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 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 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 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'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 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 The start-up's list of advisers -- featured prominently in'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, 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 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's example shows, spectacular Internet business plans attract smart money only when paired with even more stunning management teams. When they first started,'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. might also have languished at the bottom of the heap. Instead, the 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'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'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'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's team, sealing deals with partners like Yahoo.

"We're both Internet babies," says Jon. The brothers' experience at the feet of other Net-company founders provided the impulse for the launch of "I was more afraid of not taking the jump to start a company than I was of taking the jump," Jon says. James is the more plodding, cerebral Slavet. "I'm the brakes in the operation," he offers.

From an investor's standpoint, it's an appealing partnership. "They're the yin and yang of management," comments Verba, who's now at HearMe (which provides live-voice technology for the Internet) and is also a angel. The brothers' complementary styles create "the success recipe at Guru," Verba says. "James has this very strong, analytical, strategic business mind. Jon is someone who, just through the sheer force of execution, can get things done."

"The game that we're talking about, you can't play as an amateur," observes one investor.

On this late September day, there are two tasks at the top of the company's to-do list: raise a second round of financing and launch's premier product -- a job-matching service designed for independent professionals. The launch is just eight weeks away. No one has had a day off since starting with the company; all the employees need sleep and haircuts but are upbeat all the same. Joking about the dim, disheveled office space, Yau,'s 30-year-old vice-president of finance and strategy, says, "As a ratio of empty pizza boxes, I think our valuation is a little low."

Valuation is on everyone's mind because, at noon today, the team will meet with Greylock, one of six venture firms that the start-up has targeted for its second round of financing. Twice before, the founders have talked seriously with Greylock general partner Aneel Bhusri. The vice-chairman of the board of PeopleSoft Inc., Bhusri first heard about in August, from one of the software company's former executives, who had hired Yau as an intern when Yau was in business school. Having tried unsuccessfully to hire Yau full-time at PeopleSoft, Bhusri says, he was keen on learning about the former intern's new business. Even more influential, though, was the good buzz that Bhusri heard about the team from William Sahlman. "He couldn't stop saying great things about these guys," Bhusri recalls, adding, "I immediately felt that they were right on the mark."

It isn't that involves a mind-blowing technology play. Nor does it have a particularly innovative business model. Rather, in the increasingly familiar phraseology of the Net, it seeks to "amalgamate the unamalgamated" -- in this case, the roughly 25 million Americans who work as free agents, or independent professionals, according to the company. What resonates with Bhusri is the way the team talks about serving customers.'s proposition holds that free agents (or "gurus," as the company likes to refer to them), who lack the community and other trappings afforded workers in traditional office settings, will glom on to a site where they can create an alternative to the watercooler. These solitary folks will be drawn to a special place on the Internet where they can chat about "what it's like to work in your boxer shorts," as's content director, Todd Lappin, puts it. intends not only to unite independent professionals but also to empower them -- by peddling tools and services geared to making their work lives more productive. A key function in that respect: job matching.

"A lot of Internet companies talk about the business -- the advertising and other revenue streams," Bhusri says. "These guys talked about what they were going to do for people who work on their own. When someone talks to you from the perspective of the customer, you listen."

The team may have wowed Bhusri, but today marks its very first meeting with two other Greylock partners. "We have to assume that they know nothing," Jon says as he delicately picks up what he calls "the valuation glasses." In one dramatic gesture, he slips the sleek Matsuda frames onto his angular face and instantly transforms himself from earnest youngster into formidable deal maker. Jon laughs, but he's only half joking about the glasses. Everyone at fully understands the profound power of perception in the Internet-company finance game.

As the Slavet brothers stride into's modest conference room, the perception -- clearly -- is that their deal is now in hot demand. They have at this point already talked with all six firms, making it plain in all their communications that they don't want to see any term sheets until mid-October. They have also taken pains to keep the names of all the venture firms with which they are speaking under tight wraps. "We want to control the flow of information," Jon confides.

What's most remarkable about this scene is that seven months ago, when was a fledgling idea just out of Harvard Business School's hatchery, venture capitalists were ambivalent about it. Among VCs, explains Mayfield partner Vasan, "there was the perception that the space they were going after was crowded."

Sites such as HotJobs and CareerMosaic were already up and running. lagged behind those and other competitors in the job-matching business and had yet to prove its community-building concept. "That scared people," says Vasan.

The Slavets admit they were frightened, too, upon learning in late April that was also moving into the talent market for independent professionals. Though they now deride the competition as "a human auction," at the time "they were really thrown off balance," recalls Thomas Eisenmann, one of James's Harvard Business School professors. Their disequilibrium deepened upon hearing that a hoped-for domain name ( presented serious trademark complications and was owned by enterprise-software maker Opus360 Corp.

"We were completely bummed," says James. Eisenmann calmed them, assuring them that the competition served as validation for their business model.

