Not Your Father's Industry
They're competitors who sit on each other's boards, invest in each other's companies, and ask each other's advice. E-commerce has been changing all the rules
"These aren't companies that make underwear."
Johan Liedgren is touting Internet start-ups like his Seattle-based Honkworm International, which bills itself as an on-line entertainment agency. The company creates Web-based animated advertising for corporate clients in the form of "streamed" electronic images spun into eye-catching stories it calls "webisodes."
As edgy as that seems, there is another radical element to Liedgren's scene that sets his burgeoning industry apart from its more traditional predecessors. Liedgren is just 34, but he sits on the board of directors or advisers of seven other Internet-commerce companies--some of whose CEOs, in turn, sit on his. They know one another's forecasts, marketing plans, and new-product launches. They even share their financials, which ensures that scarcely a competitive secret escapes the group's notice.
The sharing of time, counsel, and ideas has become the norm among E-commerce companies racing to break open the cyberlode. In fact, openness seems to be a badge of membership. "I'd talk to anybody about my business plan and financials," vows Derek Doke, CEO of Seattle-based AccountingNet, an on-line resource for accounting information. Doke's pledge of openness is based on an ingrained faith that the free flow of information--mimicking the imprint of the Web itself--drives the industry, and his company's fate. "If I see a press release from some company and it looks interesting, I'll call them," says Doke.
Mark Goldstein, CEO of Impulse! Buy Network, an on-line shopping network based in Burlingame, Calif., shares Doke's fearless communal drive. He says that Net companies are highly interdependent and even "interoperable." They work best in a loose and open configuration, with their CEOs in regular and habitual contact via E-mail. "What each of us has to do is be the best at what we do, and to do that you have to be willing to work with others," Goldstein says. Asked if he worries about revealing too much to competitors, Goldstein shrugs off the question. "If you don't give, you don't get back. And if I don't get back in this life, I will in the next," he says.
By sitting on one another's boards, entrepreneurs like Liedgren, Doke, and Goldstein are taking out a form of start-up insurance. They can network and gather intelligence on where things are headed in one hot yet volatile industry, best known these days for its astronomical multiples--such staggering numbers as the market value of Amazon.com's stock ($6.06 billion at press time) or the volume of business expected to be transacted over the Internet by 2002 (an estimated $220 billion, compared with just $10 billion in 1997).
Liedgren, like his peers, expresses an evident esprit de proletarian corps related to being present at the fiery creation. "We're not an old-boy network of people who just sit around and invest," he says. "We're workers in this industry, so as advisers we know what we're talking about. We can support the management team and give it real advice when there's a hard decision to be made."
So Few Experts, So Much to Know
The popular image of high-tech entrepreneurdom calls to mind the cowboy culture of Silicon Valley's near past, in which scores of companies that manufactured semiconductors, PCs, and disk drives trampled one another in the hard-bitten battle for not just primacy but survival itself. Few rivals then acknowledged one another, let alone deigned to converse. So what makes this generation different? What lies behind its drive for mutually assured survival?
David Wamsley, CEO of Adauction.com, a San Francisco-based broker of Internet-ad space, says there has been a sea change in business. "What we now see among individuals is first and foremost a loyalty to their networks, because tenure in the private sector is rarely if ever seen anymore," he says. For Wamsley, the rock in the storm is not the individual, nor even his organization. It's his peer group. "The only thing I can bank on is many people continuing to be part of my professional network," he says. "The network is the constant. It's what we can count on."
Wamsley spends a quarter of his time touching base with the two dozen or so people who matter most in his network. The network lends structure and perspective at a time when "the space," as E-entrepreneurs dub their industry, is expanding in a dizzying fashion. The industry is so young that it has no real history, no codified body of knowledge. Its rules and norms are carried around in the heads of a handful of "experts" whose tenure seldom exceeds five years. "Tapping into whatever relevant experience you can find is very important," stresses Alan Salzman, a managing partner at VantagePoint Venture Partners, a Silicon Valley venture-capital firm, who has seen fit to shovel some $325 million into the E-commerce/communications maw.
The search for experts has certainly driven Wamsley, who started his Internet-ad company in September 1997. "One of the first things I did was elect eight advisers to the advisory board," he says. The group instantly dwarfed his staff of three. "That gave us extended resources in the field across key areas of the business," he adds. Adauction has since grown to 24 employees, while the advisory board now numbers 15--and still counting.
Asked what would draw advisers to such an unproven company, Wamsley offers a one-word reply: "Stock. They can share significantly in the upside, for a relatively modest amount of effort." At the same time an adviser, through a phone call here or an introduction there, "can add a lot of value," Wamsley says.
One adviser who has delivered for Wamsley is Jody Sherman, vice-president of business development at BuyDirect .com, which sells software on the Net. "He helped us negotiate a relationship with HotWired [ Wired magazine's news site on the Internet]. With one phone call he got that deal to within an arm's length of closing," says Wamsley. Another adviser he leveraged was Neil Cohen, vice-president of marketing for Sega of America. "I was able to bring Neil in on strategic review meetings on Saturday mornings," Wamsley recalls. Eventually, he hired Cohen. The arrangement worked for both parties: Cohen didn't have to leap into Adauction at its riskiest stage, and Wamsley was able to gauge how Cohen would mesh with the company's culture.
