Entrepreneurship in eBusiness

If the company does well, I do pretty well. If the company doesn’t do well….[gasp] I work at Microsoft. – Marc Andreessen, Inventor of Mosaic and Co-Founder of Netscape.

Managing a mature business is not my thing, - Steve Case, CEO of AOL

The rise of eBusiness is a story of entrepreneurship. Established enterprises have had important roles and may, in the end, come to dominate the landscape of eBusiness, but without entrepreneurship, eBusiness would not have developed nearly as dramatically. During the last decade of the 20^th century, the rules of thumb of entrepreneurship all changed. Venture capital availability exploded. Companies were founded at record rates. Established companies began to grow through acquisition of the newly formed companies at unheard of valuations. Newly founded companies started with more financial backing, grew at more rapid rates, focused on top line (revenue) growth rather than bottom line (earnings), and went public earlier than ever before in history.

Entrepreneurship is a process that is as messy as it is exciting. There are typical patterns, but there are no hard fast rules! Netscape profoundly changed the landscape for new ventures. Companies started faster, valued technical talent more, went public faster, and received higher valuation ratios than ever before.

Entrepreneurship always starts with entrepreneurs and an idea. The first part of the process is often termed “Opportunity recognition” and sometimes leads into a business plan. One of the best texts for learning about the process of starting new ventures is “New Venture Creation” by Jeffrey Timmons. The MBA bullet Point also has a nice series at www.mbabulletpoint.com/ntk/entrepreneurs.cfm .

With some guidance from each, we will identify the steps to creating a new venture as:

Opportunity recognition: What is your idea? What is the business environment for that idea?
Opportunity evaluation: How does your idea fit with the business environment? The industry? Who are the competitors? What is your target market?
Select a team. You need a driving passion and a diverse set of skills to start a business. Few persons have all of the skills necessary, but often the team can cover the bases of the technologies and business skills through the formation of a team with complementary skills. At this point, it often makes sense to do some initial thinking about what other individual skills will be needed and how and when they will be acquired. As a company grows, for example, you must often bring in a CEO from outside the business team who is more experienced in growing a rapidly growing company and executing all the steps that lead to your final goal or exit strategy.
Discuss the final goal or exit strategy for the company that you are forming. It is very important to share the same goals. It is devastating if each team member has a different goal. It is like having four people in a raft all rowing in different directions because of a lack of communication about the goal. When a new company is started there may be several final goals.

You may want to take the company public through an IPO or initial public offering of stock.
You may want to be acquired by a larger player.
You may wish to create a private company that does not subject itself to scrutiny of the public markets.
You may want to keep the company small and private because that is fun for you (a lifestyle company?).

Build a prototype. Investors and customers are all from Missouri: their motto is “show me.” Talk is cheap and hard to sell. The prototype also helps to recruit the business talent that you need. Sales people like to know what they will have to sell. Marketers need to understand the market.
Create a story. Jim Clark liked to say that his story about Netscape had the venture capitalists “drinking his Kool-Aid.” You will need:

A detailed business plan
A power point style presentation that can be adjusted from 10 minutes to 1.5 hours.
An “elevator speech.” Can you explain your project to someone who gets on your elevator and gets off a few floors later? If not, then you had better figure out how to do it.

Raise Money. OK, this is always the tough part, although we have seen that there has never been more money available than in the present (2000). Find the dollars. Where, you ask?

