.

That is a far cry from 2007, when micro-blogging service Twitter became one of the most talked-about new companies after it put giant TV screens in the conference hall that flashed "tweets" to SXSW attendees. It also trebled its traffic, to 60,000 tweets from 20,000.

Location-based social networking site FourSquare launched at the festival in 2009, and now has more than 15 million users.

This year, the most talked-about company of the festival is Highlight, an application for iPhones that alerts users if somebody they know - or a friend of a friend they may want to know - is nearby. The company will not release statistics, but anecdotal evidence suggests festival-goers were downloading Highlight more than any other apps.

But many backers and analysts now believe that the kind of overwhelming Twitter-style success is a thing of the past.

STAND OUT FROM THE CROWD

For one thing, the smaller size of the gathering made it a lot easier to stand out a few years ago, veteran SXSW attendees said. The interactive part of the festival, which also has separate film and music components, attracted just 7,000 people in 2007, a spokeswoman said. The tally for this year's SXSW Interactive was not in yet, but it could be three times that.

Also, precisely because of the existence of services such as Twitter, it is easier to reach the early adopters who may spread the word about a start-up's products or services outside of any specific event.

But that does not stop companies from trying to capture the crowd's attention. This year's gimmicks included free rides from the airport offered by social-network Tagged to discounts on Austin's legendary food trucks offered by online coupon-company WhaleShark Media.

Online-rewards company Kiip and social-giving platform Giftiki threw a flashmob-style dance party that ricocheted up Congress Avenue, the main thoroughfare, late Saturday night.

McClanahan said done right - startups using search engine-optimization techniques ahead of the festival to publicize small-scale events like the dance party, for example - companies can still gain from SXSW.

But many companies, including those dishing out freebies and stunts, have gradually shifted focus from using SXSW less as a place to win customers, and more as a place to connect with potential partners.

"The top consumer companies all have people here," said online-coupon company WhaleShark Chief Executive Cotter Cunningham. "It's ideal for relationship building."

His company, backed by Institutional Venture Partners, Google Ventures and others, owns sites like RetailMeNot.

Sahil Lavingia, founder of online-payments company Gumroad, said his marching orders from his backers - including Accel Partners and venture capitalist Danny Rimer - were clear. "I am told just to go and enjoy the ride," he said.

He was also looking for feedback on his product and the chance to meet far-flung executives he would not ordinarily run into in his San Francisco base.

Even for companies that capture the crowd's imagination, there is no guarantee the buzz will last, emerging-media marketing specialist David Berkowitz wrote in a blog post titled "Why There Won't Be Another Twitter at SXSW."

He cited many SXSW successes that did not fully live up to their potential afterward, including group-messaging service Beluga and contact-service Hashable.

MOST POPULAR

Highlight co-founder and CEO Paul Davison said he has been thrilled by the crowd's reaction. But he also knows SXSW creates an artificial environment and there is no telling how well the product will stick beyond the few days of the festival.

"My hope is people go back to their hometowns and start telling more and more people about it," he said, adding that the festival was helping achieve one important goal: making sure what he called "the right people" know about it.

Unfortunately, some of those influencers were not impressed. Minutes before Davison's comments to a reporter Saturday, a venture capitalist and an executive at Apple Inc both said they had deleted the app from their phones earlier that day because it consumed too much battery life.

Davison said his company was aware of the glitch and was working on it. In the meantime, users can put the service on pause.

(Reporting By Sarah McBride, Editing by Maureen Bavdek)

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