Tech writer Michael Arrington, who founded TechCrunch and sold it to AOL a year ago, announced last week he is raising a $20-million venture capital fund to invest in early-stage technology companies, reported The Los Angeles Times. Since then, he has been widely criticized for what many say is a conflict of interest and now the future of TechCrunch itself appears to be on the line. READ MORE
Are LegalZoom founders playing coy or are they just übercautious? Either way, the company is now revealing that it raised $66 million in venture funding this year from Kleiner Perkins and Institutional Venture Partners, bringing their total funding to an even $100 million. This surely means an IPO will shortly follow, right? Well, not necessarily. READ MORE
While Zynga and Groupon are rearing to go public, Twitter has remained out of the IPO fray. A recent effort by the company to raise $400 million values the microblogging platform at $8 billion however. Twitter’s playing it close to the vest, industry analysts speculate, because the company wants to continue to grow before going public. READ MORE
Twitter co-founder Jack Dorsey revolutionized mobile payments with Square, which made credit card transactions over mobile devices simple and cheap for merchants and small business owners. The San Francisco-based start-up announced via its Twitter account yesterday it had received more investor love, raising $100 million in its Series C Financing round led by veteran VC firm Kleiner Perkins Caufield & Byers. READ MORE
E-diaries This summer’s hot documentary tells the riches-to-rags story of an Internet start-up. Steven Soderbergh, can we talk? In January I received an excited e-mail from my friend Corey, who was attending the Sundance Film Festival, in Park City, Utah, and had just seen a movie called Startup.com. “It’s your E-Diaries column on film!” she wrote. Intrigued, I poked around the Sundance Web site and learned that Startup.com is a documentary that chronicles the rise and fall of an Internet company called GovWorks. The film was produced by some of the same people who worked on The War Room, the documentary in which James “Ragin’ Cajun” Carville spin-doctors Bill Clinton to the presidency. This was exciting stuff! Were Internet entrepreneurs, so recently spurned by the media and the investment community, poised to become Hollywood darlings? If so, what could I get for the film rights to The Gazooba Story, that roller-coaster thrill ride of passion, intrigue, and viral marketing? And who would play me? Brad? Ethan? Keanu? I quickly settled on Chow Yun-Fat to play the part of my Japanese cofounder, Zen. I could picture Chow whipping out the Green Destiny sword whenever a board member pushed back on our expense projections. Startup.com wasn’t in general release yet, but I couldn’t wait to see it. So I called the distributor and requested a screening. “Will you be rating it on a star system or writing a feature about it?” asked the distribution woman. I hesitated for a moment, unsure if having written a college paper applying Freudian theory to Hitchcock qualified me to wield my very own star system. “Feature,” I replied reluctantly. She said she’d mail me a press copy. It arrived, Zen came over, and we fired up the VCR. The action of Startup.com takes place between May 1999 and December 2000. GovWorks founders Kaleil Isaza Tuzman and Tom Herman are high school buddies who, as adults, decide that putting municipal-government processes like parking-ticket collections on the Internet represents a bigger opportunity than online tombstones. So Kaleil quits his job at Goldman Sachs and becomes GovWorks’ CEO. Tom is chief technology officer, something never actually stated but easily deduced from the fact that his subordinates carry Nerf guns. The cofounders set up shop in a loft in Manhattan: very Silicon Alley. Kaleil is the front man, the pitchmeister. Since one of the film’s directors was Kaleil’s roommate, Zen and I were treated to an intimate shot of Kaleil getting up late for a VC meeting and running to the shower in his underwear. (Note to self: If asked to star in The Gazooba Story, insist on a body double for scenes in which the word Jockey is legible.) We watched Kaleil score an appointment with Kleiner Perkins, and Zen’s eyes clouded over. At Gazooba we had gotten money from Kleiner’s Sand Hill Road neighbors but never saw the inside of the Valley’s most prestigious firm. As we listened to Kaleil talk about getting skewered by the Kleiner guy for having the gall to locate GovWorks in New York, Zen looked like a kamikaze pilot who had pulled up at the last moment. “I would have loved to have been rejected by those guys,” he said wistfully. Other incidents made us squirm. In Startup.com, the founders’ friendship is tested when, in front of a potential lead investor, Tom challenges Kaleil’s explanation of the business plan. Back at the office Kaleil is incensed. “We should all trust that any one of us will represent a vision of the business that will be seconded and thirded and fourthed and fifthed by other members of the team,” he rages, after kicking around some furniture. The scene rang so true to our own epic confrontations that Zen and I couldn’t look at each other. It was like being at a Chicago White Sox reunion and watching Eight Men Out. Then came the Citizen Kane stuff. Kaleil and Tom raise $60 million. Kaleil appears on CNBC. The company hires more than 200 people. Kaleil’s girlfriend asks for a commitment or a dog. As our heroes’ fortunes rose higher and higher, I could imagine an audience full of people who owned tech stocks a year ago sitting on the edge of their seats, hungrily anticipating the fall. Things start to unravel when competition heats up and the market cools. Like the adults in a “Peanuts” cartoon, Startup.com‘s VCs don’t appear on camera much. But when GovWorks fails to meet revenue targets, you don’t have to hear wha-wha-wha-wha-wha to know the investors are getting restless. “I’ve had some pretty ugly conversations with board members,” Kaleil tells Tom. “This is a serious crisis.” I won’t give away what happens next. But for a film with no explosions or special effects, Startup.com delivers more than its share of carnage. The saddest victim is Kaleil and Tom’s friendship, which, by film’s end, looks as though it’s been through the woodchipper in Fargo. Long after the credits rolled, the founders’ story stayed with me. Tom and Kaleil’s experience was so personal that I wondered how they felt about seeing it made so public. So I decided to ask them about it. Tracking down Kaleil on his cell phone in a Manhattan taxicab, I asked him what it was like to be the Gordon Gecko of dot-com entrepreneurs. “My visceral reaction was I’m mortified,” he said, multitasking between talking to me and offering directions to the cabbie. “Because it’s not fiction; it’s my life. It shows parts of ourselves that are not the parts we’re always proudest of.” Kaleil told me that the idea for a movie about GovWorks was originally his and Tom’s. “We thought it would be useful for business schools or people starting companies,” he explained. But Kaleil said his most valuable lessons weren’t captured by the documentary, because they came to him after the bulk of the filming was done. “It doesn’t just end with, you can’t do a financing, so you pack up your things and go home,” he said. “You care an enormous amount about the employees and the clients that you’ve promised things to and the relationships around the company.” According to a note at the end of the film, Kaleil went on to form Recognition Group, a company that brings turnaround specialists into distressed start-ups. What it doesn’t say — but what Kaleil told me — is that Tom Herman is once again his partner. I called Tom. “My first reaction was that it was hard to imagine I would want to do that again,” he told me. “What convinced me is that I wanted another chance to work with Kaleil. Also, I found what he was planning exceedingly interesting.” Asked for his reaction to Startup.com, Tom said that he wished it had fleshed out more of his professional strengths, like building a technology team and leading employees. “The movie was very one-dimensional in its portrayal of both Kaleil and myself,” he said. But it did teach him some brutal lessons about personal grooming. “I was so disappointed in my ability to dress well,” said Tom. “You realize the way you dress has an impact on people’s perception of you. I had such a bad shave through much of the movie.” You can judge Tom’s business and fashion sense for yourself, since the film should now be in theaters. Startup.com has been given an “R” rating, and entrepreneurs are strongly cautioned: it contains disturbing buzzword usage, explicit depictions of obscene valuations, and scenes of graphic cash squandering. Some material may not be suitable for people who still have a dot-com business plan on their hard drive. Andrew Raskin, founder and former CEO of Gazooba.com — now Qbiquity — can be seen in San Francisco-area theaters clutching a medium buttered popcorn and a cherry Icee. More E-Diaries. Please e-mail your comments to editors@inc.com.