Use your own. If you got it, use it. Entrepreneurs have been known to mortgage their house and max out their credit cards. Your own money is the cheapest money that you can get.
Friends and Family: There are people who believe in you. The downside: if you fail you still have to live with them. The upside: if you succeed, then they will share your success.
Angel investors: you will often encounter private individuals who are savvy investors and like to invest in very new start-ups. They are rarely angels. They are motivated by both the profit motive and the fun of doing something new, and they also usually fully understand the risk. That may not be true of friends and family.
Government: Careful here. The government is often a good source of funds to new start-ups in the technology areas. SBIR’s and other government programs can provide the seed funding for research and development. State governments will often invest in technology start-ups in their states. The danger is that you get the government along with the funding. Be sure that the extra hassle is worth the funding. Also be sure that the business plan leads to products and revenues. Too many SBIR funded projects end up as “hobby businesses” or “lifestyle businesses” that remain dependent on government funding and do not make it into the commercial market place.
Bootstrap: Can you start selling product for later delivery? The old cartoon character Wimpy always used to say “I’ll gladly pay you Tuesday for a hamburger today.” In some businesses including software and consulting, this can be possible. “I’ll gladly deliver a software product to you Tuesday for a few dollars today.” If you can start like this and stay ahead of the cash flow it can be a great way to grow. It can also be a tough way. You may find yourself constantly strapped for funds and not able to do the development, marketing, or other tasks that are required to grow. Eventually you will need more funding.
Venture Capital: You rarely start with the venture capitalists, but in the heady days of 1999 and 2000 this was an often-used strategy even in the early stages. In 1999, the VC’s were funding B2C dot.coms. In early 2000 they decided that B2B was the way to go. By the middle of the year it was networking infrastructure. The motto became: “We will make money selling Levi’s and shovels to gold miners. We will not make money mining gold.” Remember that the earlier that you go to a VC, the tougher the terms you are likely to receive. The later you go, the more of the company that you may be able to keep. The latter assumes that you go with a successful growing business. If you are desperate for funding, then the terms are always tough.

Now make it happen! Do it! Execute! Time is of the essence for many reasons. Money has time value and will not hang around waiting for success. Getting to market first is a clear advantage, but staying ahead is a continuous process. The vaunted “first mover advantage” can be useful, but as we have seen it is not nearly enough. The best way to keep a lead is to continuously innovate and improve your product and services. Don’t let a competitor make your company obsolete. You do it yourself. You may wish to defend yourself with patents or copyrights. These can be useful, but don’t over rely on them. A patent is just a ticket to court and is only as good as your ability and resources to defend it. Build the team as you grow. You have to be willing to move additional talent in and even step aside. Achieving your ultimate goals may very well depend on that.
Repeat steps 7 and 8 above as often as required. Funding comes in rounds. There is early stage, middle stage, late stage, and mezzanine rounds. There is no set number of rounds, just a need for financing to do what you need to do.
Execute your exit strategy. If that is going public then make it happen. If it is a long career followed by retirement, plan for that too. It may be to be acquired. Just enjoy it.

ILINC LearnLinc Corporation

The founding, growth and eventual acquisition of the ILINC Corporation is a typical small example of technological entrepreneurship. ILINC was founded in 1993 by a professor (the author) and two students at Rensselaer Polytechnic Institute. Later the name was changed to LearnLinc to match the name of its popular product and eventually LearnLinc entered a triple merger in early 2000 with Gilat Communications and Allen Communications to form the Mentergy Corporation.

It all began with an idea, and that idea eventually became a research project. In the late 80’s and early 90’s, Wilson and his scientific colleagues were working on the application of computing and communication technologies to science and engineering education. After producing several multimedia projects, Wilson turned his attention to the management of large quantities of educational materials on networks. The early focus was on the modularization of materials and the ability to store and retrieve those modules in an object oriented fashion.

Wilson had served as an IBM Consulting Scholar and was a frequent speaker at conferences on multimedia on networks. At one point he was invited to present his vision of the future of networked multimedia education to a group of executives that included several key executives from AT&T. That speech led to an invitation to Bell Laboratories to discuss potential cooperation and to present his vision to a broader and more technical audience.

