~OT~...Here is an interesting article on 'the dot-com start up movement' in the Silicon Valley...FYI..
<<Net start-ups pull out of the garage
Money abounds for dot-coms that click new ground
By Kevin Maney
USATodayOnline
Fri., Oct. 1, 1999
FINAL EDITION
Section: MONEY
Page 1B
The romantic era of garage start-ups, when a few ambitious young people could scrape together an Internet company on a shoestring, is all but over.
It's not that there's no more room for new ideas and new companies. The booming Internet economy is ravenous for them. But a new era is here. Many of the easy opportunities -- especially those businesses that sell to consumers -- have been done. Today's wide-open opportunities are often much more complex and aimed at businesses. And on the increasingly crowded, cacophonous Web, the cost of breaking out and getting customers' attention is soaring.
Stir in one other important factor: Astounding amounts of money are pouring into venture capital firms and are available from nouveau riche individual investors known as angels. That money is cascading into new ventures in bigger sums at earlier points in a start-up's history.
''Access to capital is very easy, and having lots of capital is one of the competitive advantages of today's dot-com start-ups,'' says Magdalena Yesil of U.S. Venture Partners. ''The CEO of the start-up you just funded probably has a better-looking office than you do.''
Adds Christine Comaford of Artemis Ventures: ''Lots of great companies still start in the garage. They just move out much faster.''
The old era looked something like eBay's beginning. In 1995, Pierre Omidyar put up a Web site for trading Pez dispensers, tending it from home. Six months later, as envelopes stuffed with checks piled up at his door every day, he quit his job to run the site. Not until 1997 did he look for venture money -- or did the VC community find him. And that was only after eBay was becoming visible and popular on the Web. Then Benchmark Capital invested $3 million, eBay set itself up like a real business, and Omidyar set his sights on an initial public offering.
The new way is more like E-Time. The company's software and Web site will help businesses speed up the time it takes to get paid for receivables and reduce associated administrative costs. It was founded in 1998 by the chief strategist for Federal Express and a supply chain consultant. Within months, E-Time had $6.8 million in first-round financing from Mayfield Fund and two other firms. E-Time doesn't even have its Web site up yet.
E-Time vs. eBay. Deep business applications vs. Pez dispensers and garage sales. Months vs. years. Twice as much money in a fraction of the time.
The new rules apply even to similar companies. Peapod, which sells groceries on the Web, was started in 1989 in Evanston, Ill., by brothers Andrew and Thomas Parkinson. At first, customers connected directly to Peapod computers by using modems to dial in and place orders. Their first infusion of outside investment didn't come until 1993, from media giant Tribune Co., not a venture firm. In 1996, Peapod got top-shelf funding -- $17.5 million -- from a group of investors led by venture firm EOS Partners. That year, Peapod launched the Web site and moved into the Internet big leagues. This week, it hired a high-profile CEO, Bill Malloy, who had been executive vice president of AT&T Wireless.
In stark contrast stands Webvan, another Web grocer. Webvan began doing business earlier this year with $122 million in funding from Softbank, CBS and others. Its founder is Louis Borders, who started the Borders book chain. This summer, the company placed a $1 billion order with Bechtel to build warehouses nationwide. And in September, Webvan hired George Shaheen, longtime CEO of $8 billion Andersen Consulting, to be its new CEO.
''We are seeing a ton of innovative ideas, big ideas, radically new ideas,'' says Steve Jurvetson of VC firm Draper Fisher Jurvetson. But, he notes, ''The decent Internet ideas are funded and grow faster than ever.'' There are several reasons why.
Business-to-business is hottest of hot
''The easy cream-skimming has been done in many areas,'' says venture capitalist Howard Morgan. That especially applies to entities that move retail or services aimed at consumers from the physical world directly to the Web. Think bookstores, retail stock brokerages and florists.
''Each new medium starts out by mimicking its predecessor,'' says Jurvetson, drawing an analogy from television's early days, when it essentially did radio shows with pictures. But that's finished, he says. The Web is moving on.
To what? Right now, the hottest of the hot areas is business-to-business, what the VCs call b-to-b. Comaford says it's a feeding frenzy. ''Think of all the gross inefficiencies in the analog world -- the supply chain for packaged goods is a decent example -- and think of all the ways the Net can optimize these inefficiencies,'' she says. ''It's very exciting.''
These b-to-b companies can be as varied as the day is long. One, called eMerge Interactive, handles live cattle auctions through its Web site. Another, called Freemerchant, helps small businesses set up Web-based stores. Again Technologies uses the Web to help companies handle complicated incentive pay packages. ''There are whole industries in the b-to-b space that haven't been cracked yet,'' says Larry Downes, author of Unleashing the Killer App. ''And no industry has been won.''