Tomorrow’s Entrepreneur The dot-coms crashed, the Nasdaq is dipping — but new trends and companies are rising from the ashes anyway. After all, the Internet is still with us, and the Web is one of the more revolutionary technologies in recent memory. But what will the near-term future look like? Here are some perspectives from an investor, an analyst, and a start-up entrepreneur. The venture capitalist Institutional and individual investors alike have experienced the flu-like symptoms (nausea, cold sweats) brought on by watching their favorite tech stocks take a dive. But E. Floyd Kvamme, a partner at venture-capital firm Kleiner Perkins Caufield & Byers, in Menlo Park, Calif., and cochairman of President Bush’s advisory committee on science and technology, says to relax: the Internet is just getting started. “One of the next hot areas will be the Internet infrastructure area,” he says. “Usage of the Net is still continuing to increase in terms of people coming online….Plus, lots of areas of the world don’t have Internet infrastructure yet, so you can bring it to the rest of the world.” The pundit “Anytime anybody says there’s going to be a next big thing, it’s usually going to be one of several” big things, says John Jordan, a principal at the Cap Gemini Ernst & Young Center for Business Innovation, in Cambridge, Mass., and an expert on trends in business and information technology. Here’s Jordan’s list of the next big things in the Internet space: Dot-com tango. Dot-coms want to be acquired, but big companies have something else in mind. “A lot of dot-coms right now are hoping to be bought, and big companies are saying, ‘We don’t have to buy you. We can partner with you and give you a revenue stream, but we don’t want to deal with the fact that your stock price is a dollar,” says Jordan. “People who would have sneered at the idea of being bought by a big company a year and a half ago are now begging to be bought.” Bundling up. Companies will try to bundle their services with those of others. Jordan says, “There will be new kinds of partnerships as people realize (a) we don’t have the money to buy each other and (b) this may not be an eternal opportunity. They can [come together to] realize an opportunity and then part ways. This is a huge opportunity for small companies to find niches in which they can work with larger companies.” Customers in charge. Customers will continue to increase their market power. “People have power through their recommendations and word of mouth. It’s very easy for them to avoid companies that they want to avoid,” says Jordan. No more IPOs. Entrepreneurs will shun Wall Street. “Companies are exploring ways to get capital without going to the public markets, because they realize now that if you have one bad quarter, your stock tanks,” explains Jordan. “With the insane valuations we’ve seen in 1999 and 2000, the only place you can go is down.” Going back to the future. Long-term planning will be back in style. Jordan says, “We’ll see a return to ‘I’m building the company for the next five years’ instead of ‘I’m building the company for the next five months.’ The Amazonian customer-acquisition curve is an aberration, and for people to expect that is just lunacy.” The entrepreneur As Furniture.com discovered, people hesitate to buy big-ticket items like furniture online. But what about small-ticket items — really small-ticket items — that cost less than $10? Neil Evans is betting that they are one path toward the Web of the future. Now the president of WebCredit Inc., a Boston-based company that processes microtrans- actions, Evans used to be in the entertainment industry. He came up with the idea for WebCredit when thinking about old nickelodeon movie theaters. He figured if people were willing to pay small amounts of money for entertainment, they would probably dole out $1 or $2 on the Internet for a recipe, an article about hotels in the Caribbean, or perhaps a song or a film clip. Right now few businesses provide merchant accounts for such tiny transactions. That’s where companies like WebCredit and Seattle-based Qpass Inc. come in. Both provide payment services for small and large companies alike; for example, Qpass facilitates the purchase of articles from the New York Times Web site. All those little purchases add up; in a report last December, Jupiter Research estimated the 2001 market for paid online content (such as articles, games, and music downloads) at $1.1 billion. The company predicts the market will reach $5.7 billion in 2005. The 2001 State of Small Business issue Please e-mail your comments to editors@inc.com.
