Like thousands of other Internet entrepreneurs, Ashfaq A. Munshi lost his head at the dot-com party. He had held management jobs at old-line tech companies, including Silicon Graphics Inc., but in 1996, he took the startup plunge--co-founding three e-commerce companies in quick succession. His highest hopes were for SpecialtyMD.com, a medical e-marketplace where he was CEO. When Internet medical pioneer Healtheon Corp. went public in February, 1999, and its price zoomed to $105 a share, Munshi became obsessed. He had previously worked with several of Healtheon's founders.
Suddenly, all he thought about was selling out or going public. He needed to prove that he, too, could become fabulously wealthy practically overnight--he was just as smart as the billionaire next door.
It was his wife, Ruma, who made him take a hard look at himself. One night in the summer of 1999, she told him he had turned into the greedy person he had vowed he would never become. At first, Munshi denied it, but within days, he realized she spoke the truth. Shook up, he started operating differently--building the company for the long haul. Ultimately, he sold SpecialtyMD.com for $110 million.
PENT-UP EMOTIONS. After the deal closed, the emotional impact of operating for years at mind-frazzling speed sank in. He had bottled up the thrills, tension, greed, and guilt of the Internet boom. During a religious retreat, Munshi broke down and wept. "I have never cried that long and deeply before," he recalls. "Everything I had pent up came out."
That roller coaster is just a dizzying memory now. These days, a startup's prospects are no longer the same--and neither is Ash Munshi. He's still creating Net companies. In fact, he has two under way: Radiance Technologies, which speeds the flow of information on the Web, and Vivecon Corp., which streamlines companies' dealings with their suppliers. But today, he's doing things differently. At Radiance, Munshi spent a parsimonious $4 million in the first year of operations. Rather than scheming to get rich quick, he's creating technology that solves acute problems for corporations. And he's managing companies to make profits--now. "It's back to the old way," says Munshi.
That's the mantra of second-generation Internet entrepreneurs. They're back, chastened, and vowing to build companies out of bricks rather than straw. It has been 18 months since the dot-com meltdown began, and the first stirrings of Webland rebirth have begun. Dozens of Net veterans are laboring in obscurity--targeting everything from wireless communications to software for corporate supply chains. They're convinced that the Internet phenomenon is still in its infancy. And they aim to take the mistakes of the past and turn them into advantages for the future.
"The opportunity to build a business around the Internet is as big as it ever was, but the means for pursuing it have returned to rationality," says Mike Homer, a former senior executive at browser pioneer Netscape Communications Corp. who is now CEO of Kontiki, a startup that moves video across the Net.
NO IPO. These entrepreneurs are consulting a new playbook. Rather than betting on ideas aimed at overthrowing the powers that be, they're providing the tools that help established corporations do business more efficiently. They're raising venture-capital money in smaller dollops--$2 million rather than $10 million. They're concentrating on engineering rather than marketing: Some startups won't hire a sales boss until they have a product ready for launch. And they're not planning on going public anytime soon. Instead, some vow they'll put that off for ages. They plan to build mature companies before they open themselves to fickle public markets.
At the same time, they're sticking with the best strategies they learned during the boom. They're engineering products differently--often creating services delivered on the Web rather than traditional software. And, trained to operate on Internet time, they're ready and able to change directions in an instant if a new strategy is required. Good thing, too: The uncertain economic climate has made the demand for products as changeable as the weather.
Consider Steve Kirsch, a co-founder of Web portal Infoseek and now CEO of Propel Software Corp. In May, he abruptly abandoned his plan for developing e-commerce software because the field was too crowded. He switched to creating software that makes massive databases operate smoothly when they're queried by thousands of people at once. "Agility and nimbleness are even more important to startups than they were in the past," says George Foster, a management professor at Stanford University.
Because they have been through boom times as well as the bust, these second-timers have a leg up on new entrepreneurs. Venture capitalists are willing to back people who have made their mistakes and learned from them. "In Silicon Valley, failure is forgiven--as long as you're a technologist," says Guy Kawasaki, CEO of Garage Technology Ventures, a consultant to startups. Even uncertainty about where the industry is headed is an advantage for these Net vets. They have the ability to sort through tech trends and spot where the next opportunities lie.