The competition also signaled that could not afford to waste time seeking venture capital. Even if the Slavets found a VC willing to take them on, doing a venture deal could require three to six months. "So much about the Internet is about speed that if there's any way that you can jump-start your company, you should do it," notes David Hornik, a San Francisco lawyer and business adviser to Internet start-ups. "If you are even a short time ahead of the pack, you will simply expand your lead over time because the growth is exponential."

"Everything conspired to make it very clear that we should go angel," concurs James. The Slavets and Yau hit the streets, asking their old bosses and colleagues for advice, for money, and for leads to angels who would not only invest but also add genuine strategic value -- through experience and through relationships with companies that could become's partners.

Among others, Jon brought aboard Wired Ventures Inc. cofounders Louis Rossetto and Jane Metcalfe. Yau roped in Yahoo's Rightmire and Steve Rehmus, an angel and start-up adviser he had worked with while at Goldman Sachs.

Rehmus agreed to back the team and gave the Slavets entrÉe to two other heavy hitters: former McKinsey partner and managing director Gluck and CitySearch cofounder Layton, who has invested in a total of 32 companies so far. "When Steven calls and says he's got a company that he believes in and wants me to see, no matter how busy I am, I'll find the time to see them," comments Layton.

The founders followed the same systematic approach with all their prospective angels, relying on personal contacts to introduce them to Internet heavyweights such as former VP for business development George Aposporos, two-time Net-business founder Ariel Poler, and even Allen & Co. managing director Stan Shuman. "We didn't call anyone blindly," notes Jon.

The Slavets followed up every contact with a letter that reiterated their connections, identified their existing backers, and included a four-page summary of the business plan. "It gradually got easier as we had more investors come in," notes Jon. "The last few investors said, 'Wow, I know five of the people on your list."

From an investors standpoint, the brothers are an appealing partnership, "the yin and yang of management."

Of course, the founding team's personal strengths were also a big draw. "I was willing to do this because I believe in James," explains Mark Silverman, a vice-president of business development and investor. "It's not because I perceive it as a great economic opportunity."

In at least one instance, though, the system failed. After spending eight hours in pitches to a husband-and-wife angel team, the Slavets were shut out cold, Jon says. "They wouldn't return our calls."

By mid-July, just two weeks after completing the $3-million angel round, had erected an elegantly designed "preview site." The main page introduced as "power for independent professionals" and defined guru as "an expert, a resource to others." But for all its attractive look and feel, and lively, entertaining content, the site offered not a smidgen of job matching or other services. "It's a juicy promise," acknowledges the site's designer, Steve de Brun. "It's all about managing the perception." Adds content director Lappin, who has stocked the space with a question-and-answer feature and guru profiles: "I'm like the guy in the circus who juggles flaming bowling balls until the elephants arrive."

Worried that the site might appear "half-baked," two of's angels argued in a strategy meeting last July that the Web site should come down. It was a heated discussion, according to three people who were there. It also illustrated the degree to which's angels have been willing to get involved with the company, as well as the Slavets' willingness to follow their own instincts.

The Slavets opted to keep the preview site alive, a decision they now consider one of their smartest early moves. By September,'s site had attracted some 20,000 users and had generated feedback proving that the company had hit a nerve with its audience. The 230 E-mail messages reviewed for this article were overwhelmingly positive, describing the site as "brilliant and indispensable" and "a fantastic idea for the Net." One true believer gushed, "I have been waiting for more services like yours."

"The feedback almost seemed like it was scripted, it was so positive," observes Bhusri, who reviewed E-mail responses as part of Greylock's due diligence.

Indeed, several Internet entrepreneurs interviewed for this article emphasized that having a bona fide site, as well as a loyal customer following, is crucial to attracting VCs. "You have to get an initial proof of concept," says Alan Warms, whose, which helps companies set up and manage on-line business communities, received more than $13 million in September.

To be sure,'s preview site generated great buzz. After it posted a press release under the headline " Announces First-Round Financing from Leaders of the Internet Economy," for example, CBS MarketWatch featured the start-up as its lead "Executive Briefing" item of July 26, highlighting the names of the company's angels. Soon thereafter, a venture firm came calling, this time waving a term sheet and "trying to take a deal off the table preemptively," says James.

The Slavets and Yau turned down the offer, flat. Relying on the advice of their angels, they instead identified six "dream firms," distinguished by partners and portfolio companies that wanted to have involved with its business. The strategy was to have in-depth discussions with every firm on the list, get offers from three or four, and then choose two.

The founders also made it clear that they would not use an offer from one firm to drum up higher offers from others, as some Internet entrepreneurs do. Instead, they proposed to "front-load the due diligence," as James puts it, with a goal of both sides' attaining an intimate knowledge of their prospective partners and reserving discussions of the deal's terms for later.