Photo Opportunities Digital-photo start-ups get ready for their close-up By the time Mark Platshon landed a meeting with celebrated Kleiner Perkins venture capitalist John Doerr in mid-1999, Platshon and his online digital-photo business, Zing Network Inc., had already been snubbed by a dozen other VCs. So Platshon couldn’t help bracing for rejection when — midway through his pitch — Doerr walked out and began rummaging around in an adjoining office. But as suddenly as he had exited Doerr rushed back in, hastily pulling a brand-new digital camera out of its box. Finding nothing in the accompanying literature about uploading, accessing, and distributing digital images on the Internet — a major component of Zing’s business — Doerr concluded that Platshon had hit on a missed market opportunity. Kleiner Perkins took the lead in a $14-million round of financing for Zing that closed in August 1999. “Doerr just got it,” remembers Platshon. “He understood the significance of the consumer shift to digital photography and that it would remake the entire industry in just a few years.” Indeed, Boston-based InfoTrends Research Group Inc. projects that online photofinishing will be a $4.4-billion worldwide market by 2005. The start-ups jostling for position in this emerging field have staked their claims in slightly different territories. Some have opted to become digital photo processors, creating hard-copy prints of film and digital media, and uploading digital images to the Web. (See “Someday Your Prints Will Come,” below.) Others, including San Francisco-based Zing, outsource their customers’ printing needs and focus on Web-based storage and sharing of digital images. A collage of services Among storage-and-sharing sites, Zing’s stands out for garnering some 3.5 million users each month. That’s quite a following, considering that three years ago the company was headed in a completely different direction. When Platshon stepped in as CEO, in December 1997 — after a yearlong stint with Zing investor Alloy Ventures Inc., in Palo Alto — the company was developing imaging technology for use in Web-based advertising. But by late 1998, Platshon saw a bigger market for online photography management as part of an Internet business for uploading, storing, and sharing digital images. “And so,” he says, “we changed the business.” Since making that shift, Platshon has made acquisitions a major part of Zing’s growth strategy. He began by purchasing image-uploading technology developed by FotoNation Inc. that provides a camera-to-Web connection, enabling digital photographers to plug their cameras into computers and connect through the Internet directly with Zing. Platshon has also sealed deals with manufacturers that have agreed to install FotoNation’s uploading technology in their cameras, making Zing the default Internet destination for users of digital cameras sold by Sony, Casio, and Nikon. Those deals are driving customers to Zing’s site, where product E-tailing accounts for some two-thirds of revenues, Platshon says. In E-tailing, too, he has bought his way into the business. Last January, Zing acquired Pix.com, which scans digital images onto everything from calendars and cookies to mouse pads and T-shirts. Platshon added another source of E-commerce revenues in August, when he snapped up Eframes.com, a high-margin, high-end framing business that handles its own digital printing. That deal may enable Zing to collect revenues from competitors that outsource printing and framing services to Eframes, which has retained its name within the Zing network. “Eframes can provide its services to anyone, even businesses that might be Zing competitors,” Platshon says. Enjoying its Kodak moment In contrast with Zing, which has focused exclusively on digital converts, San Francisco-based PhotoPoint Corp. has positioned itself as a go-between for film users who are just now beginning to go digital. Launched in August 1998, PhotoPoint seized an early-mover advantage in the online photo-sharing space through a partnership with PictureVision Inc., a subsidiary of Eastman Kodak Co. In that deal, PhotoPoint CEO Ed Bernstein agreed to pay Kodak a flat fee in exchange for access to the film- and digital-camera users who bring their pictures to 40,000 Kodak PhotoNet processing locations throughout the country. Bernstein proposed the deal as a way for Kodak’s digital-development division to provide its customers with long-term Internet-based storage, sharing, and image-enhancement tools. Because PhotoPoint provides free long-term storage for Kodak’s brick-and-mortar retail customers, the Kodak retailers stand to get more reprint orders over a longer time period, Bernstein says. And PhotoPoint enjoys direct access to established Kodak customers. As Bernstein sees it, PhotoPoint’s tie-in with an old-economy film-industry giant is the surest way to build market share in the burgeoning digital field. Close to 90% of camera users have yet to take the digital leap, after all. And although digital-camera sales are predicted to soar, a survey by Jupiter Communications Inc. found that 37% of consumers would rather store digital images at home than post them on the Web. Bernstein is betting that PhotoPoint can leverage Kodak’s trusted brand name to reduce such consumer wariness. When Kodak customers pick up their prints, they receive directions on how to transfer digital versions of their pictures from a Kodak site — where the images are stored at no charge for 30 days — to the PhotoPoint site, where they can get free long-term storage, as well as find tools to create and share online albums, and buy PhotoPoint merchandise. “We’re all about making it brain-dead simple to get your digital images to the Web,” says Bernstein, noting that PhotoPoint now hosts more than 13 million photos. For PhotoPoint, Zing, and their competitors, consumer education remains the biggest and most daunting hurdle. As Bernstein puts it: “Our mission is to transform customers into digital users without fundamentally changing the way they think about and use pictures.” D.M. Osborne is a senior writer at Inc. Someday Your Prints Will Come Serial entrepreneur Kamran Mohsenin eased into the summer of 1999 with time on his hands. Having recently sold his second start-up, Mohsenin was scanning the landscape for a new business venture and playing with one of the toys he bought with the spoils of his company’s sale — a new digital camera. “The camera was taking great pictures,” Mohsenin recalls. “The problem was, I wasn’t able to get quality prints.” In a flash, Mohsenin hit on the idea for his third and most recent start-up, Ofoto Inc. Soon, Mohsenin was caught up in a heated race among online digital photofinishers, including Shutterfly.com. “It’s a huge market, and the competition is fierce,” observes David Hornick, who is on Ofoto’s advisory board. Founded in July 1999, Ofoto, based in Berkeley, Calif., has adopted a clicks-and-bricks business model. Like Shutterfly, Ofoto has invested millions in terra firma photo-development labs. At the same time, online photofinishers have seized upon technological advances to carve out an Internet-based niche in the photo-processing market, which has traditionally been dominated by industry giants like Eastman Kodak Co. To the extent that these nimble start-ups can secure a foothold — and create new, Web-based efficiencies — before bigger competitors lumber into the market, their payout could be huge. Margins in the traditional photo-development business typically run as high as 50%. Thus the game right now is all about grabbing market share. Toward that end, Ofoto and Shutterfly are competing to become the photo processor of choice for a