Joining an e-business start-up might seem like a fast road to a
quick buck but, warns Andy Favell, it has more to do with long
hours and high risks
Picture the scene. A pub in the City of London, three men dressed
in matching blue shirts and yellow ties huddled in a corner, ready
to give it all up: the BMW 7 series, the secure job shuffling paper
for Big Bank Incorporated. No entrepreneurial background between
them, just the bare bones of an idea for
haemorragingmoney.com, an Internet site
destined to become the hub of business-to-business e-commerce
across the globe. No need for a business plan, no need to live
on the breadline - just pop down to the First Tuesday networking
event (where venture capitalists fight among themselves to give
away investment funds, reportedly) do a bit of sweet-talking
then walk out with a cheque. Twelve months later, float the
company and never work again. The Information Superhighway is
paved with gold - it must be true, the newspapers said so.
The harsh truth, of course, is an entirely different matter.
Venture capitalists estimate that no more than 5 per cent of
Internet start-ups receive the funding they seek. At Durlacher, a
venture capitalist company, Edward Forwood, director of corporate
finance in technology, admits there aren't enough hours in the day
to read most of the business plans that are piling up on his desk,
let alone assess them for funding.
Most of these start-ups will subsist for a while on the personal
investment of the founders and their family and friends - a
situation that inevitably involves sacrifice - and not just their
own. Any employees brought on board can't expect a regular salary,
benefits or the job security of an established business, and will
be asked to kiss goodbye to their social lives, company cars, the
personal offices, the telephonist, the post boy, the tea lady, PC
support and the travel agent.
Even at more established Internet companies like Mondus, a
business-to-business procurement specialist with two years
experience, 30 employees and $60m of venture capital under its
belt, the founders still work 12-hour days. Chief executive officer
Rouzbeh Pirouz is now looking for a chief operating officer to
share some of the workload, but even then he's not expecting to be
able to put his feet up.
The magic ingredient that attracts employees to start-ups is
share options. If the future holds the potential for either
takeover or stock market flotation, these could be worth
immeasurably more than the paper they are written on. To dissuade
those chasing the fast buck, however, options are unlikely to be
redeemable within three or four years of the employee joining the
company. We are all too familiar with good luck stories - founders
and employees that share windfalls of millions of pounds when
Internet start-ups achieve venture funding or flotation - but the
rewards are only high because the risks are high, as the collapse
in the share price of Lastminute.com last week clearly illustrates.
What happens to those who take the gamble and fail to hit the
jackpot - are they condemned to a life on the dole?
Mo Tobin took the plunge in late 1998, leaving a secure,
enjoyable job, with Lloyds TSB's emerging technology division, to
give his full attention to an Internet start-up which he and three
partners had started earlier that year. At 36, with a wife and two
children, it was a nerve-wracking decision for him to quit
"flat-lining in the comfort zone" for the unknown. With
mainframeskills from working with British Gas and new business
skills from Lloyds TSB, coupled with whatever skills he picked up
through the new venture, however, he was certain that if it all
went pear-shaped he wouldn't be drawing unemployment benefit for
too long.
The plan was to provide local communities with Internet portals,
search engines and facilities for businesses to set up instant
websites. It gained support from local councils, but the partners
were unable to get the funding necessary to carry through the
project. In retrospect, explains Mo, it was too ambitious for its
day and the partners weren't connected in the right circles, so
after much soul-searching, the project was shelved.
The founders, however, were not left on the shelf. Mo Tobin now
works with Citria, the e-business consulting and systems
integration arm of Protege, a London-based company that provides
"virtual management" (incubation services: providing premises,
sales channel, consulting and executives) for established US-based
Internet companies seeking to expand into the UK and Europe. His
compensation package - basic salary and benefits - are equivalent
to those he left behind at Lloyds TSB, plus share options in a
younger company. He says he works more hours, but feels invigorated
by the world of new media and would happily do the start-up thing
all over again.
It is largely this fear of the unknown that prevents many people
in the established business world from taking the plunge. The
curriculum vitaes of Internet entrepreneurs are more likely to
demonstrate a history of academia or a history of risk-taking -
starting and running new businesses of their own or as part of a
corporate business development team - rather than an IT, marketing
or sales manager for a multinational corporation.
