07/13/01 RMIUG Meeting Minutes - Internet Startups - the Next Generation

Dan Murray called the meeting to order at 7:00. About 110 people were in attendance. He introduced Alek Komarnitsky from the RMIUG executive committee who was also the minuteman for this meeting. BTW, you can see another set of meeting notes taken by Suzanne Lainson (slainson@sportstrust.com) at: http://www.thecyberscene.com/cgi-bin/show.cgi?city=denver&year=2001&issue=0-7-13

Dan thanked XOR and Microstaff for their sponsorship (audience especially appreciated the pizza provided by MicroStaff! ;-) and then took announcements from the floor:

- Scott Price from CIK thanked RMIUG for co-hosting the meeting. CIK is the Colorado Internet Keiretsu (www.cik.org) for founders/management team members of Internet companies.

- Eric Payne from MicroStaff Corporation ( http://www.microstaff.com/ ) based in Boulder & Denver says they are still hiring, although things are tighter.

- Fluent Solutions LLC, a staffing company that recruits, evaluates, and places Senior to Executive Level High Tech individuals, is seeking 4 Sr. Java Developers (J2EE Technologies) for a 2-4 month contract. Feel free to send resumes to Jason Grubb at jason@fluentsolutionsllc.com

- Forum for Women Entrepreneurs is an organization for women running high-tech companies - Surf to http://www.fwe.org and click on Front Range Forums.

Dan asked the audience some questions to set the stage for our panelists: About half of the attendees were from Boulder and about a third from Denver. About 1/4 work at startup, about 1/4 USED to work at startup, a handful are thinking about startups and also looking for funding. About 1/4 looking for job. Couple folks have been associated with Softbank and/or at Hotbank. About a third were members of CIK.

Dan then introduced Daniel Feld (dfeld@sbvc.com), who is the executive director of Softbank's Hotbank Incubator in Superior (right above Old Chicago's! ;-) The outline of his talk was: Who is SVBC, what is Hotbank, types of companies, Good/Bad News, and What's Changed.

SBVC: Silicon Valley based, $2.5B under management, currently investing from $1.5B - includes 160 different companies.

Hotbank is "classic" incubator/accelerator with facilities, infrastructure, and service provider relationships. It's really a concept/title idea ... there are other of these in other geographic locations.

Types of companies: Typically early stage & strategic partners, MUST BE funded by SVBC ("community), and Internet Technology Companies (Infrastructure, Messaging/Communication, Services). Complimentary companies rather than competitive.

Bad News for Entrepreneurs: Lousy time to be raising funds, nearly impossible to get VC's attention, valuations have dropped tremendously, no idea where the bottom is and/or when it will be reached.

Mixed news for VC's - they feel pain, raising money is not easy/fun, changing business models, growth plans are time-consuming. Time is the constraining factor - first responsibility is to existing companies, then to new investments. New investments require more work/scrutiny.

Good news: shaky firms are weeded out, "build to flip entrepreneurs" are fleeing, while "right entrepreneurs" are sticking around. Startup valuations are moving in our favor, returning to sanity.

What's changed: Gone from 6-12 months to more normal 5-7 years. Shift from momentum (create buzz) to value based metrics (revenue/profitability). VC's no longer just hatching ideas and throwing them into the market - spending time with startups to do things right. BUT, some startups WILL fail!!!

In the "old" days, 1 out of 200 start-up companies might "make it" past the 2-year point. Things were wacky for a while, but are now returning back to that normalcy.

Question: What do you mean by angels? Angle investors are typically high wealth individuals who are willing to help out early on.

Question: What BtoB's, BtoC's, etc. are the "right" ones these days? Daniel said this is still shaking out, so hard to say. Stuff that was "fluff" to the consumer is shaking out - have to provide real value and solve real problems.

Question: How long does SBVC stay with companies it invests in? Typically through the life of the company and as required. I.e. SBVC can continue to fund through later stages.

Question: How much is invested in Colorado? Of $1.5B, about half is invested, of which $130M has been invested in Colorado by SBVC. We currently have 15 active portfolio companies in Colorado which account for part of this total investment to date. Amount of investments range from $1-5M to higher for later round investments.

Dan then introduced Eric Kirby (ekirby@veripost.net), CEO of Veripost. Eric co-founded the E-mail change of address company in May 2000 after being heavily involved in a previous startup (Worldprints.com) during the "heyday" of the Internet.

