A disturbing report from the Washington Post suggests the citizen journalism startup Backfence.com is “struggling to reinvent its business model to stay float.”

Backfence was launched in May 2005 in the Washington, D.C. suburbs of McLean and Reston with $3 million in venture funding from SAS Investors, Omidyar Network, and others. It was one of the prominent, early “hyperlocal” sites — designed to use community chatter, or user-generated content, to populate its online pages.

But a January 15 Post article says a several executives have left the startup after feuding with the investors. In temporary command is Mark Potts. He is the former Washington Post online guru who had been part of the Backfence founding team. Potts had left the company in October but is not now back. He told the Post that BackFence would be adding social networking and mapping features soon. SAS investor’s Josh Grotstein told the paper, “We remain very upbeat on the whole face of citizen journalism.” But angel investor Frank Bonsal described the company as “destroyed” by infighting. Says Bonsal:At this point I don’t look for any return or prospect of recovery.”

If Backfence, the hyperlocal startup with money, is having hard times, what does that say about the local startups without money?

Maybe the takeaway is: being underfunded has to be considered a blessing. Of course it’s never easy to have to struggle to pay bills, and the local sites, like Fresno Famous, that have sold out already (in this case to the McClatchy Newspaper empire), are probably not much more or less successful than was Backfence. But because there were no big investors, there was nobody to make big demands in an arena where folks are basically still groping for the business models.

Consider the lessons of an Online Journalism Review article in which former reporter, editor and now screen writer Tom Grubisich. The piece, published in November, is a tough but probably fair report card. It says in part:

“The best sites – WestportNow and iBrattleboro – have got better over the past year and are closing in on profitability, but only because the key players don’t take salaries. It’s not clear how scalable either operation is. Neither has the capital yet to expand or even hire advertising staff.”

Read the whole piece if you play in this sand box.

But what all this is telling us is that these ventures will not generate stable cash flows. Period. These are not stupid people who have tried and so far failed — unless we define success to mean that you keep the whole mess floating along until some mass media outlet, operating out of fear rather than financial sense, buys you out and then probably proceeds to kill whatever it is that you were starting to grow.

The other day, in a completely different context, I was talking to a venture capitalist who said something apropos. It’s not good for a startup to have money too early. Once a startup gets money it spends it. The company starts executing on a plan — but in the early days of a market, who knows what the plan is, and whether there is one plan or many plans to profitability.

So if you’re bootstrapping a hyperlocal site (a placeblog as Lisa Williams says) consider it a plus. Necessity is forcing you to be inventive. (Pop quiz: who wouldn’t rather take the money and bet that they would be just as creative if they were able to draw a paycheck?)

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Noted in passing: Say goodbye to the Independent Press Association, which used to distribute independent magazines but has had to shut its doors. I don’t know how long the website will live so maybe you should mine it for links and resources like its recommened printers’ list and its list of 10 ways for magazine publishers to survive hard times.

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The me-too meter? Want to know what stories are dominating the news? Each Tuesday, the Project for Excellence in Journalism will distill the prior week’s headlines from 48 news outlets into an index that will tell us what dominated the front pages. The composition of the index includes a smattering of large, mid-sized and small newspapers, a handful of leading web sites and some broadcast outlets. I filled out a form to ask for e-mail notification each week.