HAVE THEY CHANGED? "The true entrepreneur wants confusion. He wants to get started before others figure things out," says John L. Nesheim, author of the book High Tech Startup. "These are wonderful conditions for entrepreneurs--if they apply the lessons of the past."
But have these entrepreneurs really changed their stripes? Sure, they've made their vows of sobriety. But the harsh economy could be credited with their newfound stinginess in spending. When the economy and capital markets pick up, they might be tempted to revert to 1999-style practices. Until then, management experts say, it will be hard to tell whether attitudes have fundamentally changed and a build-for-the-long-term philosophy will prevail. "To be frank, I think you would see a lot of craziness again. Some people think this is temporary," says David Morgan, CEO of online-advertising software company True Audience Inc. and former CEO of Web ad pioneer Real Media Inc.
When Morgan looks back on Real Media, he sometimes wonders what he could have been thinking. He remembers when, in early 2000, he organized a get-together for the company's staff of 400 at a Greek resort that was going to cost $800,000. "It was a boondoggle," he admits. When the Nasdaq crashed, he canceled the trip, giving up a $350,000 deposit. Morgan resigned from Real Media last year, intent on starting a new company that would help advertisers better measure the effect of their online advertising.
Now, when Morgan ponders a staff retreat for his crew of nine at True Audience, he doesn't want to sacrifice even a day of productivity. "I wonder if they'd be willing to have a picnic at the office on a Saturday," he says.
ON THE CHEAP. Like Morgan, CEOs today have to come up with creative ways to get money, and then even more creative ways to get the job done without spending very much of it. Last year, Narasimha Reddy, an early Netscape employee, started a company code-named Momsdesk.com, a maker of secure e-commerce systems. He decided he would custom-design his product for a corporation, then retool the technology into a product he could sell to other corporations. That way, he got his company off the ground without venture capital. In fact, he and a partner invested just $250,000. And talk about cheap: Reddy and his 10 colleagues brought their own tables and chairs from home to furnish their Sunnyvale (Calif.) office, which is behind a strip mall next to a cocktail lounge.
Even entrepreneurs with plenty of cash are mighty careful about how they spend it these days. Juice Software Inc., a New York startup that interweaves desktop computer applications with information gathered on the Web, laid off seven people from a staff of 50 last fall even though it had $6 million in the bank. The company had hired prematurely in administration and marketing and decided to trim back amid signs that the economy was weakening, says Chairman Charles H. Ferguson, who was CEO of Vermeer Technologies Inc., a Web-page design-tool company that was sold to Microsoft Corp. for $130 million in 1996. Juice resumed hiring as its products came closer to their July 30 release. It now has 57 employees and recently raised an additional $12 million.
All the penny-pinching in the world means nothing, though, if you don't have a sound idea to build a company around. Late in the boom, many were chasing after the latest hot thing--delivering software over the Net as a service, optical networking, or brokering transactions between buyers and sellers via the Web. None of those markets has blossomed yet, though they still have promise. Now, there are few huge, new fields ripe for the picking. So veteran entrepreneurs are doing things the old-fashioned way: Rather than targeting the Next Big Thing, they're focusing on hard-to-do technologies that make corporations more efficient. "Call it a return to nerdism," says Garage's Kawasaki.
Nobody illustrates the shift better than Halsey Minor. The founder of CNET Networks Inc. (CNET
), the leading online tech-information company, and Snap.com, a Web portal that was later bought by NBC for a paltry $5 million, is now CEO of 12 Entrepreneuring Inc., a San Francisco holding company that builds tech startups that use the Internet to improve a corporation's internal processes.
So far, he has launched Grand Central Networks Inc., which is developing Web services for managing the exchange of information among corporations, and iBuilding, a Web service for handling business tasks for real estate companies. These services are focusing on fundamental business processes--not trying to upend established players in industries. "I think it's very hard for new players to emerge in the media business now," he says.
MONEY SUPPLY. Minor didn't have any trouble raising money. He bagged $130 million in May, 2000, before it was clear just how bad this downturn would be. Today, most entrepreneurs are having a difficult time getting funding. Money for Internet startups has plummeted from $22.6 billion in the second quarter of 2000 to $7.3 billion in the second quarter this year, according to Venture Economics. Only 173 early-stage companies got funding last quarter, vs. 625 a year earlier. Now, it often takes six months or more to get initial funding--compared with just weeks in the past. And valuations placed on startups have been cut in half.