If they manage to get as far as recruiting, Internet companies
tend to look for employees cast in the same mould as themselves -
people who will put the business before family and friends and are
prepared to forego income in return for a share of the equity.
Honor Marks, head of the Internet division at recruitment
specialist Apex, which has seen a 150% rise in its Internet-related
business in the past year, explains that many of her clients aren't
looking to recruit staff from big businesses, often preferring
employees who spend their spare time surfing the Internet, feel
more comfortable wearing the ubiquitous combat trousers and
tee-shirt combination, as opposed to suits and ties.
But start-ups looking for external investment must match
Internet-savvy and technical-skills with business acumen for the
financial beauty parade. According to the British Venture Capital
Association the three things investors look for in new ventures are
"management, management, management".
"Our investors aren't interested in the 19-year-old in sandals
in his bedroom in Slough," explains David Beer, partner at Beer
& Partners, a company that match-makes Internet start-ups and
private investors (dubbed "business angels"). "You need to have
both the business skills and the communication skills to convince
investors that you are a serious player, that you can change an
investor's money into more money."
Even when looking for senior executives, Internet companies may
still avoid courting the potential talent locked up in big
business. UK start-up application service provider Aspective is
recruiting a chief financial officer to carry the company through a
second round of financing and an initial public offering this year,
but the head-hunters won't be looking to the city institutions. "I
don't have time to persuade someone [from a traditional background]
or wait for them to adapt to a very different business model," says
Javaid Aziz, CEO at Aspective.
Every day we hear of new paper-millionaires at highly
capitalised, loss-making Internet companies, but until we start
documenting Internet paupers and the Internet ventures that have
joined the innumerable ranks of ghost sites on the Net, people will
continue to perceive that the super-highway is a fast-track to
riches. In the real world just like other infant businesses,
virtual companies demand sacrifice, both in terms of time and
money. True, some entrepreneurs may be solely motivated by the
possibility of financial reward, but for many the interest will be
Internet technology itself, or simply the addictive nature of
running a business that keeps them up to the early hours answering
emails. In fact, given the chance, many Internet entrepreneurs
would rather retain complete control over their venture than open
it up to external funding
Any employees brought on board can't expect a regular salary,
benefits or the job security of an established business and will be
asked to kiss goodbye to their social lives
Case study: Steve Robinson This may make me sound like a
bit of a geek, but it was more about wanting to understand java
script and visual basic, and the desire to develop an engine that
could deal with more than a three or four criteria and still
deliver fast results, than about dream of making money," says Steve
Robinson, the 28-year-old founder of finder-home.com.
Steve is an IT contractor specialising in database design and
administration with recruitment specialist Corporate Services Group
(CSG), and is one of four engineers to hold Microsoft's Most
Valuable Professional certification in UK through his work setting
up the SQL Server user group. He's never been the sort for fast
cars and fast living, preferring to invest his time and money in
something more beneficial. The site has cost him approximately
£21,000, excluding development hours, which have been considerable.
On top of an eight-hour day at CSG, for the past nine months, he
has often worked until 2am on his site. The site, which went live
in January, allows purchasers to search for homes while specifying
up to 100 criteria, such as price, area, must have swimming pool,
must not be near main road. It automatically e-mails or phones the
vendor with the potential purchaser's details, and also allows
searches for local builders, solicitors etc. The service is free,
but when established will be paid for by the vendor or estate
agent, either as a small fee per house or a fee measured by
interest shown. Steve's girlfriend, Charlotte, is helping to market
the site to estate agents. He also plans spin-offs -
finder-hotel.com and finder-antique.com. If finder-home is
successful, Steve will cut back on his contracting to a couple
of days a week, but is not keen to bring in venture capitalists
unless absolutely necessary, as he does not want to relinquish
control of his venture.
Case study: Tim Keogh Tim Keogh, 34-year-old managing
director of Uovo, is fending off offers from US e-commerce agencies
that have been eagerly buying into the UK and European market. "I'm
not just in this to make a quick buck. For me it's not about money
- I want to work for this company for the rest of my life,"
explains Tim.
When he founded the e-commerce consulting, design and promotion
consultancy three years ago with two partners, Justin Lord and
David Ashford, venture capitalists and banks weren't interested.