bundle of other start-ups that outsource printing for their online photo storage and sharing. At the same time Ofoto and Shutterfly are reaching out to picture takers of all stripes by offering steep discounts on old-fashioned film processing (returning prints by snail mail), as well as digitizing the images for online viewing and distribution. It’s an updated twist on a low-cost, mail-order film-processing service popularized a few years ago by Seattle Film Works, recently renamed PhotoWorks Inc., in its own bid to straddle the digital divide. For its part, Ofoto has concentrated on high-level business-to-business partnerships. It’s teamed up with InfoSpace Inc., for example, to become the preferred print shop for that company’s affiliate network of 2,500 Web-based businesses, which provide communications and commerce infrastructure services for wireless devices. Ofoto has also sealed a deal to print the digital images sold through the Internet division of Corbis Corp., which boasts an online archive of 2.1 million images — from fine art to quirky photography. Meanwhile, Shutterfly, based in Redwood City, Calif., has gone directly after consumers. Since cofounding Shutterfly, in December 1999, CEO Jayne Spiegelman has cut cross-promotional deals with such portals as Yahoo and Homestead.com. Spiegelman, who hails from senior-level retailing posts at the Good Guys and Macy’s West, has also persuaded electronics retail outlets to display Shutterfly’s sample prints at camera counters. “We wanted to connect with customers at the point of purchase,” she says. Market Snapshots A sampling of other digital-photography players Snapfish.com, San Francisco Business concept: Offers basic printing and digitizing of film images free of charge. Depends primarily on advertising revenues but also sells photo equipment and merchandise and charges for reprints. Competitive advantage: A superlow price point and a catchy marketing campaign engineered by a branding expert with experience at Kraft and Nabisco. Major challenge: Proving its advertising-revenue model, which has fallen out of favor among investors. Also, to access image files stored on the site, customers must provide demographic information used for advertising purposes. eMemories Inc., Los Angeles Business concept: Enables amateur photographers to create online photo albums. Makes money selling hard-copy prints and albums. Competitive advantage: Being the exclusive photo-sharing community for the Women.com network and the teen site Alloy.com, and securing a slot on the Earthlink personal start page. Major challenge: Beefing up its E-commerce offerings. At press time, eMemories’ merchandise was limited to mouse pads, mugs, hats, and T-shirts. DotPhoto Inc., West Trenton, N.J. Business concept: Allows digital-camera users to upload images, create their own voice-over “captions,” and share pictures through E-mail links. An ad-free site, DotPhoto offers a sliding-scale subscription-fee plan that may appeal to people who don’t want to be bombarded with marketing come-ons. Competitive advantage: Its proprietary “talking pictures” technology. DotPhoto is the first site of its kind to accept both image and sound files from digital devices. Major challenge: Gaining traction and getting noticed. A relative latecomer to the market, DotPhoto is funded by founder Glenn Paul and carries less clout with prospective partners than its venture-backed competitors do. Q&A The Big Picture Can these digital-photo start-ups successfully take on the Kodaks and Fujis of the world? The outlook might best be described as blurry. To help us bring this expanding and highly competitive space into focus, Inc. spoke to Lia Schubert, an analyst at Boston-based InfoTrends Research Group who follows developments in the online digital-image arena very closely. Q: Some entrepreneurs describe what’s happening in the online digital-image domain as a renaissance in the photography business. What’s your reaction? A: Yes, we’re seeing all the signs of a renaissance. Digital photography combined with the Internet is creating a paradigm shift in the way personal pictures are captured, shared, stored, and printed. New players are coming out of the woodwork with innovative business models. We’re seeing renewed interest in photography as a result. Q: Traditional photo processors are expected to offer digital photofinishing services in their retail centers. How can these start-ups compete with them? A: The key advantage that online photofinishers have is that they’ve already developed their services before retail solutions have been actively promoted. Online photofinishers are reaching out to digital-camera users through strategic partnerships and free-print promotions, teaching those users that it is possible to order photo-quality prints online. If the online start-ups can gain significant mind share before retail services become more competitive, then they may be able to lock in a certain portion of the market. Q: How big a slice of that market do you expect the start-ups to capture? A: It would be too speculative to predict a precise number right now. Start-ups will succeed according to their ability to secure the capital necessary to scale up their operations and to draw in and retain members. But it’s safe to say that traditional photofinishers, like Fuji and Kodak, will garner a significant portion of market share. Please e-mail your comments to editors@inc.com.
From the Front Lines How do you hire new employees, lease a building, get financing, and develop a new product in total secrecy? A CIA veteran tells you how Awhile back, some friends bestowed a new title upon me: the King of Stealth. I’m not sure I like it, because I don’t enjoy being secretive. Admittedly, I’ve spent 10 years of my life working for three of the most secretive organizations in the world: the Office of Special Investigations (OSI — known from The Six Million Dollar Man TV series, for those old enough to remember); the CIA; and the National Reconnaissance Office (NRO), an organization so secretive that one legend claims that just the letters N-R-O on a sheet of government paper would be considered classified. In those organizations, multimillion-dollar programs can be affected if word leaks. Loose lips can lead to lethal results since espionage is punishable by death, or worse, in most countries. There is no room for error. Every employee from the janitor to the director undergoes a 15-year background investigation, takes repeated polygraphs, and is protected by armed guards and the most advanced security systems in the world. People never discuss classified information in public places. Conversations about work occur within special facilities and on secure encrypted telephones. And don’t accidentally bring a cell phone or a computer into one of the buildings these agencies inhabit — unless you want to donate it to the government, since it can never go back into the unclassified world. I come from a background where if someone said, “If I told you, I’d have to kill you,” it wouldn’t be funny (though I did mean that to be funny). “We in the government don’t have a sense of humor,” I used to say. So when venture capitalist Vinod Khosla, whose firm — Kleiner Perkins Caufield & Byers — had just invested $5 million in our new Internet company, suggested that my cofounder, Brian Axe, and I should put the business into stealth, my first question was “How much stealth do you really want?” His answer: Enough. We were developing a whole new way of communicating on the Internet, and we feared that someone would copy our idea before we could protect it. I’m sure I think about stealth and secrecy considerably differently from the way the