Anatomy of a Start-Up, Part 1: The Climb Begins
In mid-October Richard L. Thompson, 44, and Lawrence G. Braitman, 40, co-founders of Flycast Communications, a Web-based advertising firm, flew from San Francisco and Princeton, N.J., to Austin, Texas. They were scheduled to meet Arie P. Schinnar, 52, an associate professor at Wharton, who was flying in from Philadelphia to join them at a conference about business incubators. When the proceedings began, however, the men realized that attending the conference was likely to be a waste of time: One session, for example, debated how often incubators should replace their carpets. So Braitman, Schinnar, and Thompson -- together with Thompson's fiancée Rhona Rogers -- spent the next two days holding their own conference, an exercise that proved to be much more productive.
By the time they were done, a new business was born. Braitman, Schinnar, and Thompson decided to form E*Entity, a company they define as a so-called business accelerator. E*Entity plans to help entrepreneurs launch Internet ventures by providing them with services that might include seed capital, support in advertising, public relations, access to strategic partners, management talent, and possibly even offices. While Braitman, Schinnar, and Thompson are still discussing the exact mix of services, they know one thing: E*Entity will help entrepreneurs get their companies off the launching pad into the market -- and fast.
Says Thompson: "In the past, it took a year or more after conception for a company to get its first round of funding, and if it did not run into difficulties, it could go public in five to seven years. Today, if it wants to gain market leadership, it must do this in a land grab in six to nine months. Our accelerator will bridge that gap."
Entrepreneurs form companies to fill a market need, and Braitman, Schinnar, and Thompson are no different. They believe that E*Entity meets at least two needs.
First, as the Internet phenomenon has burst upon corporate America, the past couple of years have seen a tidal wave of capital flood the investment market for e-commerce start-ups. Venture funds that would have traditionally waited for a company to become established before investing in them have begun to fund businesses at very early stages of growth. As a result, e-commerce entrepreneurs who in the past might have had to turn to family and friends for seed capital can now approach venture funds, which will pony up cash if they like a start-up dot-com's business model and management.
"We now have new kinds of venture capital enterprises, which we call business accelerators, which are bridging the huge gap in valuation between start-up and market entry," says Braitman. This creates a need for companies like E*Entity, which can do their own due diligence and find promising deals for potential investors. As Schinnar adds, "We have a situation where flows of business ideas and new venture money are accelerating. The venture capital community, which is still a cottage industry, cannot handle this volume. Funds are under pressure to spend less time [looking into deals] because they have to move things along. This creates a vast opportunity for market entry and innovation."
Second, speed has become a critical competitive factor in the Internet economy. Example: Epinions, an Internet start-up in Mountain View, Calif., assembled its core management team, got $8 million in venture funding, wrote a marketing plan, hired 31 employees, and launched its web site within 12 weeks -- a story that The New York Times magazine reported in a profile titled "Instant Company."
If that pace increasingly represents reality, and if entrepreneurs who want to gain market leadership are merely months away from their closest rivals, a company like E*Entity can add value by helping make things happen faster. Thompson says he and his partners will do just that. How? By simultaneously setting in motion value creation processes -- such as finding a reputable law firm, ad agency, PR agency, and most important, a strategic partner with the right customers -- that might otherwise have happened sequentially.
While E*Entity is looking for start-up firms, it is itself a start-up firm -- and its formation offers an unusual opportunity. As the creation of two self-described "dirty-nailed entrepreneurs" and an academic with a taste for theory, it offers rich glimpses of the processes involved in bringing a new company to life. Over the coming months, E*Entity will face huge challenges as it seeks to define its vision, find customers, and create an identity in a volatile and savagely competitive market. Knowledge@Wharton and inc.com will follow E*Entity as it confronts these challenges and report on its experience.
For now, the first and biggest challenge that E*Entity faces is defining itself. Braitman, Schinnar, and Thompson have been asking themselves a host of questions: What services should E*Entity offer the entrepreneurs it wants to serve? Should it provide them with office facilities? If so, where? Should it provide other services that have greater impact and add more value? What would be most central to the needs of E*Entity's clients? "We are looking at what some of the potential companies we want to work with will need and what their desires are," says Braitman. Braitman, Schinnar, and Thompson have different perspectives on these issues, shaped in part by the different backgrounds and varied paths that have brought them together.