Chautauqua Publishing - started in January, 1998 - sell posters and funded via angels. Worldprints.com launched in late/1998 to becoming leading print and poster e-tailor ... funded by VC's. Image Catcher launched in Sep, 1999 to become leading Internet marketing company for image content - example application was really cool screen savers and got additional VC funding. Eric was not actually a founder, but brought on around then as part of the senior management team.

Got 2 million registrations in 6 months and got 1 million page views/day. Consistently one of Internet's "top 300 sites" Bought by Excite@Home in April/2000 for $75M in stock and assumption in debt.

Veripost founded in May/2000 by three former Worldprints employees. Develop tools/services to make Email communications more effective for businesses and consumers. First service was Email change of address services. 30% of Email address change annually - problem for both businesses and consumers.

Financed in August/2000 by Softbank and leading angel investors, launched service in Feb/2001, and currently scaling the solution. Eric than compared what it was like THEN and NOW.

THEN - Go Big!!. Early mover is everything, spend whatever it takes. WorldPrints had million dollar marketing deals, rapid growth to 60 employees, large office space/leave.

NOW - Make the Money Last. Grow cautiously and in line with demand. Make every dollar count, target marketing dollars, controlled employee growth to <20 employees, flexible office space at Hotbank.

THEN - Eyeballs have value - just build traffic, then figure out how to make money. Valuations based on visitors/users rather than revenue/profitability.

NOW - Solving Problems/Pains that have value. Focus on stuff where there is a demonstrated demand for solutions. For Veripost, focus on the pain which is Email change of addresses and provide solution.

THEN - Speed is all-important, Internet companies are fast, "old economy" companies are slow. 20 other companies standing in line with VC capital. Worldprints approach was get something to market NOW, then fix/evolve as needed.

NOW - Speed still important, but execution is critical. Do fast, but do it right. Won't get a second chance to execute. Veripost focuses on processes and testing, automating where possible, build foundation for growth/scalability.

THEN - "new" economy. George wore casual, goatees, birks, etc.

NOW - Back to old rules. George back to oxford shirts.

THEN - Everyone would ask when are you going to have an IPO? Typical answer was as soon as we get the paperwork filed!

NOW - Focus on generating sustainable revenue and positive cash flow.

SUMMARY: Each approach was arguably the "right" one at the time given the prevailing wisdom and business strategies.

Money raised by Worldprint was in the teen millions. Shopping around last summer was easier for funding than would be now. BTW, Veripost is a permission based system and YOU decide if your address is forwardable or not.

Question: When/what was the genesis of the idea for Veripost? This happened shortly after the Excite@Home buyout - the founders felt then that they would be interested in starting something.

Question: How many pieces of the puzzle did they have put together before they approached the VC's? They had the concept down, but just three guys and a business plan, no technologies yet, but lots of chatting with partner companies, so ready to go. Angel funding was after the SBVC funding. Veripost wanted more than just SBVC involved, and so recruited folks who could help them out.

Veripost choose SBVC because they have a lot of experience with investments around Email - they understand it. They also wanted Softbank as a backer - GREAT name. Got $3.5M in funding. Current approach is to "sip" the cash - temptation to "gulp" it ... but gotta be careful doing that.

Dan introduced our final speaker which was David J. Jilk (djilk@wideforce.com), CEO of Wideforce, which is remote workforce and workflow Management company. David was previously a Development Officer for SOFTBANK Venture Capital, so he been on both the venture capital and also the entrepreneurial side.

Commented that there is B2B and B2C... but also B2B2C ... where business provides that interaction with consumers. Provided example of where company (Global Sports) where the CEO closed a big deal by camping out on major customer's CEO home lawn.

Has worked in both VC and startups ... commented that VC is fun, but a heck of a lot of parallel processing required because so much going on. When he was in VC, the first company in the "pitch day" was (coincidentally) Veripost. They did a GREAT job ... but the rest of the pitches during the day were dismal ... so point is that it's pretty obvious which companies have a chance. SBVC focuses on investing in right people more so than right market.

Veripost was looked at positively because it was an Email company, and SBVC has invested in ~dozen Email companies, so good match between company and VC - they understood each other and the market.

Venture Capitalists are investors - some similarities to day trading. They end up buying some stock, then try to get other people to buy in, and then you, of course, want to sell at a (big!) profit.

Hotbank creates a good environment for companies, but you have to ultimately sell your stuff by yourself.

VC's can be lemmings - following current trends. They currently have a "stinking mountain of s*it" to cleanup ... times are tough so they are focused on that effort.