Staying Dry in White Water
Internet companies occupy a strange universe inhabited by relatively few experts amid huge industry potential. E-commerce companies tend to be run by cadres of modest-seeming people in their thirties--people who are all competing to divine the code that will crack open global markets with the click of a mouse. And yet technological proficiency is merely the ante. Skip Franklin, the founder and chairman of MountainZone.com, which sells outdoor equipment and apparel, says that winning at E-commerce entails being well versed in the traditional domains of the suits--sales, marketing, and finance--rather than being a crack "techie." MountainZone.com's advisory group has two people from E-commerce, two from retailing, and one each from computer software, computer hardware, telecommunications, and travel. Says Franklin, "When you navigate white water, you need specialists on all sides."
Franklin looks for people with "broad circles of influence." Two of his advisers are Dan Nordstrom, a co-president of clothing retailer Nordstrom, and Janice Sears, a divisional vice-president of catalog planning at Eddie Bauer. The two executives offer Franklin expertise--and access. Nordstrom knows the CEOs of most major apparel vendors, Franklin notes. "This is someone who can help you jump the time warp. He can get you quickly to a potential strategic partner," he says. That's crucial on the Net, where a smart business model can be knocked off in six months. "With the right person on the board you can cut the cycle of developing a relationship with a partner from one year to two months," says Franklin. "It can amount to just a phone call as opposed to having to go out and prove yourself."
Growing the Money Tree
E-commerce companies, despite the popular image of treading lightly across the filigree of the Web, burn money by the bale. Members of corporate boards, by offering access to investors, can keep the vital flow of money coming. Dwayne Walker, CEO of Seattle-based TechWave, an E-commerce service provider, says for an E-commerce company to really thrive it must ascend to "the first tier"--an elite group of well-heeled and well-connected companies that can afford the rapidly rising price required to establish brand identity and prime position on the Net. TechWave has raised nearly $35 million to date, and, Walker says, "fund-raising for me is a full-time job. It never ends. It's the most intense part of my job."
Walker sits on the advisory board of FreeShop, a Seattle-based company that specializes in trial-product offers. Of Walker's nine fellow board members, three are from the financial community. In a similar vein, Skip Franklin says his board of directors' primary mission is "to help me get funding." Adding to the mercenary flavor is an unwritten rule that board members themselves are expected to vote with their wallets--Franklin says that 80% of his board members have invested in the company. "A frequent mistake small companies make is they get someone in to champion the company, but then he doesn't invest," Franklin says. "That doesn't look good."
Cross-investing is, in fact, more than a show of solidarity. It has its practical side, representing a hedge that allows Internet entrepreneurs to bet on an industry, not just on a company. "I picked seven of my friends from the industry as angels," says Mark Goldstein. "They understood the high risks, that one out of three of these companies fails abjectly. You get none of your money back."
Despite the free flow of ideas and money, E-commerce companies, given the industry's breakneck pace, must often base crucial decisions on incomplete information. That sharpens the search for an edge, an insight.
"The driver for me is education and learning through networking with people," says TechWave's Walker, who is indeed a driven man. Walker routinely logs 14-hour days, and, he acknowledges, "I'm usually thinking about this stuff at 7 a.m. in the shower." He recently invested in Doke's on-line accounting company--and became a member of its board--because the business had built a strong "vertical market" in its industry. (Vertical markets are based on "peer to peer" selling, in which a product recommended by one professional is bought by many of his or her peers because of the recommendation.)
Doke, meanwhile, scarcely discouraged Walker's interest. "Dwayne knows a lot about acquisitions and finance," he says. "You have to go after the best." Walker had recently raised $25 million from venture capitalists and acquired three companies. Doke saw Walker's skills as integral to his own future growth; he needed to learn as much as he could from him.
Meanwhile, Walker was courting another company, Major Connections, which sells software in supermarkets. Sensing that some of those buyers could be converted to buying software electronically from TechWave, Walker called Major Connections' CEO, David Lonsdale, out of the blue. Lonsdale said he would be on the West Coast in two weeks. "I'll meet you," replied Walker, who subsequently hopped a plane for San Francisco, where the two men talked for three hours nonstop.
Two weeks after that they hammered out a joint-marketing agreement with plans, as well, for Lonsdale to sit on TechWave's board. Lonsdale instantly saw how he could benefit from affiliating with Walker. "Dwayne's an extremely flexible and lateral thinker," he says. "He's intellectually stimulated by casting his thinking in a variety of directions at the same time. He's always touching and feeling as much of what's going on around him as he can."
Perhaps the drive by the likes of Doke and Walker to reach out to peers will subside as the industry matures. Competition will soon intensify, and consolidation will roll through the industry. The old gang will break up, and people will recall palmier times when they all shared time and talent so freely. One Seattle-based Internet entrepreneur, Martin Tobias, remarks that people in the industry are "friendlier" in his hometown than they are in Silicon Valley, where some of his colleagues "want to get paid like consultants for information we'd give away free up here." After talking about how open the industry is, another CEO, Ariel Poler, declines even to elaborate on what his company, Topica Inc., does.
People are now, in effect, choosing allies to fight the war. "There will most emphatically be a massive consolidation as we move downstream," predicts Lonsdale. While no one really knows where E-commerce is headed, industry leaders do know "they need to have good counsel around them," Lonsdale adds. And he further warns, "If you remain insular in this business, you'll get eaten alive."
Edward O. Welles is a senior writer at Inc.