Braitman, who holds a bachelor's degree in psychology from Franklin and Marshall College and a J.D. degree from Georgetown Law School, during the early 1990s worked as a partner in the business and tax departments of Saul, Ewing, Remick & Saul, a Philadelphia law firm. He later also worked for the law firm of Prickett, Jones, Elliott, Kristol & Schnee. In 1996, Braitman helped Thompson found Flycast Communications. Thompson, who has a bachelor's degree in psychology from the University of California at Santa Cruz, worked for Octel Communications before joining Wharton to get an MBA degree. Thompson and Braitman wrote the business plan for Flycast Communications over pizza and beer on the University of Pennsylvania campus in the winter of 1996.
Flycast Communications delivers web-based advertising. Using its network, the company combines unsold advertising at more than 1,400 web sites to offer advertisers a large audience of web users. Thompson was initially Flycast's CEO and CFO, and Braitman was its vice president of marketing. Later the company was restructured, and Thompson became vice president of client services while Braitman became vice president of business development. Flycast's revenues increased from $2.5 million in the quarter ended Sept. 30, 1998, to $12.5 million in the quarter ended Sept. 30, 1999.
Between these two dates, a significant event intervened. The company went public on May 4, raising $74.4 million through its initial public offering. Thompson and Braitman owned substantial minority stakes in the company.
Four months later, Flycast Communications crossed another major milestone: CMGI, based in Andover, Mass., which owns some 50 Internet companies including Alta Vista and Adsmart, bought Flycast in September in a stock-for-stock deal worth a reported $740 million.
"With the acquisition of Flycast, CMGI again strengthens its position to offer a full-service, end-to-end solution for both advertisers and web publishers," said David Wetherell, CEO of CMGI, announcing the merger. For both Thompson and Braitman, however, the closing of the Flycast door signified the opening of a new one.
"The question for us was, what do we do after Flycast?" says Thompson. "As we reflected back, we realized the part of the process [of building Flycast] that we really loved was the early stage -- when we were creating something from nothing. We wanted to focus on that the next time around, and we also wanted a mechanism for getting out of companies when they were no longer a good fit for us. Our real objective was to be serial entrepreneurs who could help Internet companies get launched and established. Our desire was to be always involved with young, start-up companies."
Two weeks after Flycast's sale to CMGI, Thompson and Braitman flew to Austin for the meeting with Schinnar, which laid the foundation for E*Entity.
For Schinnar, the path to E*Entity lay through the halls of academe, punctuated by occasional forays into consulting. An architect by training -- Schinnar has an M.Arch degree from the State University of New York at Buffalo -- he completed his Ph.D. at Carnegie Mellon University in 1976. That same year he joined the University of Pennsylvania, moving to Wharton in 1983. Schinnar founded and directed the school's Policy Modeling Workshop from 1980 to 1993 -- a research services lab that developed decision support software and data management systems for corporations and government agencies. In 1997 he became the director of the Gruss Public Management Program, which seeks to inculcate sound business principles among public-sector officials.
Although as an academic Schinnar did research on issues such as corporate governance and performance management, he was no armchair theoretician. He participated in founding four international management and trading companies, in addition to consulting for such firms as Mellon Bank, CIGNA, and McKinsey. One assignment involved helping Rosenbluth International open offices in Moscow.
As part of his research on corporate governance, Schinnar earlier this year began studying companies that were in their early, embryonic stage. He visited Silicon Valley and was soon eager to become part of the Internet economy, not just as a researcher but also as a participant. Schinnar spent the summer meeting venture capitalists on celebrated Sand Hill Road in Menlo Park, Calif. On August 12, Robert Coneybeer, who works for New Enterprise Associates, a venture capital firm, told Schinnar about Thompson, who was Coneybeer's MBA classmate.
Schinnar met Thompson that week and spoke to him several times. Thompson introduced Schinnar to Braitman. Schinnar and Braitman met at Braitman's parents' home in Philadelphia during the Jewish holy day of Rosh Hashanah in early September. Soon, Schinnar had decided to take a leave of absence from the university to concentrate on the new venture. They decided to meet in Austin on October 14.