Apparently the speech was a great hit with the audience, because Wilson was asked to create a prototype of the vision in partial collaboration with scientists from Bell Laboratories. The negotiation of the contract for this work took longer than most since Wilson felt he had a significant interest in the pre-existing intellectual property and also wanted to maintain the rights to derivative work from the earlier work. Eventually an agreement was reached which granted rights to AT&T for all software created newly for this project, but protected the earlier work and allowed further developments based upon it. The contract was written as a contract with deliverables and due dates rather than as a ”best efforts” grant. The contract and deliverables caused several faculty to decline to participate because of the difficulty of working under the pressure of deadlines in an academic environment. Never the less, Wilson and Rensselaer entered the contract with AT&T and began work on the project. The resulting prototype would allow distant learning on networks by using ISDN video conferencing and by using the same ISDN lines to network the distant learning sites. Wilson and his team of students and staff also managed to make several of the multimedia projects work in this environment.

Wilson was pressed into service for presentation after presentation to AT&T executives, engineers, and customers over the next few months. At the same time, the Bell laboratory engineers began to port the code into potential AT&T products including the WorldWorx project.

No technical person is ever satisfied with the first version of any software product and Wilson was no exception. So much had happened in computing and communications over the course of the project and the ensuing months, that Wilson became convinced that it needed to be done quite differently to take advantage in the advances in object communication and multicasting just to name two items. He went back to his colleagues at AT&T and proposed that they start all over from scratch to create a different kind of prototype that would take advantage of all the new things. He was easily able to get the technical staff at Bell labs excited. They could see exactly what he was talking about, but the proposal went absolutely nowhere with the business units. They wanted to focus on getting out product and they had what they needed in their opinion. The Rensselaer and Bell Laboratories technical staffs commiserated and schemed, but no further options presented themselves and Wilson moved on into other projects while nursing the mental design forward - adding new features with each advance in computing.

One of the other projects in Wilson’s laboratory, The Design and Manufacturing Learning Environment, had a bright young graduate student working on it and he became fascinated with Wilson’s plan for a network of educational objects all communicating across the internet and distributing voice, video, and data to every site. Degerhan Usluel had been and undergraduate electrical engineering student who decided to come back for an MBA in entrepreneurship. As a student he had already founded one computing company that he turned over to his father to come back to school. Young, brilliant, naïve, and fearless, Degerhan was the ideal person for discussions about the future of collaboration on networks. One day, Degerhan showed up in Wilson’s office to announce that he was beginning to plan for his upcoming graduation and that he wanted to share that plan with Wilson. He explained that he did not want to go to work for a large company and that he wanted to start a business in software and the wanted to do that in collaboration with Wilson. Moreover he had recruited one of his classmates, Mark Bernstein to join him in the venture. Mark had been a “Top Gun” salesperson for Computer Associates prior to joining some friends in a start up computer disaster recovery firm called CPR. The firm had been a reasonable success and Mark’s sales skills were certainly a factor.

After discussing several different possibilities, Wilson pulled out a file that he had been keeping with the details of the design for a distributed learning environment that would run on the internet and utilize communicating objects on students and faculty machines in a peer – to peer architecture. Wilson also pointed out that they could use multicasting to distribute the video and audio while using that and agent technology to manage the bandwidth on the network and keep it from getting out of hand as more and more sites were added. He did not point out to Usluel that no one had really been able to make multicasting work reliably and that most of the Internet did not support it anyway. He was confident (foolishly) that these were all solvable problems.

Thus ended the opportunity recognition portion of the formation of LearnLinc. The team building portion began immediately thereafter. Usluel, Bernstein, and Wilson vowed to start a company and began meeting regularly in the Wilson basement and sunroom. Usluel’s assignment was to build the software from scratch. Bernstein took the lead in the opportunity evaluation phase as he looked at the market and identified competitors and potential competitors. Fortunately, there were no actual competitors using the technology they envisioned! Wilson served as president and mentor while Usluel became vice-president for Technology and Bernstein became Vice President for Sales, Marketing, and Business Development. Wilson began serving as a part time President and full time Chairman of the Board using his 20% consulting time from Rensselaer, his weekends, his evenings, and his holidays. It was agreed upon up front that at the end of 1-1.5 years, he would either quit Rensselaer and join ILINC LearnLinc or step down as President and CEO, recruit a replacement and serve on the board. The decision would be a joint decision of the Founders.

