SAN FRANCISCO (Business 2.0 Magazine) - Microsoft used to cast such a pall over startups that venture capitalists would ask them the "M question" -- how does the company plan to coexist with Microsoft (Research)? And if the answer was that the startup planned to compete with the software giant, then VCs wouldn't invest.

That has changed drastically in the past year. Venture capitalists are investing in desktop applications again -- though they'd never call them that, because although this new breed of software resembles desktop applications it lives on the Web. For all their sophistication, until recently, Web-based applications couldn't handle as simple an interaction as clicking and dragging a file into a folder -- something users have been doing for decades on Macs and PCs.

Call it the "webtop": Instead of running on Windows, these applications run within any standard Web browser, like Mozilla's Firefox, Microsoft's Internet Explorer or Opera. As such, they offer one distinct advantage over their PC-based counterparts; they're accessible from any computer anywhere, as long as it has a browser.

There are a host of venture-backed startups taking advantage of this new webtop reality. Hive7, a startup launching today, is building virtual-world environment -- similar to the ones World of Warcraft and Everquest gamers spend hours in -- within a browser.

Fabrik, another recently launched startup, is offering an online file-storage service that offers a click-and-drag graphical interface like Windows Explorer or Mac OS X's Finder for navigating through your files.

Hive7 and Fabrik are joining older startups that have already embraced this model. Goowy, for example, offers a full-featured desktop with e-mail, instant messaging, and other commonly used applications, while Zimbra offers e-mail that looks and feels like Microsoft Outlook.

Even a couple of years ago, none of these companies could have gotten funding, because they would have had to build their software on top of Microsoft Windows and compete head-to-head with the giant.

The new wave of investment is driven by the convergence of three major trends. First, broadband is spreading everywhere. Second, open-source programming tools are widely available and improving in quality. And third, technologies are emerging that make Web-based software as graphical and interactive as desktop applications, like Ajax (asynchronous JavaScript and XML) and Adobe's Flash.

Ajax uses JavaScript, a popular programming language for writing interactive Web pages, to gather small bits of data quickly in XML, a common data format. The result is that Web pages can change dynamically without having to go through a slow reloading process. The best-known example is Google (Research) Maps, which lets users scroll and zoom through a map. (Earlier Web-based map services required a page reload every time the user changed the view.)

Flash is a software program best known for creating short animations and games. But clever programmers have found ways to extend its abilities far beyond entertainment, turning it into a serious tool for creating full-fledged web-based applications.

These technologies are letting programmers create Web applications that resemble desktop applications in every way except the window they run inside.

Zimbra, a San Mateo, California-based start-up, built a virtual clone of Microsoft Outlook using Ajax that impressed A-list venture investors such as Accel Partners, Benchmark Capital, and Redpoint Ventures enough to have them invest about $16 million in the company.

Fabrik, a start up also based in San Mateo, is the brainchild of former Maxtor executives Mike Cordano and Keyur Patel. Cordano and Patel have created an online storage service that allows consumers to manipulate their videos, photos and music files in a browser, just like they would on their Windows PC or Mac. The company recently raised $4 million in Series A funding from investors such as ComVentures of Palo Alto, California.

While many companies are offering Web-based online storage directly to consumers, Fabrik is also hoping to get hard-drive makers to include its application on their drives. (It's already in talks with one major hard-drive maker that Cordano and Patel won't name because the deal is not yet final.) Fabrik's Web-based software would let users will securely access files on their home hard drives from any browser, not just their home PC -- an added feature that might prove to be a selling point for hard drives.

"What we have done is used technologies like [Ajax] and made it easy for end users who are not tech experts to store and share their digital information," says Cordano.

E-mail and storage are serious business, of course, but Ajax can also be used for fun. Entrepreneur Max Skibinsky is using Ajax to build virtual worlds (supported by advertising) that he hopes will rival popular multiplayer games like "Second Life." His startup, Hive7, is barely ten months old, and has been in stealth mode up until today.

Skibinsky's company has created a virtual world that, unlike "Second Life" and other competitors, doesn't require a lengthy software download. In Hive7, users build rooms where friends can create their own avatars, or virtual personalities, and chat, listen to music, surf the Web, or even watch videos together. Consumers can add YouTube videos, photos from their Flickr accounts, and any other media they can find on the Web.

Hive7 has raised angel funding from Naval Ravikant, co-founder of Epinions, a company that was sold to an eBay (Research) subsidiary, and Gaurav Dhillon, co-founder of enterprise software company Informatica (Research).

Goowy, meanwhile, is proving that Ajax isn't the only way to build browser-based applications. It has taken Adobe's (Research) Flash multimedia technology far beyond its roots and created a full-blown point-and-click desktop, with email, instant messaging and so forth. The company, based in San Diego, California, was founded by programmers who helped develop Yahoo (Research)! GeoCities, and has signed up more than 25,000 users, and is about to close a round of financing from angel investors.

Those are hardly numbers to make Bill Gates quake in his boots, of course, since Windows has hundreds of millions of users around the world. But it's notable that entrepreneurs are even able to raise money for such products. Finally, the Web has technologies for interactive software that match the capabilities of the desktop -- now the field is wide open for anyone with an idea.