In Austin, it was apparent that as strong-willed people, one of the toughest challenges that Braitman, Schinnar, and Thompson would face would be to work through similarities and differences in their ideas. Schinnar, who had arrived in Texas with a prepared business plan, soon saw his ideas being vigorously debated.
"Academics are used to defining their intellectual turf and then defending it," he says. "When the stakes are minimal, it is easy to fight those battles. But in Austin I met with people who had worked successfully together and were pretty close. Initially, we had to make a strong attempt to synchronize different visions of the business and to fit our personalities to the implementation plan." This process is still going on.
One initial difference in perspectives: Schinnar felt that E*Entity should focus on early venture funding. "When I met with Rick and Larry, it became a much broader discussion of providing support to entrepreneurs in other ways," he says. "They were looking from within the Internet environment to opportunities outside, while I was looking at the situation from the vantage point of my experience in a university."
Another difference was that Schinnar used the term "nurturing" for the services that E*Entity would provide. Thompson and Braitman saw matters differently.
"From our point of view, struggle has some value," says Braitman. "If you coddle or nurture people too much, you may be putting off the inevitable that will sink the company later. It's almost like tough love versus the university perspective, which is to be much more protective. In a university, you don't want people to fail. Well, that's not the real world. People do fail -- and we are interested in early indications of success or failure. They keep score out there in a way they don't in a university."
After that discussion, Braitman, Schinnar, andThompson decided to describe E*Entity as an accelerator, not an incubator.
In these first weeks, Braitman, Schinnar, and Thompson are still debating such issues as they shape their newborn venture. The basic business model, for example, is still being discussed: Should E*Entity own its resources -- such as an advertising agency -- or should it draw on resources as it needs them, creating them just in time? The organizational structure, too, is being defined. "We are looking at an organization with a highly networked approach," says Schinnar. "We want to build a network-based value-amplifying process that is managed by a national alliance of strategic partners. Some activities may be sequential, but others will go on in parallel so that we can help entrepreneurs zip through the process of market entry. This is our concept, but we are struggling with how to implement it."
Another question is where E*Entity should be based. Thompson lives in California, Schinnar in Pennsylvania, and Braitman in New Jersey. Who should live where? Should the company exist virtually, as it were, or should someone move somewhere? "We will figure this out over time because it reflects our families' and personal desires," says Thompson. Yet another debate centers on the company's name. "E*Entity is our stealth name," says Braitman. "The URL was available, and we have registered it. But we are still seeking a good name."
Even as E*Entity seeks to define itself, Braitman, Schinnar, and Thompson are already pursuing deals -- and that may help define the company more specifically than general debates. Says Thompson: "We don't have the leisure to sit back. As we talk about our structure and so forth, we are also doing the things we are talking about. That has been a great strength, because we are structuring our organization while focusing on what our customers want."
Schinnar agrees. "We have opened our door while we try to figure out who and what we are," he says. "Whoever walks in first will have a substantial impact on what we become."
Schinnar emphasizes that a very important featureat the company's current stage is the partners' high tolerance for ambiguity. "Personally, I enjoy ambiguity," he says. "I find structure confining."
Braitman observes that people who find ambiguity appealing and who thrive on it are driving the Internet world. He likens the process of creating E*Entity to climbing a mountain.
"When you start out, you are at sea level, and when you look up the mountain, you don't see much else," he explains. "As you get higher up the mountain, you get a better sense of where you are. You can't necessarily know everything you need to know about the mountain from sea level. But you learn as you climb. You start up a path that may turn out to be wrong, so you turn back. If you wait at the bottom and try to project your way up the mountain, you'll be wrong. You need a general sense of where you want to be, but then keep changing your plan as you go. The best course of action is to first start up the mountain."
For E*Entity, the climb has just begun.
*Note to readers: The founders of E*Entity are eager to getfeedback from inc.com readers about the issues their company faces. Example: Should they call their companyE*Entity or something else? E-mail your suggestions.
All materials copyright © 1999 of the Wharton School of the University of Pennsylvania.