The New-Boy Network
Inc. goes behind the scenes at Guru.com as it attempts to raise capital in the fast-paced world of Internet financing. Here's why whom you know is just as important as what you know.
In today's fast-paced world of Internet finance, whom you know is just as important as what you know
The thrill ride of financing Guru.com began to hit breakneck speed late last May.
Brothers Jon and James Slavet were in the middle of wooing one investor for their Internet start-up when another prospect called and "wanted us to pitch to him right away," recalls James.
Just a few weeks earlier, things had not been going so well. The Slavets had been downcast by the glazed stares they'd received from the venture capitalists they'd approached about their San Francisco-based company, which offered job-matching and other Web-based services to independent contractors and soloists. But the brothers had now gained momentum, leveraging a network of contacts they'd amassed at Harvard Business School and from Internet companies at which they'd worked. Hats in hand, the Slavets had humbly drummed up financial backing from their old bosses at E! Online and Drugstore.com. They had tapped their Internet connections for leads to angel investors such as CitySearch Inc. cofounder Thomas Layton and Yahoo's Matt Rightmire. Now Fred Gluck, a former partner and managing director of McKinsey & Co., wanted an impromptu face-to-face with the start-up.
In San Francisco for a meeting, Gluck had some downtime before returning to his office in Los Angeles. He asked the Guru.com team to meet him at the airport's Red Carpet Club. James and his second business partner, former Harvard classmate Al Yau, jumped into a cab and obliged.
Slavet and Yau had been through their 20-page presentation a dozen times, but in the Red Carpet lounge, Gluck took their breath away by challenging them to identify the key uncertainties in Guru.com's projections. Downplaying what was probably a heart-stopping moment, Yau admits, "It was a level of probing we hadn't anticipated."
If their answers lacked clarity, it hardly mattered, because Guru.com had people pulling strings behind the scenes -- where it really matters. A former McKinsey consultant had already put his own credibility on the line with Gluck in vouching for Guru.com. The start-up's list of advisers -- featured prominently in Guru.com's pitch -- also suggested that an investment in the company warranted serious consideration. Moreover, the management team -- led by the Slavets -- boasted an impeccable Internet pedigree. With all that going for Guru.com, Gluck decided to bet on the company, joining 19 other angels in a $3-million round of financing that closed last July.
In interviews two months later, Jon, 32, and James, 29, exuded a boyish joyfulness that made it seem as though lining up a killer pack of angels were as easy as arranging a squadron of toy soldiers. As they closed in on a second round of financing -- $16 million in venture capital -- the Slavets' enthusiasm for Guru.com was so infectious, it made you want to jump into the game too.
After all, in the first half of 1999 alone, venture capitalists poured a record $5.9 billion into Internet-based companies, according to the VentureOne Corp., which tracks the venture industry. In this era of Internet riches, entrepreneurs can simply slap ".com" behind a catchy concept and watch investors rush in, right?
Sure, just about everyone wants to dip a pan in the Internet and swish for gold. But Web-based start-ups thrive not on easy money but on smart money. "Easy money is like crack," warns Robert Bingham, an Internet-entrepreneur-turned-angel in San Diego.
Trouble is, with everyone vying for a taste of the Internet rush, avoiding a quick fix in favor of astute strategic investments has become harder than ever before. As Bingham puts it, "the bar has been raised." These days, as Guru.com's example shows, spectacular Internet business plans attract smart money only when paired with even more stunning management teams. When they first started, Guru.com's founders might have thought their product was hot enough to get a fast investment. But they quickly realized that more than anything else they had to build and work a network. Savvy investors assess a start-up as much by its founders' connections as by the founders themselves. And that's all assuming the entrepreneur can rise high enough above the noise to catch investors' attention.
In raucous Silicon Valley, literally thousands of Internet proposals streamed into the big venture firms last year. "On a daily basis I receive a dozen unsolicited business plans," notes Mayfield Fund partner Robin Vasan. "I look around my office, and there are dozens and dozens more." Most, he admits, will never be read.
Guru.com might also have languished at the bottom of the heap. Instead, the Guru.com team put their plan on top by piggy-backing on the success of others. That strategy provides a management lesson in how to get smart money from angels who can help guide and groom a company for venture funding and crucial Internet partnerships down the road. The story of Guru.com's financing also serves as a tip sheet on how to act like a player in the new, new economy. It's an economy in which money is merely a commodity, and strategic assistance is key. The dollars you're after are a consequence of the relationships you build.
Observes William Sahlman, a professor of entrepreneurial finance at Harvard Business School who is one of Guru.com's investors and advisers: "The game that we're talking about, you can't play as an amateur .... It's like running up rock faces, trying to get an edge with every move you make."
It's 9:15 on a sweltering September morning in San Francisco, and Guru.com's tunnel-like office space is coming to life. James Slavet, sporting a suit as black as his slicked-back wavy hair, munches on a bagel and cavorts with incoming staffers as they take their places around makeshift workstations. An imposing six feet five inches tall, James has to duck through the doorway as he enters the front room, where his older brother (a mere six feet three) has staked a claim on the only office with a view.
Bristling with confidence, the Slavets explain that they've worked alongside each other before. In 1995 and 1996 they were both at Wired Ventures Inc., where they helped engineer the technology-magazine company's on-line offering, HotWired; Jon on the ad-sales side and James in business development. Later Jon moved to E! Online, where, according to former president Jeremy Verba, he proved himself "a very street-smart, savvy salesperson." James, meanwhile, headed for Harvard Business School and spent the summer between sessions on Drugstore.com's team, sealing deals with partners like Yahoo.