The three founders took a salary holiday and subsequent salary cut
to raise the funds necessary for application development. Three
years after leaving advertising agency Publicis - where he was the
director in charge of the international technology accounts,
including the Intel Inside campaign in Europe - Keogh's company has
grown to 30 employees (and is looking for 10 more) and boasts
clients like MFI and Whirlpool - but Tim's still driving a D-reg VW
Golf.
Case study: Julia Jones Being a self-confessed workaholic
makes living in a different time zone easier for Julia Jones. As
both managing director and sole employee of HyCurve's Europe,
Middle East and Africa office (which doubles as her home), it's
necessary to be on call when the San Francisco head office goes to
work, even though that's when most of us would be preparing to go
home.
Then there's the travel - Julia has been to San Francisco five
times since May last year, and when she's on this side of the
Atlantic she'll still spend three out of the five days on the road.
HyCurve, born in May 1999 out of USWeb Learning, develops courses
and certification programs for Internet-related roles - web design,
web security, application development, web administration and,
coming shortly, e-commerce.
It concentrates on retraining people with traditional skills for
the web, for example teaching graphic designers web-site design; or
teaching Certified Novell Engineers or Microsoft Certified
Professionals web-master skills. Courses are resold through
partners - in the UK they are IT-IQ, ICTEC and ilion Faculty, and
others in Holland, Benelux, Sweden and Germany. Jones is charged
with managing and expanding these partnerships.
Coming from an established organisation - she was director of
education and services at ilion - the biggest change is not having
"100 people to delegate tasks to". She now makes her own tea, does
her own typing, organises her own travel, as well as trying to
recruit employees and running the business.
Her compensation package is similar, but "there is also the
added attraction of a possible initial public offering", she
admits.
Case study: Chris Ledgard There isn't much coal mining
left in North Yorkshire, so when Chris Ledgard talks about wanting
"to get nearer to the coal-face," the former group information and
marketing manager in the US at global chemical group Allied
Colloids plc certainly doesn't mean that he's going down the
pits.
Chris returned to Yorkshire in September 1999 to join e-commerce
developer Shopcreator Developments Limited as head of corporate and
international marketing. At 38, Chris took the $500 million merger
of Allied with Ciba Speciality Chemicals as an opportunity to break
with 20 years as an IT consultant and strategist in big business
for something a little more dynamic.
Chris estimates that he is being paid 25 per cent less than at
Allied for work that is "definitely harder" and can take as much as
12 hours out of his day.
In return he receives stock (Shopcreator was established in 1998
and has already received $30 million in venture capital, has 25
employees and 600 corporate customers) and the possibility that if,
as expected, the company floats later this year, he could be
looking at netting a tidy six-figure sum.
Look before you leap Have you been approached by a
dotcom? Louise Campbell from Internet recruitment specialists
Venture Partnership gives some advice to those thinking of jumping
ship.
- First, it's important to ask some basic questions such as "are
you funded, and who by?" If you discover that your prospective
employer has one of the big Venture capital firms behind them, its
a fair assumption that they've done the due diligence on the
business plan - look for names which are really active in the
industry and have lots of business plans to choose from - Atlas
Venture, Arts Alliance, New Media Investors, Global Retail Partners
- all of these are very well respected but there are tons more so
ask what else they've invested in.
- Second, look at the management team and its' experience. All
too often we see great new ideas that are funded but the people who
are running the companies have no track record in that vertical
market. For a really safe bet go for older, serial entrepreneurs
with an existing track record. Chances are if they've built a
company before, or reached a senior position in a big company with
responsibility for people and profit and loss account, they can do
it again.
- Interrogate the business model. If it's an internet company
which adds little value by being in that channel , will it be
sustainable and able to compete in the market after the start-up
gloss has worn off? For example, if someone is starting a company
just to sell stuff which isn't particularly hard to get hold of
anyway, where's the reason to buy from them. On the other hand, if
it's a new business model which really embraces the medium such as
LetsBuyIt.com, you're on to a winner.
- Finally, look for ambitious expansion plans from European
start-ups. If they are not planning to roll-out quickly, they'll be
an hors-d'oeuvre for a US dotcom at best.