07/14/98 RMIUG Meeting Minutes - Sizzling Net Startups

Dan Murray called the meeting to order at 7:00 sharp and introduced the other members of the RMIUG Executive Committee in attendance: Alek Komarnitsky, who was the minuteman (and also turned 35 that night! ;-). Spike Ilacqua from Indra's Net was our "Comm member for the night" as we were short-handed; thanx for helping us out. About 60 people were in attendance. Note: This was a joint RMIUG/CIK (Colorado Internet Keiretsu) meeting - pls see details about the CIK below.

Some misc. announcements:

• Dan mentioned that we have about 1,800 folks on rmiug-announce, 1200 on rmiug-jobs, and 900 on rmiug-discuss Email lists. He also mentioned the RMIUG is planning another BBQ ... similar to what we did 3 years ago (see http://www.rmiug.org/special.html) and this is planned for Saturday, August 22nd at Alek's place in Lafayette (near 95th and Arapahoe). More details will be sent out to rmiug-announce in a few weeks.

• Dan thanked the RMIUG sponsors - XOR for web and email hosting and NDA for refreshments. Also, Dan showed a Rocky Mountain News story on a local Internet company Email Publishing that is being acquired by First Virtual; see details about this at: http://InsideDenver.com/yourmoney/0714sale1.shtml Also, one of our panelists, Vstream, has since been written up in the Denver Post; http://www.denverpost.com/enduser/leyla0720.htm

• An audience member asked if anyone was actually using ADSL, and no one was. Spike from Indra's Net says he knows of 4 people who got ADSL, but US West ran out of capacity ... and nothing will be available until September at the earliest.

Dan then polled the audience on several questions that related to this evening's topic. 1/3 of the audience has started a company, only a few have done VC, but a number have used credit cards for financing. A couple are at the Boulder Tech Incubator, 1/4 attended Rockies Venture Club Meeting, no one (yet! ;-) has gone to Blackhawk/CC for financing! A bunch have had stock options, but a smaller number have had valuable stock options. About half of the audience has heard of the CIK, and several members were in attendance.

Maxine Most (maxmost@ix.netcom.com) talked about the Colorado Internet Keiretsu (CIK). It was founded in early 1997 by Brad Feld (brad@feld.com) to provide networking opportunities for founders/CEO's of Internet Companies and to also generate publicity/interest for Colorado that it is a great place for Internet companies, talent, employees, and employers. I.e. everyone has heard of Silicon Valley, Silicon Alley - Colorado is the Wired West. The CIK provides a community where folks can help each other out. No membership fees (yet), very loose organization, getting people connected, create synergy, etc. Web Site is at http://www.wiredwest.org/ Brad's brother, Daniel Feld, defined Keiretsu as "a loose affiliation of individual/organizations that band together to leverage their strengths for the group as a whole."

Dan introduced Deborah Arhelger (arhelger@logtrax.com), who is the co-founder and CEO of LogTrax, which is a startup in the Boulder Technology Incubator. They are developing WebNovation, which is a suite of visualization and analysis tools to improve web site usability.

She started by describing how she went shopping for a laptop using the Web for research, and spent 20 minutes drilling down Compaq's web sites trying to determine which laptop supported NT - basically, their vertical orientation created a lot of unnecessary work for her - she had to check each individual model.

The goal of LogTrax is to be able to tell companies where their web site is failing, where it can be improved, and report on the ROI, Return on Investment, for Web site initiatives. She started the company with co-founder Wayne Citrin because they want to build useable products that are used to solve real-world problems, they have a start-up itch, want to create/grow their own environment, and $$$ is always a motivation! ;-)

They have a business plan, are self-funded (although looking for first round of financing), product is in development with first customer ship scheduled this fall, and are located at the Boulder Technology Incubator. The BTI (http://www.bouldertechincubator.org/) is home to a dozen start-ups, provides misc. resources for startups including mentoring, support and professional services, and other misc.

She commented that most visitors to large web sites bail within two clicks - mostly due to poor site navigation configuration. Industry estimate is ~$5 per web contact for customer service, versus $12-$250 over the phone, so not only is it cheaper to grab 'em with the Web, but if you don't, the competition may snarf 'em up.

Current approaches to analyzing web sites are heuristic evaluation; rules of thumb - are images too big, lack of ALT tags, etc. Traditional usability analysis where you have trained observers and testers but this is a lot of work and is an artificial environment. You can also analyze the log files, but these generate a LOT of data and patterns are often not that clear.