average Silicon Valley entrepreneur views it. The word stealth means a lot of things to me, but here Vinod was talking about hiding the technology our new company was building from potential competitors. We’d watched as other dot-coms got funding and suddenly became surrounded by a whole field of copycats. Keeping our developing business under wraps would help us gain strategic advantage. We weren’t going to let anyone know what we were doing — not a potential employee, a partner, our neighbors, or our friends. Here’s what we were trying to keep secret: we were pretty sure that the new Internet platform we had invented, called Zaplets (available at www.zaplet.com), would be the next big thing after E-mail and instant messaging. The technology allows Web applications to be delivered by E-mail, thereby eliminating the greatest barrier to using the Web: having to visit a particular site. It’s that reality that forces dot-coms to spend billions trying to attract people to their sites. The opportunity was so big that we feared others would jump into it at a time when we were vulnerable. A Zaplet works like this: I send one to a list of friends, inviting them to my office picnic and asking them to RSVP. As people respond, the Zaplet in my friends’ in-boxes is updated to reflect who’s coming. Or a financial service might send out a Zaplet in the morning with the stock quotes you’ve requested. Look at that Zaplet later in the day and the quotes have changed — they’re up-to-the-minute. Zaplets reduce E-mail clutter by consolidating messages, and they also support such things as secure messaging, self-destructing E-mail, project management, auctions, stocks — the list is as big as everything that exists on the Web. And Zaplets bring it all to people’s in-boxes. Stealth was critical for us because the opportunity was so big that we feared others would jump into it at a time when we were vulnerable. (One study says that 96% of Internet users spend more time on their E-mail than they do browsing the Web.) At the time, we had filed only one patent. Though the network of copycats and potential competitors wasn’t as dangerous as a hostile intelligence service, without maintaining some secrecy we could have inadvertently created a lot of unwanted exposure. Deep Stealth So we did a host of things designed to keep our company in “deep stealth” for more than nine months. We used some tactics that I had learned in my days at the CIA, the OSI, and the NRO, and some that I had learned from other entrepreneurs who were also hiding their new companies. During that time we grew the business from 2 to 120 people while we fully developed our product. We finally debuted in March to the complete surprise of the entire computer industry. The key to good stealth is having people not notice the stealth. It’s the difference between armor and concealment. The former protects you if you’re found; the latter prevents you from being found in the first place. First, we changed our name. Company names can be a dangerous source of speculation — especially in our case, where it wouldn’t have taken a rocket scientist to deduce that a Zaplet might be a combination of a “zap” (an E-mail) and an application. So we held a quick brainstorming session for a name that sounded like a cool company that you’d want to work for but that would say nothing about our business or what we did. FireDrop worked just fine. Second, we kept our funding under wraps. That was awkward, because before Kleiner Perkins funded us, we’d pitched three other VCs. Brian received E-mail messages from the other firms asking, “How’s the funding going?” He’d show me the messages, but we couldn’t respond to them without revealing that we’d been funded. One persistent VC sent an E-mail message that said, “How’s the funding, and why didn’t you reply to our E-mail?” We couldn’t answer that one, either. Third, we had to hire fast and well, but without telling applicants what the company did. I didn’t feel I had to worry about the people I’d already brought on board who had salaries and equity; their interests were aligned with mine. I worried about the people we would interview but not hire — they could do a lot of damage. Naturally, it wasn’t easy to get applicants in the door. Even our outside recruiters didn’t know what we did. So after a few months, when we no longer had to keep our financing secret, we enticed potential hires by telling them about the people we’d already attracted. We told them that Kleiner Perkins had funded us, that Vinod was involved, and that some well-known Internet engineers, software developers, and marketing gurus had come to work for us. The fact that Vinod had taken all of 15 minutes to decide to invest in us — and that Kleiner Perkins had given us a term sheet only four days after we started talking — raised a few eyebrows. Nevertheless, at the end of the interviews, most applicants would look at me with some frustration and say, “I still don’t know what you’re doing.” It takes tact to uphold stealth. I would empathize — but I wouldn’t answer. I would say, “I understand how someone would want to know what we’re doing. You’ll know soon.” “Soon” may not have been soon enough for our first few hires — they knew little of the product until after they showed up for work. But most applicants didn’t have to actually start working for us before they learned what a Zaplet was. Instead, to learn our secrets, they signed a nondisclosure agreement. NDAs aren’t foolproof — they are as trustworthy as people are. But NDAs set the tone for how seriously an organization takes its confidentiality. When government agents specify that information is classified, they determine how secret it should be by how much damage a leak would cause. The release of secret information, for instance, would cause grave damage to the country; the release of top-secret information would cause extremely grave damage. So we drew up a tough NDA. It specified that breaking the agreement would cost the signer $100,000 in damages. Nondisclosures often cause messy court cases if they don’t specify monetary damages; the judge or jury has to figure that out. And how much is competitive information worth? Agreeing on a number beforehand eliminates conjecture. Coming up with the $100,000 figure simply took common sense. Since we had invented a new Internet platform, other people will use Zaplets and build applications on top of them. New communications tools like this one come around only once every few years, so its value was great. At the same time, the damages had to seem reasonable. For instance, it would have been hard to believe that leaking our secret should cost someone $1 million. On the other hand, the price had to be high enough to make the risk unpalatable. If we had been anyplace else in the country, we would have asked for only $20,000. But our company is in Silicon Valley, where we figured that $100,000 would be appropriately painful for everyone. Some people fiercely resisted signing. One guy refused, so we didn’t hire him. And he was a great Internet security officer! It was a loss; he had a stellar background. But if people aren’t prepared to sign an NDA, you have to ask yourself what else they may not be prepared to do in the best interest of the company. So why did anyone join us? It was all about execution. Most people’s decision to join a company is actually based very little on the product itself and more on the people, the opportunity, the competitive advantages, the business model, and the company culture. We focused on those things and learned to tell only certain parts of our story. We practiced it like a military exercise, over and over, so anyone involved in recruiting had