Depression Era entrepreneurship. In some respects, this is good, since much easier to hire technical people. LOT more office space available. Companies going bankrupt, so lots of equipment (office furniture, computers, etc.) available for cheap price.

Bad news is that funding is difficult. One contrast is a year ago, angel investors wanted to see "how much they could make from each investment" ... now they "just want to get their money back from one"

Customers are also reluctant to spend money - you gotta clearly show something that is of value to them. Talking about just eyeballs is bogus these days.

Some advice on how to start business now. Don't recommend being "3 guys and a business plan" right now. Right now, do it on the side and/or self-funded. Yak it up with folks and find out what problems/pains people/companies are having. Then build some simple tools/software and see if it works - maybe give away for free to see if it really solves the problem and interests people.

Future is so bright I need to wear shades. Internet stocks down 98%, so LOTS of paper wealth has been destroyed. Must be close to the bottom - pretty close to zero right now. David believe that upturn is coming. He said VC's need to start investing - some funds are sitting on lots of money, and limited partners who have provided money would like to see some action. Suggests that VC's will "wake up" in September and start investing again - greed will overtake fear.

Good new is that silliness is gone. People understand that their company needs to make money, engineers have to write code, more than a "SuperBowl" ad is needed, and work ethic is back.

Question: If you were a company with funding already in place, but getting to the time when you need more money, what would you do? Watch headcount VERY closely, go with minimal staff to stretch $$$$. Sit on a customer's lawn to get the sale. Partnership approach is falling out of favor, since these don't help you in terms of cash flow - go sell stuff!!!

Latency affects. Stock market crashed in March/2000, VC's took 4-6 months to figure that out and start to tighten stuff up. Entrepreneurs didn't realize until a few months after that ... and Limited Partners are just starting to realize that DOOPPPP!!!!!

Dan then had all three panelists come up to the front for some group Q&A.

Q: Compare SBVC vs. Fastideas/I-Belay. Daniel says most incubator/accelerator concepts/place were started 12-18 months ago with the idea of building companies FAST so they could go public quickly. Hotbank's goal is to help companies/team succeed more effectively by stuff like reducing cash flow on leases, basic infrastructure, additional services, introducing outside service operators. I.e. they have done this a number of times and the startup process is repeatable, so they have is "down." Hotbank has been open since October/2000, keeps a lean staff; no accounting, finance, legal department. They provide connectivity, but not hosting - 'cause they want to encourage companies to be able to operate standalone. David commented that the CGMI/Fastideas model is more hands-on by the folks that run the incubators, whereas Hotbank feels it is more of a facilitator. Eric commented that the Fastideas model is built around the "go-big" concept/idea - not as applicable in today's market.

Q: Is "3 guys with a business plan" better than "1 guy with a business plan?" David said 3 guys are better if 3 smart guys that all mix well, but can be a problem if it does not. Typical VC advice to the "1 guy" is go get another guy, although nothing wrong with just one guy. Eric felt three guys are better than one because you have other people to bounce ideas off of.

Q: Eric said you only get one chance to do things right. But isn't it a balancing act with getting something out there and getting some $$$? Eric said yes, but you want to lean toward doing it right rather than doing it fast. David said what you can do is present a "clean" interface so that things work fine for the customer, but "creaky" underneath ... but patch up as you get feedback from the customer.

Q: Do you use Beta customers to "test" the product for free. David said YES to start banging away on things and get market feedback.

Q: How important is Sales/Marketing when you are getting ready for that 2nd round of investing. Eric said about half the company is focused on this part, because YES, it's important to have revenue. Daniel agreed with all that, but also said all parts (Product development, getting management team, etc.) are all important. The audiance laughed at his discription of good sales people: "Go Dog, Hunt!"

Q: Wideforce is a "horizontal" company selling into several industries. Is it more difficult getting funding this way rather than if it was vertically focused? David agreed a little tougher, but possible to segment horizontally and doable.

Q: Isn't the goal of VC's to take some money, invest it, and return more of it? Daniel replied: "Yep!"

Our host, Dan Murray, gave a reminder of the next RMIUG meeting. The date is Tuesday, Sept 25, 2001, which is a date change (fourth Tuesday instead of second). Cluetrain author Chris Locke will be unveiling his new book, "Gonzo Marketing: Winning Through Worst Practices."

Dan then called it a wrap at 9:00, although folks stuck around for a while afterwards for personal Q&A with the speakers and networking.

Alek Komarnitsky The Minuteman! ;-)