The New Netrepreneurs

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.

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, 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.

No IPO

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

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.

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 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.

Attitude adjustment

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.

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.

New deals

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.

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, 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

round-the-clock services



for connecting companies and their


suppliers.

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. 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

around.

By Steve Hamm in BusinessWeek. Copyright 2001 by The McGraw-Hill

Companies, Inc