the drill down. Flying under the Radar Hiring was tough. But the real struggle came when we had to get financing, a home, and equipment. Our banker, our prospective landlord, and Sun Microsystems (from whom we wanted to lease more than $1 million worth of computers) legitimately needed to understand our business. They couldn’t take a risk on us without knowing who we were and what we did. That made sense, of course, and we had a fiscal and ethical responsibility to explain our business to them, including who our backers were and who our team was. But we didn’t feel that outsiders needed to know the details of our product. That’s not how the Sun people felt. No way were they going to provide $1 million worth of equipment to us when they didn’t know whether we could pay them back. They wanted a business plan. We said, “We’re in stealth mode. We can’t give you a business plan.” Their leasing officer said, “No business plan, no lease.” We tried to use our network to go around him, but it didn’t work. Whatever we did, we ultimately came back to him, and every time that happened, he insisted on a plan. I thought that if we gave him a plan, he’d pass it on to a number of other Sun people we hadn’t met — people who were well connected in the industry. Finally, we wrote a short, generic plan — and they accepted it. The whole process took about a month and slowed us down. The generic plan saved us. That doesn’t mean you can do anything to get a deal or keep a secret. I highly recommend never lying. Your integrity is the only thing you have that allows people to trust you; never give it up. We became experts at describing our business without giving away a single detail. And we made sure it didn’t sound exciting. Calling it “B-to-B stuff” with a good yawn always helped keep the interest low. When we were asked for details, we somehow always remembered that we had some other urgent thing to do and made a hasty exit. We’d retreat to a new building in a sparkling complex on a brand-new street that wasn’t even on the map. We had planned to lease space in a new building that didn’t have any other tenants (to eliminate casual elevator conversations with neighbors). We got lucky when it came to the address; if we were to do it again, I’d find such a street on purpose. (I’ve heard from a few people in the Valley that our complex is unofficially known as Stealth Alley because of its lack of signs and the presence of other in-the-dark Internet companies.) I look out of one-way-mirrored windows onto miles of marsh; there’s no reason for anyone to stroll over here on their lunch-hour walk. We also leased the top floor, which added another level of security. I’ve heard from a few people in the Valley that our complex is unofficially known as Stealth Alley because of its lack of signs. Inside the company, we’re very open with one another. Rather than using whiteboards, we write on the glass conference-room walls, a practice that the military uses in submarines and war rooms. (The idea of stealth is not to maintain secrecy everywhere, because that doesn’t work. Once people were in here and trusted, we felt everyone should know nearly everything — except things like salaries. That makes for an effective company.) Since one-way windows don’t work well at night and we don’t want people to see in, we hung shades on every window. It sounds paranoid, but many reporters drive by a company just to see what it looks like. And not that anyone would ever go through our trash, but trash happens; we still shred all our confidential documents and use a document-destruction company instead of throwing paper in the garbage. Naturally, we hadn’t listed FireDrop in the phone book or put any contact information on our Web site, so it was practically impossible for most people to get our address. Even if they had gotten it, they would have had a miserable time finding the place: we didn’t put up any signs. We just told invited guests how to find us. Since we had little practical information on our Web site, why have one at all? Because stealth creates a lot of buzz. People knew that FireDrop existed and that we were hiring quickly. (Today we’re up to 230 people.) We started to work with advisers like Bill Joy and Esther Dyson. We wanted to be able to leverage the curiosity we’d generated. So on our Web site we asked people to sign in, and we promised to E-mail our big news to them when we launched. By the time we came out of stealth, we had a complete, working technology and had filed more than 12 patents. The only real leak was a Wall Street Journal article discussing our strict NDA, among other things. Much of the stealth is gone these days — except for our name. Our plan was to go back to Zaplet, but we had recruited everyone to work for a company called FireDrop, and the name was so good, people didn’t want to change it. Maybe I should have picked a name like 3Com or Microsoft. David Roberts is chief zaplet at FireDrop Inc., in Redwood City, Calif. The street where he works is now on the map. Please e-mail your comments to editors@inc.com.
E-Diaries A start-up builds an identity from a car horn, Sir Edmund Hillary, and an irate father-in-law If you’re a character in a spaghetti western or a Kafka novel, you can get by without a name. Dot-com start-ups don’t have that luxury. Not only do you need a name, but you need one powerful enough to etch itself into the gray matter of consumers hard-pressed to remember anything beyond Amazon.com and “the one that sounds like yodeling.” My partners and I spent much of last summer in search of such a name. We already had a business plan, venture money, and subleased space in Redwood Shores, that Silicon Valley community-cum-office-park-on-a-landfill dominated by the shimmering cylindrical towers of Oracle Corp. But we couldn’t go much further until we fixed on who “we” were going to be. After all, a Web-based company doesn’t have a business till it launches a site. It can’t launch a site till it determines that site’s look and feel. It can’t determine the look and feel till it creates a logo. And it can’t create a logo until it has a name. Dot-com coinage is even more of a hassle than it used to be, thanks to Bigstep.com, a company that builds and hosts E-commerce sites. Before its launch as Bigstep.com, last June, the company’s founders decided to keep the nature of their business under wraps by masquerading as “the Springfield Project,” presumably on the assumption that if they used the name “Bigstep,” everyone would instantly think, “Oh, yes, they must build and host E-commerce sites.” Of course, the less people know about something, the more they talk about it; soon, knowledge of the Springfield Project’s true identity became a Silicon Valley status symbol. The buzz reached a crescendo when Red Herring magazine included the Springfield Project on its list of 10 private companies to watch in 1999. What you would see it doing was still unclear. The Springfield Project was the first popular example of a so-called stealth name, and soon hordes of company owners were waltzing around town with the corporate-identity equivalent of bags over their heads. Our venture capitalists urged us to adopt a stealth name too, but we decided it was a trend worth bucking. Devising a brand that is wildly intriguing, wholly misleading, and ultimately disposable just seemed like a waste of time. Anyway, we were having enough trouble coming up with a real name. For the first few months of our company’s existence, we had referred to ourselves as “SendToFriend.com,” a bland summary of the business plan. (We help companies set up Web-based referral programs that reward site users for getting friends to visit, register, or make