Because there's much more money out there than there are good deals, some venture firms these days throw down a term sheet almost right away, seeking to lock up a deal for 30 days of due diligence, James explains. By contrast,'s strategy put the entrepreneurs in control, enabling them to drive up the start-up's valuation through a polite and restrained bidding in which they held most of the cards.

What's more, their strategy succeeded. In the second week of October (right on schedule) received term sheets from four of the six firms. Jon and James then split the list and embarked on an aggressive final phase of due diligence, requesting five references from the contact partner at each firm. They methodically asked the same five questions of every reference:

  • Why did you choose this VC firm?
  • How effective has the firm been in securing deals and partnerships for your company?
  • How effective has the firm been in recruiting additional board members?
  • How has the firm helped your company increase its valuation?
  • How would you rate the contact partner overall, on a scale of one to five?

In the end settled on two firms: Greylock and August Capital, which along with a few other investors put into the company almost twice as much as the Slavets had said they hoped for in September. Back then, the Slavets had cautiously pegged the deal in the $8-million-to-$10-million range. As this article went to press, in November, was preparing to announce that it had raised $16 million -- a stunning comeback for a company that had been casually brushed off by VCs just nine months earlier. "The first time out, we didn't have anything. We were just three guys saying, 'Picture this," remembers Yau. "The second time out, we were able to say, 'Look at all this backing we've got from this A-plus list of angels; look at our team; look at this feedback from our site."

Indeed, in the view of's new venture partners, the company is well worth its valuation. "These guys really understand the market," says August Capital's Andrew Anker. "They really see that for gurus, it's a lifestyle, not just a job, and they're going to give gurus all the things they don't even know they need."

Greylock's Bhusri, who has joined's board along with Anker, concurs. "They have done the right things for the right reasons. Not to get the highest valuation or the most money but to help them build a company."

Now the Slavets confront the real task of making that company work. "They've got terrific traction in a very interesting space, but they're going to have to be very flexible and relentlessly focused on the needs of their customers," says CitySearch's Layton. "There's no model for what they're doing. They're organizing something that was inherently unorganized before."

D.M. Osborne is a senior writer at Inc.'s Seven Strategies for Financing an Internet Start-Up

The formula for financing an Internet start-up is an imprecise mix of art and science, charisma and luck, timing and contacts. Some companies strike it rich right out of the gate, like, in Bellevue, Wash. Founder Jed Smith's concept for an on-line drugstore went straight to the top at Silicon Valley venture firm Kleiner Perkins because Smith knew an assistant to partner John Doerr. Other entrepreneurs, such as Blaise Barrelet of San Diego­based WebSideStory Inc., have had to bootstrap their businesses and found outside funding only after proving their model in the market. Whether you're on the high road to capital, like, or on the low road, here's a tip sheet for navigating the funding stream.

1. Go after smart money, not easy money.
THE HIGH ROAD: Scour your Rolodex for deep-pocketed contacts in the Internet arena -- and then check with all your friends, your boss, and your colleagues. That's what did in spades, and it clearly worked well. Have your contacts introduce you to people who can provide funding or act as strategic advisers. Feature advisers in your investor pitch, and update the list each time a new one comes aboard. "Once the dollars start to flow," observes Salt Lake City entrepreneur Will West, "there's a herd mentality."

THE LOW ROAD: No contacts? Drop in on your chamber of commerce and find out who's involved in the local Internet economy. Track down your closest angel-investor group. Chat with the group's administrator about the sorts of businesses its angels have funded and why. Find out how best to submit your business plan for the angels' consideration. Do everything in your power to put off relying on relatives. In the Internet-finance environment, explains Harvard Business School professor William Sahlman, "from whom you raise money is often far more important than the terms."

2. Use your first dollars to buy topflight management.
THE HIGH ROAD: A truism these days among Internet angels and venture capitalists holds that a stellar management team is worth more than a supercool business plan. "The idea is irrelevant," states venture partner Andrew Anker of August Capital, in Menlo Park, Calif. He's exaggerating -- but not by much. "So many people are focused on the Internet right now, the reality is that any great idea you may have, five other people are going to have, too.", for example, bet a lot on being able to hire technology director Kevin Kunzelman early on. Kunzelman, who had been the systems architect of E! Online's and's Internet dating service, was hard to woo. had to up the ante twice -- and in the end resorted to offering to pay for him to take a vacation anywhere in the world (he chose New Zealand) on top of a signing bonus. As's experience demonstrated, a team that has proved itself capable of running with an idea at Internet speed can break ahead of the pack.

THE LOW ROAD: If you can't bring top talent in-house right away, forge strategic alliances with others and then link their management with your concept. Remember, too, that customers speak volumes about a business.

