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Posted at 9:13 p.m. PDT Wednesday, July 7, 1999
E-commerce start-up was engaging for chief-to-be
BY SCOTT HERHOLD
Mercury News Staff Writer
Chief executives arrive at the companies they run through a multitude of paths: referrals by VCs, recruitment by headhunters, even a patient ascent of the internal ladder. It's safe to say that few of them arrive as customers. But this is an age that erodes the old rules. So it shouldn't be a huge surprise that 30-year-old Mark Vadon arrived at his post as head of Internetdiamonds.com by dint of a task that strikes fear into the heart of every potential groom, a search for an engagement ring for his fiancee.
Last December, Vadon was a consultant with Bain & Co. in San Francisco, and he embarked on his search for a ring by hitting retail stores like Tiffany and browsing San Francisco's diamond market. He was feeling perplexed when a friend suggested he should buy the ring on the Internet. ``I was thinking this guy is absolutely crazy,' Vadon remembers.
But to gather more information, Vadon eventually went online, and came across a site called Internetdiamonds at www.internetdiamonds.com. Impressed with the customer friendliness of Seattle-based owner Doug Williams, who had transformed his brick-and-mortars jewelry business into a completely online site, Vadon got curious. ``He wore kid gloves. He was very good with me,' Vadon said. ``At the same time, I realized this guy was doing a lot of business.'
Vadon flew to Seattle, met Williams and ultimately struck up a partnership to pursue a much more ambitious Internet site. Vadon brought in his chief technical expert, Larry Elowitz, from Fatbrain.com. And he got his first-round funding from Trinity Ventures and Bessemer Venture Partners, two firms experienced in e-commerce. Then Kleiner Perkins Caufield & Byers asked in. And while the young start-up had plenty of money, Vadon agreed to do a second round with KP only two weeks after the first closed. ``They came back and said, `Hey, we just really want to do this,' he remembers. ``From our standpoint, it makes a lot of sense in building the business.'
Unlike a lot of e-commerce start-ups based fundamentally on convenience, Internetdiamonds.com says one of its big advantages is cost: Without the overhead of a retail store, it can afford to offer a ring that would cost $15,000 at Tiffany for about half the price. And it boasts of its selection of 20,000 diamonds and a Web site and staff to help the nervous consumer. ``Before you talk to us, there's no pressure,' he says. ``We have people who browse our site for five or six hours.'
And oh yes: Vadon did buy the ring from Williams for his fiancee, well before their corporate marriage.
THE TELEVISION REVOLUTION: Suddenly, attention is focused on two Silicon Valley start-ups that are promising to change network television as we know it: Sunnyvale-based TiVo Inc. and Replay Networks Inc. of Mountain View. Both companies offer a hard disk that allows television viewers to record and view programs at their leisure, redeeming the promise never fulfilled by VCRs. Perhaps more slyly, the technology allows viewers to skip over ordinary commercials or pause a program to take a telephone call.
In fact, the new personal television recorders hold the potential to change commercial television irrevocably. And there's been speculation that the two companies could usher in a new era of ``couch commerce' that would allow people to purchase items from their perch in front of the television.
Amid all this speculation, it's worth noting just who the investors are on both sides, particularly the venture investors. In this battle, Paul Allen, the co-founder of Microsoft, has hedged his bets. Allen's Vulcan Ventures has invested in both companies, and while the amount has not been disclosed, the estimates have been in the $5 million range. Kleiner Perkins Caufield & Byers has invested in Replay Networks, and Kleiner partner Will Hearst sits on its board. Replay also has investments from the Tribune Co. of Chicago and Marc Andreessen, the Netscape Communications Corp. co-founder.
TiVo, however, is by no means without significant backers. Last month, it announced a ``multi-million dollar' investment from NBC. Its investors -- and board members -- include Geoff Yang of Institutional Venture Partners and Stewart Alsop of New Enterprise Associates. Both TiVo and Replay are actively looking for more corporate partnerships -- and Replay says that it intends to announce a $50 million corporate funding round soon. ``They're both just shipping product,' Alsop says. ``In that sense, they're out there getting their first customer experience.' Don't be surprised if one or both of them talk soon of an IPO.
LOCATION, LOCATION, LOCATION: Ever wonder just how venture capitalists put a price on the companies they're funding? Competition has a lot to do with this, naturally. A venture firm that is consistently conservative will lose deals to competitors who offer more money. But some of it is subjective, a bet on the people and the market. One of those who has thought about this is Kevin Fong, a general partner with Mayfield Fund in Menlo Park. Fong likens the valuation game to something that almost every Californian understands: real estate. Think of industry sector as location, Fong says, and you begin to understand the prices.
``For example, Internet-related start-ups would be the equivalent of the most expensive and exclusive community in an area where homes run in the millions of dollars,' he writes. ``That is because, overall, Internet start-ups have nearly tripled in value since 1995, easily outpacing all other startups.' Fong likens communications start-ups to an upper middle-class neighborhood where homes fetch a million or so. And he says that enterprise software deals can be likened to four-bedroom four-bath homes in a solid middle-class neighborhood. (Fong does not talk about health care or biotech deals, which right now fall far short of the returns from Internet investments).
Mayfield, incidentally, recently announced the closing of its tenth fund, the $450 million Mayfield X. The 30-year-old venture firm, which has been a bit slower to embrace e-commerce start-ups than some of its competitors, says that 80 percent of the new fund will be committed to Internet and communications deals, while about 20 percent will be invested in health care companies. For the record, Mayfield says it is the first venture firm to close its tenth fund.
DEAL TO WATCH: World Online International at www.worldonline.com, the fastest-growing Internet service provider in Europe, announced recently that it had received an investment from Intel Corp. of Santa Clara. In keeping with the hush-hush protocol on these matters, the size of the Intel investment was not disclosed. But there are a couple of links worth mentioning. First, Intel's former vice-president of corporate business development, Avram Miller, recently joined the board of directors of the Dutch-based company. And Intel's CEO, Craig Barrett, who appeared at a press conference in the Hague with the World Online leaders, has announced he wants to accelerate Intel's investment in Western Europe. World Online's chief executive, Nina Brinker, has promised, naturally, to deploy content that runs optimally with Intel's chips. World Online now has more than 450,000 subscribers and is aiming to reach one million before the end of the year. Its majority shareholder, with a $300 million investment, is the Sandoz Foundation, started by a family that made its money in pharmaceuticals.
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Term Sheet -- a name drawn from the formal proposal that a venture capitalist offers to an entrepreneur -- is an occasional column about venture capitalists and the companies they fund. Contact Scott Herhold at sherhold@sjmercury.com or (408) 920-5877. The fax number is (408) 920-5917.
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