a purchase.) “SendToFriend.com” lacked pizzazz, so we were not surprised when the subject of a new name came up at the first operating meeting with our VCs. When I suggested that we name the company ourselves, the investors reacted as if a bunch of kids with plastic stethoscopes were proposing to perform real brain surgery. “I’ll give you the number of a good consultant,” one of them told me kindly. We decided to interview two consultants, one representing a high-profile corporate-identity firm, the other a tiny independent. The big-name namer showed up at our office wearing a suit and carrying a fat loose-leaf binder. His portfolio was full of appellations such as “Tecra,” “AXP,” and “Fortiva,” words that conjured up images of synthetic fabrics and microprocessors. It wasn’t us. Then we met Mya Kramer. Mya dresses like someone who works in a hip San Francisco design firm, which in fact she does. An 18-year veteran of the design business, she told us she had gotten fed up with “constantly doing design work for brands that sucked” and had turned to naming as a creative alternative. Her portfolio, sent by E-mail before she arrived, bristled with funky monikers like “Zeum,” “BabyCiao,” and “CampSix.” The high-profile guy wanted six figures. Mya would do the job for one-tenth that price. I told her to start naming names. To kick off the process, Mya asked me and my two cofounders, Zen and Shanti, to look through magazines for pictures evocative of the brand we wanted to create. We soon had a pile of 30 images, including Sir Edmund Hillary drinking tea after his 1953 ascent of Everest, a teenager getting into a new CD, and a champion female windsurfer. They were people with experiences worth sharing, people whose recommendations you’d trust. Armed with these stimulants, Mya returned to her office to brainstorm with her design team, which includes a science writer and a TV producer. In short order she sent us 500 possibilities. A few days later our naming committee, composed of the founding team plus two investors, convened in our conference room to discuss the list. Mya asked us all to pick our 10 favorite names. A few of us were hot for “BigVine,” but Zen objected because the v sound is hard to pronounce in Japanese. I voted for “Zamza,” but one investor had had a bad experience with a similarly named start-up. “Don’t go there,” advised our part-time chief financial officer. No name tickled all our fancies, but we agreed that a nonsense word was the way to go. We sent Mya back to the drawing board with a mandate to come up with something “Dr. SeussÂish.” The next week brought another 70 names, and we repeated the exercise. This time one of our investors seized on “Gazooba,” which Mya told us was inspired by the ah-ooga sound made by an old car horn. It didn’t do much for the rest of us at first. Then Zen stood up. “If we want to be reasonable about this, we’ll pick a serious name,” he said. “But ‘Gazooba’ would really piss off my father-in-law.” Zen’s father-in-law is an elderly, conservative gentleman living just south of Tokyo; Zen figured a name that got under his skin would have the same effect on others. And if old Soma-san went into a tizzy about his daughter’s being married to a guy who worked for something called “Gazooba” — well, as far as Zen was concerned, that was pure gravy. Being amused by a name is one thing; living with it every day is another. Like a clerk in a shoe store, Mya insisted we try walking around in “Gazooba” to see how it felt. We began by introducing ourselves to one another. I extended my hand to Mya: “Hi, I’m Andy Raskin, CEO of Gazooba!” We pretended to answer our phones: “Gazooba, how can I help you?” We envisioned the ultimate sign of branding success — our company’s name transformed into a verb: “Hey, can you gazooba that site to me?” We were in love. Further confirmation that we’d made the right choice came when a customer told me that Mork, of Mork & Mindy fame, had once owned a gazooba, which he defined as “a crawling, hairless form of Orkan animal life, considered more advanced than human beings.” So if we ever need a mascot. … A few weeks after Gazooba Corp. was born, Zen’s phone rang. The caller identified himself as an employee of a nearby start-up. He offered us $4,000 for one of the names that we had considered earlier and reserved as a domain just in case. Zen brought the proposal to me, and I made him an offer that no chief technology officer could refuse: anything over $20,000 that he could negotiate would go straight to his engineering budget. Bidding for domain names usually starts around $100 when small fry are involved. I figured someone opening with a few thousand would probably agree to pay more. Zen, who loves a good haggle, got the phone guy up to $32,000. I took that figure to our VCs for approval, and they passed along an interesting tidbit: our suitor’s company was a Kleiner Perkins Caufield & ByersÂfunded start-up. That meant pockets. Deep ones. The phone guy insisted that he couldn’t go higher. What a shame, we said. Good-bye and Gazooba. A few days later the company’s CEO called. Would I be willing to meet him at Jamba Juice to discuss a price? As I walked in the door of the smoothie chain, I knew we were about to make a killing. What’s in a name? As it turned out, a month’s operating cash. Andrew Raskin is cofounder and CEO of Gazooba Corp., based in Redwood City, Calif. E-Diaries: Episode 1: A New Beginning The Game of the Name Take My Job Offer, Please. Pretty Please There’s No Such Thing as a Free Launch Gimme Shelter Bridge Financing over the River Scared Let the Good Times Roll There’s a New Man in Town I Really Must Be Going
What’s Cooking On-line? If you’re not sure where your next meal is coming from, you might try the Internet The Web’s next killer app? Think arugula. A host of entrepreneurs are convinced that, just as the on-line arena has changed the way we communicate, shop, and invest, it will change the way we seek sustenance as well. “People have to eat three times a day, but even on the brink of the new millennium, nobody has found a way to get more free time,” remarks David Hodess, the 37-year-old CEO and cofounder of Cooking.com, one of the new players catering to today’s time-starved — and just plain starved — consumers. Along with former Disney Store executive Hodess, refugees from Microsoft and PepsiCo, as well as such high-profile venture capitalists as John Doerr, are staking their money and their good names on new sites that promise to point and click consumers to their next meal. What to have for dinner tonight? The next five nights? That dinner party you’ve scheduled for Saturday? Both Hodess’s Cooking.com, in Santa Monica, Calif., and another on-line start-up, Tavolo, in San Rafael, Calif., offer thousands of gourmet products and wares that can help answer those questions. Each site is financed with $50 million in seed funds and is as much an information resource as a culinary E-tailer. Click on either site’s weekly menu planner for week-at-a-glance menu suggestions, with printer-friendly recipes. In addition, both sites offer various foodie bells and whistles. Tavolo’s site (www.tavolo.com) has features that convert recipes from standard to metric measurements, tailor recipes to the number of people being served, and create a shopping list based on your weekly menu. Cooking.com has an on-line glossary for boning up on the history of cognac or determining the precise definition of a zapotilla. But customizable recipes and on-line glossaries are just the marketing bait. What these sites really want to do is sell you stuff. “Providing a free recipe certainly has value for the consumer,” says Ken Cassar, an electronic-commerce