LEAD

Freewheeling Expansion Ends in Free Fall

Nets Inc., headed up by ex-Lotus Chief Jim Manzi, lost its investors when it attempted to grow quickly and failed to provide a clearly defined company mission. A business obit.
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FieldNotes: Obits

THE BUSINESS: Network for Web-based business-to-business commerce

FOUNDED: In 1990 as Industry.Net Corp.

CLOSED: 1997

PRIMARY CAUSE OF DEATH: Mission not clearly defined

SECONDARY CAUSES OF DEATH: Ill-advised acquisition, and loss of investors' confidence

By early 1996 investors were deeply in love with the Internet. "Netscape had gone public the previous year, and there was this huge explosion of interest in Web businesses," remembers Raj Reddy, dean of the school of computer science at Carnegie-Mellon University. Entrepreneurs were capitalizing on the euphoria, rushing into the equity markets. One company on whose board Reddy sat, Pittsburgh-based Industry.Net Corp., exemplified the trend.

Founded six years earlier by entrepreneur Donald Jones, Industry.Net was the publisher of a business-to-business directory of manufacturers and distributors. In January 1996, Jones decided to recast the company, which would eventually be rebaptized Nets Inc., as an Internet titan. He installed former Lotus Development Corp. chief Jim Manzi as CEO. Manzi, 46, had exited quickly from Lotus--best known for its 1-2-3 spreadsheet software--after the company was taken over by IBM, in 1995. Now the much-touted Manzi was ready for a fresh challenge.

His mandate: to catapult Jones's company to the forefront of on-line marketing. It was already building a Web directory where engineers looking for products like ball bearings could peruse such offerings from a particular manufacturer. Now the business would become far more ambitious: an omnibus electronic marketplace where companies could shop for, and order, a wide range of industrial goods and services.

Manzi's strategy was to grow Nets swiftly, with engineers developing the software that the company would need to facilitate secure on-line shopping. In July 1996, Manzi doubled the company's size to 300 employees by absorbing an AT&T on-line business unit. The future looked plenty bright. Nets then claimed as many as 4,500 paying customers.

But by last spring the whole edifice was cracking. Manzi's plan to create the mother of all electronic marketplaces demanded large amounts of money and time. The AT&T merger had weakened Nets' finances by bloating the payroll.

Worst of all, Nets had started to lose the confidence of the venture-capital community. While it had raised about $25 million in total capital, in 1996 it was also burning $3 million a month on annual revenues of only $10 million, by the estimate of a former company insider. Director Raj Reddy says that Manzi, for all his smarts, lacked the entrepreneurial knack of "minding every penny." (Manzi did not respond to requests for an interview.)

Nets also never finished building the complex transactional software that was pivotal to the whole enterprise. The technical wizardry that would have united on-line buyers and sellers from a range of different industries proved daunting to develop.

Then came a fatal blow, according to Richard Eckel, formerly Nets' vice-president and a company spokesperson. The vision that Nets projected to investors in the spring of 1997 lacked coherence, Eckel says. "We never did nail it to the extent that the venture-capital people could say, 'I see what market you're in. I see what problem you're solving."

New capital was not forthcoming. Last May the company filed for Chapter 11. The only apparent winner: Ross Perot's Dallas-based Perot Systems, which paid $9 million for most of Nets' technical team and its intellectual property.

Last updated: Mar 1, 1998




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