Still, new companies with seasoned management teams are getting funded. The key is to focus on the slices of markets that are likely to mature first. SEVEN Networks CEO Bill Nguyen, ex-CEO of Onebox.com, an Internet messaging provider that was sold to Phone.com for $850 million, was able to raise $30 million this month on top of $34 million he raised a year ago. What drew those backers? Nguyen realized that the earliest wireless Web opportunities would come from corporations, not consumers. SEVEN sells software to telecom carriers who manage wireless networks for corporate clients.
Once startups get their money, every step of the building process proceeds at a more deliberate pace than in the past. At DanaStreet Technologies, CEO and Healtheon veteran Kittu Kolluri expects to take 18 months to deliver his first product, software to quickly create secure Web connections for a company's farflung employees. Compare that with the eight months it took Kolluri and the other founders of Healtheon to deliver their first product--which wasn't polished. Almost all of Dana-Street's 20 engineers are senior people with deep knowledge of networking protocols and security.
FOCUS ON PATENTS. To make all that work pay off, companies are aggressively seeking patents. That didn't seem necessary in the earlier Internet days. Back then, the focus was on creating new kinds of businesses and getting there first rather than on building a technology foundation. The U.S. Patent & Trademark Office received 72,526 information-technology and telecom patent applications last year, compared with just 40,576 in 1997. Rearden Steel Technologies Inc., for example, which is developing Net-connected home-entertainment devices, has applied for 44 patents for chips, software, circuit boards, and mechanical engineering. It plans to file 16 more applications as well.
"Engineering is important again because it's creating something that's real and something that's hard to do. So it creates barriers to entry by others," says Steve Perlman, Rearden's CEO, who was a co-founder of Web-access pioneer WebTV, which he sold to Microsoft in 1997 for $425 million.
As important as engineers are, companies don't have to pay as much to get them these days. In 1999, it was a programmers' market. Software engineers with three or four years' experience could expect to get paid more than $100,000 and 0.5% of a startup's shares if they joined early enough. Companies can't afford compensation packages like that anymore. Now, CEOs say they can get experienced engineers and marketers for less than $100,000. And they're no longer giving flextime to everyone who asks.
ATTITUDE ADJUSTMENT. Once they get engineering under way, startup CEOs are drastically rethinking the way they take on their markets. John K. Peters, CEO of Sigma Networks Inc. and former CEO of Internet service provider Concentric Networks, which was sold to NextLink Communications last year for $2.9 billion, says he learned from the mistakes of high-speed Net access providers. They blanketed metropolitan areas with their networks and ultimately ran out of cash. Sigma, which provides broadband links between the Internet backbone and high-traffic users, builds out sections of its network only when specific customers come online. "In the old days, the strategy was: `Build it, and they will come.' Now, you want to see the whites of their eyes before you build it," says Peters.
There's a new attitude when it comes to running sales, too. Mike McCue, chairman of Tellme Networks Inc., learned how not to treat customers when he was a manager at Netscape. "We were being driven to hit a new revenue target every quarter. We used to do drive-by shootings. We'd go in and get the cash and disappear," he recalls. That post-deal inattention hurt Netscape's long-term relationships with customers. In some cases, the company even had to give money back to disgruntled buyers. At Tellme, which started in 1999, McCue focuses on a handful of telecom and airline companies, hoping to get them to buy more of his voice-recognition services each year.
This summer, he reorganized the 195-employee company into customer-satisfaction teams made up of sales and technical people, each responsible for a few accounts. "We have plenty of money--$150 million. But if we run out of customer goodwill, we're dead," says McCue.
In the go-go days, strategic partnerships were vital but often ill-conceived. Perry Friedman, a co-founder of Digital Envoy, a Web marketing technology company, recalls that when he was vice-president for engineering at Internet Sports Network, the company forged partnerships that made no sense to him. ISN, which he left two years ago and which ceased operations last year, created sports contests for its own and other companies' Web sites. He cites a December, 1999, pact with SportsLine.com Inc. (SPLN
) in which ISN got its name on CBS SportsLine and other Web sites, lifting its profile with consumers. But it agreed to pay SportsLine.com $17 million over four years for the honor of running contests on those Web sites. Friedman believes the investment in building a brand didn't pay off.
