Like thousands of other Internet entrepreneurs, Ashfaq Munshi lost his head
at the dot-com party. He had held management jobs at old-line tech companies,
including Silicon Graphics, 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 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.
Munshi CEO, Radiance Technologies
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, 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
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
These entrepreneurs are consulting a new play-book. 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.
Consider Steve Kirsch, a co-founder of Web portal Infoseek and now CEO of
Propel Software. 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.
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.
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.
On the cheap
Minor CEO, 12 Entrepreneuring
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 office.
Even entrepreneurs with plenty of cash are mighty careful about how they
spend it these days. Juice Software, 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
Ferguson, who was CEO of Vermeer Technologies, a Web-page design-tool company
that was sold to Microsoft 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.
Nobody illustrates the shift better than Halsey Minor. The founder of CNET
Networks, the leading on-line tech-information company, and Snap.com, a Web
portal that was later bought by NBC, is now CEO of 12 Entrepreneuring, 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, 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.
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.
|Steve Perlman, CEO,
Rearden Steel Technologies
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 US Patent & Trademark
Office received 72,526 information-technology and telecom patent applications
last year, compared with just 40,576 in 1997. Rearden Steel Technologies, 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.
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.
Once they get engineering under way, startup CEOs are
drastically rethinking the way they take on their markets. John Peters, CEO of
Sigma Networks 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
on-line. “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.
What’s Getting Funded
|Overall, venture investing in Internet
startups has plummeted, but communication and software have held up
better than e-commerce and content
There’s a new attitude when it comes to running sales, too.
Mike McCue, chairman of Tellme Networks, 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.
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’
websites. He cites a December, 1999, pact with SportsLine.com in which ISN got
its name on CBS SportsLine and other websites, 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 websites. Friedman believes the
investment in building a brand didn’t pay off.
At Digital Envoy, chief technologist Friedman is making deals
that bring the company dependable returns. A pact with Web giant AOL Time
Warner. 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 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.
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, found that just because the company’s Excite website 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
for connecting companies and their
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. Mark Goldstein, who ran e-tailer BlueLight.com, the Web presence for
retailer Kmart, 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 , Intel, IBM, Oracle, AOL, or
Cisco 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
By Steve Hamm in BusinessWeek. Copyright 2001 by The McGraw-Hill