B-to-b companies are often harder to think up than business-to-consumer (b-to-c) companies such as Amazon.com. An entrepreneur has to be well-schooled in a particular industry to know the problems and opportunities and how the Web could beat the current way of doing things. The start-up also needs to be bigger, better and more credible faster. A consumer might take a chance by placing a $10 order on an interesting new Web site that may or may not be around next month. A business can't afford such chances. A corporation or even a small business probably won't try a new Web company unless it seems to be proven and capable -- certainly not a garage start-up.
Once successful, b-to-b companies are the ones investors are rewarding most. Since June 30, all but one of the top 10 performing stocks in the USA TODAY Internet 100 index have been b-to-b companies. The only consumer company: eToys.
Besides b-to-b, another hot area for start-ups is equally as complex and difficult: Internet infrastructure companies. Usually, these are started by people who know the Net's deepest, darkest corners, and who have the technology chops to see opportunity there. Most of the companies need a lot of money and talent to get off the ground. One example is Akamai, a year-old company that helps content move faster across the Net. Akamai lured former IBM and BBN Planet executive George Conrades to be its CEO and just got a $15 million investment from Microsoft. Another such company is Cerent, which makes technology that can quadruple data traffic on the communication network around a city or town. Cerent, which is 2 1/2 years old and has fewer than 100 employees, was bought this summer by Cisco Systems for $7 billion.
Costs soar as firms fight for visibility
Two to three years ago, the Web was like a vast, undeveloped prairie. Put up a business and it could be seen from miles around. Simply opening an eToys or Lycos would trigger coverage in newspapers and magazines. Radio or TV ads for Internet companies stood out because there were hardly any other ads for Internet companies.
Now the Web is a busy city where even a new skyscraper can go unnoticed. A new Internet company is unremarkable. B-to-b companies are inherently less visible, so they get less media coverage or word-of-mouth. The most likely way to get above all of that and connect with potential customers is to spend huge amounts on ads, public relations and brand building.
''People have grossly underestimated the cost of customer acquisition on the Web,'' says Roger McNamee of Integral Partners, a technology investment firm. ''To build a reasonable Web brand now costs $30 million to $100 million.''
VCs say that's one reason they're pouring big money into start-ups so early. If a new company wants to beat out others that are working on a similar idea, it has to spend the cash to get its name and message out quickly and loudly.
The money avalanche unleashed
Too much money is chasing too few start-ups. A few years ago, a technology entrepreneur with a good idea would traipse through the different VC offices pitching and hoping for a bite. Now, in many cases, it's the other way around. Spanking new companies find competing VCs bidding to invest in them.
Actually, the game begins even before that, back when an idea is born. By now, several generations of technology companies have been launched, built up, then sold either to the public or other companies. That's created an army of wealthy people who'd like to invest in other tech start-ups. They've become angels, ready to write checks for an acquaintance's concept. ''The under-40 crowd of Silicon Valley has become very aggressive seed investors,'' VC Yesil says. ''They make decisions very quickly, usually with no due diligence, and invest in packs of three to five, which can raise a couple of million dollars literally with a couple of phone calls.''
Voila! No garage. No maxing out credit cards. No sweating payroll.
Then, once there's a wisp of a company, the VCs come in. They're dying to invest their money. Investors have dumped boatloads of cash into their venture funds, expecting the same kind of big returns that have been a part of the scene the past few years. In the second quarter of 1999, venture investments were a record $7.6 billion, up 49% over just the first quarter of 1999, according to Venture Economics Information Services. For the first half of 1999, total venture funding was $14.4 billion, up from $5 billion in 1994. This could be the first year venture funding tops $30 billion, Venture Economics says.
Thanks to all that dough, McNamee figures, a similar company at a similar stage of development today gets five to seven times more in venture money than it would have two to three years ago. Within months of launching, companies can look and feel more like a branch of IBM than a desperate start-up.
Does that mean nobody will ever start a true garage company again? No, the VCs say. Just as a low-budget independent movie can creep up on the Hollywood studios, people who have good ideas might struggle to get started and eventually turn their companies into Internet hits. But it's becoming more rare.
Besides, in Silicon Valley, all you have to do is look at the wildly overpriced real estate to see why garage start-ups are on the wane. Jokes VC Jurvetson: ''It's getting harder and harder to afford a garage around here.''
©COPYRIGHT 1999 USA TODAY, a division of Gannett Co. Inc.>>
|