NEW DEALS. "The theme of the day was to spend a lot of money and get your name out there. It didn't work," he says. At Digital Envoy, chief technologist Friedman is making deals that bring the company dependable returns. A pact with Web giant AOL Time Warner Inc. includes an investment by AOL in Digital Envoy and its agreement to buy the smaller company's technology.
The slowdown has turned the initial-public-offering world upside down. In the gold-rush days, a quick IPO was a startup's raison d'tre. Zack Rinat sold his previous startup, NetDynamics, to Sun Microsystems Inc. (SUNW
) in 1998 for $180 million. These days, Zack, now CEO of Model N, a maker of collaboration software, says an IPO rarely crosses his mind. His strategy is to make his company sizable and profitable. Then, if he needs money to expand his business and a public offering seems like the best option, he'll consider it. "There's nothing in our core values that says we're going to get rich," says Rinat.
GOING FASTER. There were plenty of things about dot-com business practices that Net veterans still find immensely valuable. They share information--even bad news--quickly with everybody in their organizations. Engineering managers learned to develop products in new ways on the Net--and those lessons are keepers. Craig Donato, CEO of Grand Central and a former senior vice-president for At Home Corp. (ATHM
), found that just because the company's Excite Web site could constantly be improved didn't mean it should be.
Making changes every day wore out engineers and meant that the site was never totally reliable. So he came up with a system in which major improvements are spaced out over a number of months, keeping the development staff on an even keel. Now, he's applying that system to Grand Central's round-the-clock services for connecting companies and their suppliers.
For Donato and others, hard times caused them to reexamine their core beliefs and bring balance to their work lives. Donato bought an old gold mine on California's American River and spends his spare time restoring the land with pick and shovel. He believes working with his hands gives him a perspective that will help him make sound decisions as a manager. DanaStreet's Kolluri has banished the old around-the-clock work culture. He remembers falling asleep at a stoplight in the wee hours of the morning after one very long day at Healtheon. He now believes that that way of living and working exhausted both executives and employees--resulting in mistakes. "Now, we work from 9:30 to 5:30. Then we go home," Kolluri says.
STARTING OVER. Many of the entrepreneurs who helped launch the Internet gold rush dropped out to rest and take stock. Now, they're ready to start new companies. Joe Kraus, a co-founder of Excite Inc., is exploring the possibilities in computer-to-computer interactions--which he expects will make finding information on the Web dramatically easier. Mark Goldstein, who ran e-tailer BlueLight.com LLC, the Web presence for retailer Kmart Corp. (KM
), wants to create outlets for existing businesses on the Net, just as he did for Kmart. "I'm glad I got to surf the wave. It was a rush. I don't know if the next wave will be as big. But I'm going to try to catch it, too," vows Goldstein.
That's the way it is with serial entrepreneurs: Starting up is a compulsion. Yet for all of the frenetic activity in techdom during the 1990s, no companies of the stature of a Microsoft (MSFT
), Intel (INTC
), IBM (IBM
), Oracle (ORCL
), AOL (AOL
), or Cisco (CSCO
) have emerged out of the Internet tumult. Now, we'll get to see if the Net boom's veterans--older and wiser--do a better job the second time around.
Corrections and Clarifications
``The new Netrepreneurs'' (e.biz, Cover Story, Oct. 1) erred in saying CNET Networks Inc. received ``a paltry $5 million'' from NBC for Web portal Snap.com. NBC paid $5.9 million for 19% of the portal, and then later paid $32 million for 60%, taking control. Later, after NBC merged Snap.com with other Internet assets and took them public as NBCi, CNET sold its shares in that company for $112 million.
Corrections and Clarifications
A chart in ``The new Netrepreneurs'' (e.biz, Oct. 1) incorrectly reproduced data from Venture Economics about venture-capital funding of Internet-related startups. Of the 1,431 companies that received funding in the second quarter of 2000, 51.6% were in the e-commerce and content category, 23% were in Internet software and tools, 13.8% were in communications and infrastructure, 6.6% were in Internet services, 2.6% were in Internet-related hardware, and 2.4% were in other businesses.
Of the 645 companies that received funding in the second quarter of 2001, 41.4% were in e-commerce and content, 27.6% were in Internet software and tools, 17.7% were in communications and infrastructure, 8.5% were in Internet services, 2.6% were in Internet-related hardware, and 2.2% were in other businesses.
By Steve Hamm
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