Deciding what their exit strategy would be was one of the easiest tasks that they had to accomplish. It took about ten minutes to decide that all three founders wanted to create a successful public company, that would define an new category of software and change the world. If only the other tasks were as easy. Now they had to create a prototype, develop the pitch, and raise the money.

The prototype was created out of bits and pieces of Wilson’s work augmented by some new materials prepared by both Wilson and Usluel. Bernstein worked on the pitch with lots of kibitzing from Wilson and Usluel.

Funding was a tougher problem. After discussion with a number of other successful entrepreneurs, such as William Mow, founder of Bugle boy industries and Mike Marvin, co-founder and Chairman of MapInfo corporation, industry executives (especially from GE and IBM), and with lots of encouragement from Mark Rice, then Assistant Professor and Director of the Center for Technological Entrepreneurship, the founders decided to try to fund the company by bootstrapping the company through the sales of software for future delivery. With Wilson’s contacts and Bernstein’s passion and sales experience, they felt that they had a chance to do this without having to go to venture capitalists at an early stage. Wiser and more experienced executives counseled them on the futility of this approach, but they decided to give it a try anyway.

Bernstein’s passion and Wilson’s persistence carried the day. They obtained enough contracts for future delivery of software to fund the company in the early days of growth.

They were now to step eight above. They had to do it. For that they turned to Usluel, because he had to build the product that Wilson envisioned and Bernstein promised. And he did.

When the software was delivered, it managed to satisfy all but one of the early customers and eventually even that customer grudgingly conceded that ILINC LearnLinc had delivered what they had promised, if not quite exactly what the company wanted.

ILINC then entered a rapid growth phase with very little working capital, depending upon cash flow to finance the each new step. When the monthly “burn rate” (the amount of cash spent each month) reached about $100,000 per month, the founders decided that it was finally time to visit the venture capitalists. Because the company had no track record, the founders were financing the shortfalls in the cash flow with bridge loans against receivables, but these had to be personally guaranteed by the founders. Signing monthly personal guarantees of $40,000 or so began to make them all a bit nervous, because none of them had the income to really handle this and only Wilson had any assets!

They went to a local venture capital firm called Exponential Investors who helped to arrange several hundred thousand dollars of financing in cooperation with some New York State business development funds. It was also time for Wilson to decide. His partners encouraged him to come in full time, but he decided that it would be better to go back to Rensselaer and recruit a more experienced CEO for the company. He felt that he would be able to continue to help with the vision and direction, but that the company would benefit from someone with past experience in creating new ventures. A new CEO was recruited who had just completed another start-up that had been acquired.

The next few years saw ILINC grow substantially, if not painlessly and two more rounds of financing brought investments from GeoCapital Investors and the Intel Corporation. As we noted above steps 7 and 8 were repeated several times as ILINC released new versions of LearnLinc and arranged new rounds of financing.

By the summer of 1999, the founders felt that it was time for LearnLinc to go public raise much more funding and grow substantially. By this time, Usluel had become the President and CEO. They decided to hire an investment banker and meet with a selection of other entrepreneurs to decide how to best go forward. They identified three potential paths:

· Do an IPO.

· Get acquired by a complementary company

· Enter a partnership with (and receive an investment from) a complementary company that would build upon their joint strengths and allow them to grow faster.

From the beginning the group leaned toward some kind of business alliance or acquisition. Although the excitement and financial reward of the IPO was attractive, they felt that the glory might be short lived. They felt that LearnLinc needed a much larger sales force and needed to be much larger financially to crack the very large enterprise accounts that could allow them to reach the next phase. Although they had sold to IBM, AT&T, Lucent, MCI, Computer Associates, Aetna, United Health Care, Boeing, Flight Safety, and many other large accounts, these tended to top out at less than million dollar accounts. In order to grow and dominate the market, they needed to be able to crack that barrier. An IPO could bring them the funds necessary to grow, but it would take time and management attention to hire the people and create the systems needed to handle the growth.