analyst with Jupiter Communications, an Internet consulting company in New York City. “But it’s also a great opportunity to sell mortars and pestles.” As Tavolo founder and CEO Kevin Applebaum is fond of noting, with $55 billion in total sales (both on-line and on terra firma), the market for cooking products and gourmet foods represents a huge category. The leading national retailer of cooking supplies — Williams-Sonoma — has a market share of less than 1%. But Applebaum, who honed his marketing skills at PepsiCo and Procter & Gamble, also knows he’s not alone in spotting cooking sites’ potential. Numerous national retailers, from Macy’s to the aforementioned Williams-Sonoma, are also chasing the ever-expanding on-line opportunity. So is the ubiquitous Martha Stewart, whose Web site, launched in 1997, is in the process of receiving a $25-million tune-up, courtesy of new investor Kleiner Perkins and its general partner, John Doerr. The real challenge for all the gourmet sites, says another Jupiter Communications analyst, Michael May, will be to get the people who purchase gourmet food and wares on-line to go from buying gifts to buying for themselves. The majority of the $200 million in on-line sales of small appliances and gourmet-food items last year occurred during the fourth quarter, for holiday gifts, notes May. Arugula-artichoke-with-roasted-garlic pesto pasta sauce may make for a terrific gift, but it isn’t what people are buying for their own dinner tables — at least not tonight. Cyberconsumption Food and kitchen supplies may not be the biggest on-line shopping category at the moment (books currently hold that honor), but according to Jupiter Communications, they’re where the growth will be between now and 2003. Odds are, Peapod and its ilk will eventually outpace their Amazonian counterparts. Projected on-line consumer spending, by category 1999 2003 % change (in billions) Groceries $0.2 $7.5 3,650% Housewares $0.1 $1.5 1,400% Specialty gifts* $0.1 $1.0 900% Music $0.3 $2.6 766% Apparel $0.8 $6.7 738% Videos $0.2 $1.1 450% Toys $0.3 $1.6 433% Electronics $0.4 $2.1 425% Flowers $0.2 $0.8 300% Books $1.3 $4.9 278% *Gourmet food makes up a significant percentage of this category. Source: Online Consumer Spending Forecast, Jupiter Communications, September 1999. Party of 10? Click Here Sure, much of the on-line cooking sector caters to aspiring chefs. But what if you and the kitchen aren’t on speaking terms? And you happen to like it that way? Take heart. A crop of new sites seek to gratify the pantry-phobic as well. Feel like takeout tonight? San Francisco-based Food.com offers on-line ordering — and, more important, local delivery — from more than 13,000 restaurants nationwide. Feeding your face is merely a matter of entering your zip code and navigating menu offerings. Since restaurants are notoriously low-tech, the company’s server in Seattle translates on-line orders into a fax or a phone call, which is then sent to participating eateries, a service for which Food.com reaps a $400 setup fee, a $50-a-month retainer, and 5% of each order. For those who’d rather dine out, at least two new companies offer on-line reservations. Both foodline.com, in New York City, and OpenTable.com, in San Francisco, are attempting to replace the traditional phone-and-paper-based restaurant-reservation system with a Web-based one. They charge participating restaurants about $200 a month in service and transaction fees (and in OpenTable.com’s case, a $1,000 setup fee). Currently serving a handful of cities, both plan to be nationwide and to ultimately link their service directly into the restaurants’ individual point-of-sale systems. They also hope to personalize the diner’s experience. “Imagine being able to remember that Mr. Jones is allergic to shellfish or sending a promotional E-mail to your top 100 August diners,” rhapsodizes former lawyer Paul Lightfoot, Foodline.com’s 29-year-old CEO. CookExpress.com, launched in January 1999, offers an on-line option that’s between cooking from scratch and dining out: a gourmet, ready-to-cook meal sent to your home by FedEx. Founder Darby Williams, 46 — another Microsoft escapee — calls CookExpress.com a “smarter way to cook.” Three-part meals (for example, roasted salmon with herb-caper sauce, potato-olive salad, and baby arugula), each requiring less than 30 minutes to fix, are delivered to your door (currently just in the Bay Area, where CookExpress.com is based) or by overnight delivery nationwide. Prices range from $8 to $15 per serving, plus a single $4.95 local delivery charge or a shipping cost of $12.95 to $16.95 (based on the number of meals). Yeah, but is the stuff fresh? To mollify those squeamish about the idea of filet mignon that arrived through a delivery service (albeit packed in high-tech gelatin ice), the company has devised a system of labeling each package with color-coded dots that change color if the food hasn’t remained chilled. The packaging also indicates how long the food inside should stay fresh (usually two days). Williams boasts that the company has the potential to be a billion-dollar enterprise within five years. He plans to expand the CookExpress.com same-day service into at least 30 U.S. markets as well as another 6 to 8 markets outside the United States — each worth $25 million in his estimation. He also hopes to add a retail component to his distribution. The logistical complexity of such an undertaking actually appeals to Williams, although, he readily concedes, “had I been in the food business before, I probably never would have done this.” Child in the Wild Julia Child is cooking. So who better to ask about the marriage of virtual and victual reality? And, surprise! She’s all for it, having become Web-friendly and computer-adept herself during her many years of bringing haute cuisine to the masses. Contributing writer Alessandra Bianchi caught up with the culinary grande dame at her home in Cambridge, Mass. Inc.: Do computers and cooking mix? Child: They certainly do. It’s marvelous what computers can do for you when you’re cooking. In fact, A La Carte Communications, the producer of my new television series with Jacques Pepin, has a site, Alacartetv.com, and it has everything on there! You can get TV schedules, cookbooks, even précis of our upcoming shows. Inc.: Do you use a computer in your work? Child: Yes, I have had a computer since they first came out. I use it for writing. I used to do my books in longhand, but word processing is so much easier, for a clear copy and for cleaning up. Recently, I started using the Web to find books — cookbooks from London, for example — and it was a snap. It’s tremendously useful for getting products, too. By clicking on www.fromages.com, you can get real French cheese directly from France, even though you’re a person and not a company! Inc.: But would a serious chef log on to the Web for advice, recipes, and menu planning? Child: Perhaps not now. But eventually, quite possibly. Now it’s fairly primitive, and a good chef would already have a recipe in his or her own library. The cooking information on the Web isn’t always complete or easy to find. For example, if you look up fava beans on a search engine, you don’t get much. But the Web sites are particularly good for beginners. One thing the sites haven’t entirely worked out is how you pay for the research you do. Eventually, it will be wonderful. Inc.: What do you think the development of cooking Web sites says about our culture? Child: I think it shows we’re a progressive culture embracing new ideas. It’s incredible, really. Of course, it helps to know what you’re looking for. But what’s happening on the Web is marvelous for cooking.