3. Speed is paramount: get your site up and running.
THE HIGH ROAD: It was the subject of heated dissension among investors, but's strategy on this score paid off in the end. Work out bugs in the business while you gain traction in the space. Instruct your Web designer to put a premium on users' experience; look and feel are as important as functionality. Track usage closely and keep the figures on hand when you look for financing. deployed user feedback to great advantage in its second round. "The very fact that they had collected it showed that they cared very much and were building a business to serve customers," comments venture partner Aneel Bhusri of Greylock.

THE LOW ROAD: If you can't afford the $1 million it will likely cost you to erect a bare-bones Internet business, seal a deal with a company that is positioned to help your business take off once you do go live. Chad Carpenter's, an Internet-based rewards program headquartered in San Diego, recently forged a strategic alliance with paging company Metrocall Inc. "When we go live, we will be selling their paging services on our site, and they will use our rewards as their loyalty program for their 1.4 million consumer customers," Carpenter explains.

4. In approaching venture firms, home in on a specific partner and make your initial contact through one of your advisers.
THE HIGH ROAD: As did so well, do extensive research on the venture firms you might want to have involved with your company. Look in their portfolios for companies with revenue models similar to yours and for businesses you could partner with. Ask your angels or advisers to give you entrÉe. Active angels can drum up VC interest in your business even before you have your foot in the door.

THE LOW ROAD: If you have no VC ties, tap into the goodwill of other Internet entrepreneurs. Contact executives at companies that are funded by the venture firms of your dreams. Would they be willing to introduce you to their venture partners?

5. Don't marry your first date.
THE HIGH ROAD: There's a lot more money out there these days than there are good deals, so explore all your options.'s founders resisted the urge to snatch up the first term sheet that VCs threw down on the table. It's smart to be choosy about whom you take money from. With every firm that grants you a meeting, take time to get to know the partner who will be your company's primary contact (and possibly a board member). Ask the entrepreneurs at portfolio companies what their venture firms have done for them and others at your stage. Play your cards close to the vest, but be clear with VCs that you're shopping around. VCs start to salivate if they have reason to think that your deal is in demand.

THE LOW ROAD: It's not the end of the world if no venture firms come courting.

6. Take the best deal, not the biggest deal.
THE HIGH ROAD: Whether your capital is coming from angels or VCs, go with the deal that will not only carry you to your next planned round of financing but also add genuine strategic value. Consider the questions that asked of its prospective investors: What's the relevant experience of the partner who will join our team? What future partnership opportunities exist among the firm's portfolio companies?

THE LOW ROAD: Measly pickings? Take what you can get and run with it. Financing options for Salt Lake City high-speed Internet service provider STSN Inc. had become so thorny in early 1999 that founder Will West resorted to bridge financing. But as soon as West had inked a long-term deal with the Marriott International hotel chain, investors stepped right up: STSN vendor Intel and another major chip manufacturer suddenly wanted an equity position, as did two VCs.

7. Keep up your momentum.
THE HIGH ROAD: In today's supercharged Internet economy, even the leaders are constantly reinventing themselves. You should be, too. Momentum equals execution. When the founders of discovered they had formidable competitors, they could easily have become distracted -- and derailed their financing. After an initial panic, they instead came to view the competition as proof of just how hot the market for their services was, and got back on track.

THE LOW ROAD: Even if money isn't pouring in, stay focused on the business and look for other ways to fuel growth.

And If You Can't Get Venture Capital...

Blaise Barrelet admits he "didn't even know that there were venture-capital firms" when he and his wife, Agnes, started WebSideStory, back in 1996. The starting gun had just gone off in the race to cyberspace, and as he watched the throngs jockeying for position, Barrelet wondered, "How do all these people measure returns on their investment?" To answer that question, he built HitBOX, which measures Web-site traffic, taxing his credit-card limits in the process. At first, Internet start-ups refused to pay for the tool, forcing Barrelet to give it away free in exchange for ads on customers' sites. Against all odds, the ads drove traffic to Barrelet's own Web pages, where San Diego-based WebSideStory ranked sites by their traffic. "Instead of being paid with dollars, we were paid by traffic, and we found out a way, very fast, to make money," says Barrelet, a 36-year-old Parisian. In short order the Barrelets' fledgling business achieved positive cash flow as Internet companies lined up to advertise on the site -- at the HitBOX opening page, as well as on pages with category-specific site rankings.

Three years later WebSideStory is a booming business, with 350,000 HitBOX subscribers to date and more usage-tracking products in the pipeline. WebSideStory's Web sites now get close to 500,000 visitors a day. And unlike the vast majority of Internet businesses, WebSideStory actually makes money. "They have been able to finance the business through internal cash flow," observes Kurt Jaggers, a managing director at the Menlo Park office of TA Associates, a private-equity firm. That, says Jaggers, was a key factor in his firm's decision last June to join forces with Summit Partners in plunking down $30 million for a minority position in WebSideStory.