The company’s advisors suggested that an IPO would likely value the company at $100 million to $200 million. Perhaps it could be more, but that would depend upon timing and market excitement. They also suggested that an acquisition would probably only bring about $50 million, but that the acquisition might leave the company better positioned to grow over the coming years. Given the anticipated lock-up periods for founders stock, the founders tried to evaluate the options, as they would look one year into the future, rather than at the transaction date.

Eventually they decided to agree to be acquired by Gilat Communications and the deal closed on February 29, 2000. Gilat paid 1.5 million shares (gross before commissions) for LearnLinc. On February 29, Gilat closed at $35 per share making the value of the deal $ 52.5 million at closing.

During the same period, Gilat acquired Allen Communications from the Times Mirror group for $23 million in cash. Over the next six months the three companies were blended into one company now know as Mentergy. The companies had a complementary set of strengths. LearnLinc was the market leader in live-on-line eLearning. Allen Communications had an impressive established customer base, a large skilled sales force and specialized in web and CD-ROM based CBT. Gilat brought expertise in satellite communications and interactive learning over satellites. The plan was to create a blended learning approach that was “technology agnostic” and could provide the best eLearning solutions for a variety of different learning needs. The target market continued to be corporations and corporate training.

In hindsight, there would be many things that I might do differently if I had to do them over again, but I hope that the reader can see how we were thinking as we made each decision.

Yahoo

In the section on the Players of eBusiness, we told the story of what could happen when two electrical engineering students tried to find a diversion from their studies. That was how David Filo and Jerry Yang came to create Yahoo in 1994 at Stanford University. At first Yahoo was more of a database than a search engine, but as the database grew searching became a more and more important feature.

In the early days of the Internet many programs spread through “word of mouth” or perhaps more properly put: “word of email.” The group of Internet users was still comparatively small, technically astute, and in constant communication with one another. This kind of spread came to be known as “viral marketing,” and many later companies tried to use this to market their own products. In general this seems to work best for category creating new software products that make a significant change in the way people live or do their work. Yahoo was certainly such a product. Of course, this meant that the prototype was already in existence prior to the move into the creation of the venture.

Whether the name came from the acronym "Yet Another Hierarchical Officious Oracle" or from Filo and Yang’s own self-image, the name was a great marketing tool in its own right. Easy to remember, a bit edgy, and short to type, Yahoo became nearly synonymous with finding things on the Internet. This does not mean to slight the contributions of search tools like AltaVista, which was both highly regarded in technical circles and used by Yahoo in the early days, but no name stuck with the public like Yahoo!

Jerry Opportunity recognition for the founders of Yahoo was more serendipitous than many new ventures. Filo and Yang were more interested in the problem than they were interested in creating a new venture. In that sense one might say that the founding of Yahoo was less intentional than many foundings. The formation of the initial team was also serendipitous and dependent upon the chance overlapping interests of two students, but that seems to be far more common in start-ups. The expansion of the team to include Marc Andreessen as a mentor and the move to Netscape was a critical step for team building, opportunity evaluation, and fundraising.

The next critical step in team building was when they managed to recruit Timothy Koogle, whose experience and manner brought credibility to the team as it entered the business-building phase.

Yang and Filo had some hard decisions to make in the early years of Yahoo. The good news was that the site was well known and popular. The down side of that was that they were the target of both buyout offers and competitive attacks. Both America ON-Line and Netscape made serious offers to the two to try to acquire them, but they decided to go it alone. The offers would have made them richer than they had ever imagined, but they were driven by a vision and not terribly motivated by the financial aspects at that point. The rejected an offer of $3,000,000 each in Netscape stock which quickly escalated to 12 million and kept on rising.[1] They had no regrets.

Instead, they obtained $1,000,000 in funding from Mike Moritz at Sequoia Capital and continued on the path to an IPO.

With a market capitalization of $120 billion at the beginning of 2000, Yahoo has become perhaps the most successful of all the new eBusiness ventures. Even the precipitous drop of their stock over the first half of the year by over 50% does not change that. Yang and Filo had each about 17% of the stock prior to the IPO.