E-business start-ups: a leap in the dark

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...

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.

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