LogTrax's WebNovation uses site structure and log files, pinpoints what the problem visitors are seeing, proposes some remedies, and reports on ROI. She showed how their product graphically lays out the site in a color-coded approach with lines for links. In response to an audience question, there are some challenges with large web sites in terms of snarfing in all the data and also a visualization issue. They gather data using a "spider" approach, which means they can look at your site remotely (rather than having to run internally on your Web Server). She showed various tricks of looking at things differently and trying to assess where problem areas might be.

Examples of types of problems are: Pogo-sticking, Lost in the maze, Hide-and-seek, Spinning, Giving up, and/or Desperation searching where you just try using the internal search engine after getting lost trying to find stuff via navigation.

The product can suggest shortcut links to hard-to-find pages, inter-connections that visitors have found, propose cross-links to eliminate vertical hierarchy, provide expert advice on how to fix the problem, and look at where abandonment occurred.

One really cool thing is that every visitor becomes a tester! And usability evaluation is ongoing, so you can quantify improvements in ROI and continually improve the web experience for site visitors.

First Customer Ship is planned this fall; they are actively seeking customers, and looking for investors and staff. Current plans are to be a product company, but open for partnerships where other folks can provide the services side of it for you. Runs under NT, is shrink-wrapped, they do much more than simply checking links/HTML/hit counts, and their target audience is the web designer to help them figure out how to better do their web site.

The next speaker was Srikant Srinivasan (srikant@brianplay.com) who is the founder and CEO of Brainplay.com in Denver (formally thunderbeam.com). It is an e-commerce company providing families the most reliable and convenient way to gather information on and purchase a range of child development products. It recently received a few million dollars in its first round of VC financing.

Srikant likes the word "E-Tailing" (Electronic retailing) and says it is one of the fastest growing industries in the world. It is expected to grow 300% in the next 2 years, 57% grown in 1997 (Media Metrix survey), and 59% of Fortune 500 CEOs say E-commerce will dramatically change things (Waterhouse survey).

This is all due to increasing number of folks on the Internet - according to 1998 Jupiter Communications Report in the US, there will be 57M households by 2002, on-line shoppers go from 16M to 61M by 2002, and online users go from 63M in 1998 to 116M in 2002.

Advantages to shopping/retailing over the Internet are better assortment/selection, more information, better targeting, and 1:1 connection/interaction/marketing. There are category killers now - examples are Amazon and CDnow. Some emerging formats are:

Auctions: eBay, ONSALE
Consumer Driver Pricing: Priceline
Membership Model: NetMarket, Brainplay.com
Customer Demographics Centric: BabyCenter.com, Brainplay.com

Brainplay's approach to exploit all of this is to grab market share as fast as possible! I.e. go full on for the "top-line" (revenues/sales) and don't worry much about profits - grabbing the largest possible audience is the key. They plan to do this via Portal Site placements, cooperative ventures, off-line brand building, etc. Note that the Internet allows 'em to do this (ex: programs with schools/parents) which would not have been possible 5 years ago.

Brainplay has grown from 3 to 20 people and closed several million dollars in venture financing last fall. They changed name from Thunderbeam to Brainplay because the former name didn't really mean anything and is not memorable, whereas the later name does convey what they do/want to do and sticks! While it was hard/expensive to transfer the brand name equity/knowledge of Thunderbeam to Brainplay, waiting longer would have only made the job harder.

Srikant commented that historically, the book market that has grown 2%, so he is not sure that this market will undergo explosive growth, and what we are seeing with Amazon is not necessarily growth in the overall market, but a new channel. Interesting data point was that largest $$$ volume of sales on AOL.com last year was clothes and he suggested that people aren't all of a sudden buying more clothes, but instead the Internet is becoming another channel.

Jim LeJeal (jim@vstream.com) from VStream was our final speaker. He is their co-founder and Chief Financial Officer. VStream takes videos and incorporates it into a data format accessible via the Web. They layer proprietary management software on top of it called the DEMAND architecture, which (among other things) tracks usage. I.e. did you watch the sexual harassment seminar? Big Brother and/or Nielson Ratings; depending on your point of view!

In terms of financing/history, they started with Founders Capital of $500K in April/97, did their first VC financing of $1M in Sep/97, and just completed a second round of $10M in Jun/98.

They draw their Competitive Landscape as a box with one dimension as uncontrolled vs. controlled and the other one being business communication vs. entertainment. VStream is in the controlled (pay-per view) and business communcations quadrant. In contrast, providers of "adult" Internet fare are in the entertainment/controlled area.

He showed predictions that Internet Technology Services market goes to $116B in 2002. VStream feels they can get part of this in Corporate Training, Video/Audio teleconferencing, Distance Learning, and Computer Based Training.

They do aggressive cataloguing of the videos, so it's easy to cross-reference and build a "virtual" library where you can request all info on a particular topic. You can also look at usage statistics; this is quite useful in determining what people are actually watching (and what they aren't! ;-), so you can then adjust things accordingly. VStream feels they are primarily a Services (rather than a Product) company, since they like to provide a turnkey operation to their customers. He feels that companies will continue to outsource, since this stuff is not that trivial to do. The DEMAND architectures also supports different underlying technologies, so they should be able to support new stuff that comes along.

Jim had a few slides that talked about founding/running a startup. Some misc. keys to getting financing from VC folks: Proven Management Team, Selling transaction, large market, competitive advantage, and early market entry. These are the issues you need to address when talking with the financial community.

Some thoughts on investors: pre-qualify for fund-fit - want to be sized for what you are looking for. Diligence is a two-way street - call other portfolio companies to see what they think of the VC. Opinions are better than nothing (i.e. you want an investor that gets involved, not one that is silent).

Good/fun things about startups: an awesome instructor, an "E" ticket ride, a reason to put out. Some things that are tough/not-so-fun about startups are: it's a "tough road" to hoe, has a tempering effect, and forces you to take a hard look at yourself in the mirror.

Editorial comment from Alek: Somewhat interesting that the expression "E-ticket ride" is in the vernacular, yet Disney has probably not offered this for 20 years!

Some thoughts on Mechanics: learn to build a capitalization table, understand the vernacular, and spend time on the "plan" (operating vs. business).

Some thoughts on the Beginning: Get a partner, have a good backup team and hiring strategy, get the best professionals available in legal, accounting, and banking when you start, and decide what your end-game will be.

We brought all three speakers up for some questions & answers ... in the text below, Q is the question, and responses are B-Brainplay, L-LogTrax, V-VStream.

Q: What is your exit strategy:
L: Probably eventually be acquired by a larger company.
V: Planned on getting VC from the start - and generate return via acquisition or IPO (more probable)
B: Same as VStream

B asked if they have been accused of exploiting kids/parents for their own benefit. Srikant said that has not occurred (at least not yet) because this offers a win-win for all parties. For instance, schools benefit because a portion of parents' purchases is shared with the schools, who receive credit toward purchases from Brainplay.com

V asked if at the end of their video's if they have a Q&A to the reader where they have to pass the quiz and report the results. V said YES, and this type of feedback loop is an important part of the services they offer. V also asked if they have any way of assessing if a particular speaker is truly doing well. They can determine which sections of the video are more frequently actually watched and/or skipped over, so that can help in making that assessment and then providing feedback.

Q: How many employees/contractors and employee ownership beliefs.
B: about 20 and 20, every person has stock in the company.
V: 25 full-time people, employee stock option plan should always have 10-20% of outstanding stock available (see next question for more details).
L: 4 people currently, plan to provide stock ownership, just about to work on it.
Note: all answered they use a "typical" 4-year vesting period at 25% a year.

Q: How much control did you have to give up to the VC's?
V: Gave up about 20% in the first institutional round, and currently, the founders have less than 35%, with the Employee Stock Ownership Plan at 15%

Q: How difficult to hire people?
Everyone agreed that it has been tough to hire, but advised you to be patient.

Q: Colorado salaries tend to be lower than California ... does this make it harder to hire those really good people?
B: Don't think that is a big issue ... key is getting critical mass and word out that you are a good place to work.
V: Philosophy is to hire the best folks and pay them at the medium-high end. Told story how they are interviewing someone from Texas and they said the local offer was laughable compared to Texas, but Jim says he feels they are competitive and they check with their Board members to ensure they are being "fair"

Q: Is majority of recruiting locally in Colorado or out of state?
B: Looking everywhere.
V: Ditto.
L: Just starting, but willing to look anywhere.

Q: Is money the main/only issue for prospective employees?
B: Money has to add up ... but if that is all they want, then it may not work. They need to feel passionate about what we're doing and fit well within the company culture.
V: Try very hard to create progressive/good culture that ensures people are excited about driving to work. They also work hard to convince the spouse it is a good idea to work there.
L: Not all about cash, want to insure corporate culture is where they want to work.

The Meeting ended just after 9:00. A reminder about upcoming RMIUG events:

Aug 22nd: RMIUG BBQ - details to follow on the rmiug-announce Email list and also on our Web Page at http://www.rmiug.org/

Sep 8th: (pending) IP telephony RMIUG meeting - voice over the Internet.

Nov 10th: Secrets of the Pros on maintaining HUGE Web Sites. A behind-the-scenes peek at large, well-known web sites by the webmasters who maintain 'em - see how Sun Microsystems, The University of Colorado, and the Sporting News do it!

(To suggest a topic, pls send your idea to rmuig-comm@rmiug.org)