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The Living Legacies of Shuttered Startups

By Steve Hamm

How smoothly this handoff goes will determine whether a generation of innovation is put to good use or consigned to history. Plenty can go wrong, and the tech industry is infamous for bungling acquisitions. Technologies clash. Executives lose focus and screw up business basics. Or the best brains from the acquired companies get frustrated with the new bureaucracy and run, screaming -- the way Netscape Communications engineers fled en masse after the company's 1998 acquisition by AOL. Sometimes the handoff works like magic. Software maker BEA Systems, for instance, paid just $240 million in 1998 for WebLogic, a leader in the nascent market for Web application server software. By now, the software has become a mainstay of Internet computing in corporations, and WebLogic-related sales accounted for about 70% of BEA's $934 million in revenues last year.

With examples like that to inspire them, savvy buyers are shopping for companies that can boost their revenues or plug holes in their offerings. Documentum, the leader in document-management software, is one example. In the last year, it snapped up three companies for less than $10 million each, before splurging, for $125 million, on eRoom Technology and its Internet-based employee-collaboration technologies. "We take pieces funded by tens of millions of dollars of venture-capital money, pick them up much more cheaply, and get their products into the mainstream much faster than they would have gone otherwise," says Robert M. Tarkoff, Documentum's chief strategy officer.

TAKE MY COMPANY, PLEASE! Plenty of entrepreneurs are grateful to be bought out, given the hostile environment. Andrew Parkinson, co-founder and now CFO of online grocery-delivery pioneer Peapod, points out that despite the high-profile failure of online grocer Webvan, Peapod is thriving under the wing of grocery giant Royal Ahold, which bought it in mid-2001. And the parent company's current accounting difficulties don't seem likely to change that. By plugging into Ahold's Stop & Shop and Giant chains, Peapod gains price advantages and plenty of promotion. Peapod's sales expanded 20% last year, to approximately $150 million, in an industry that grew just 3%. "We're working with a retail partner, and we're making money," says Parkinson.

Selling out to the giants seems to be the way for startups to go -- at least until the initial-public-offering market picks up again. After a record 176 tech-industry IPOs in 1999 and 107 in 2000, there were only five last year. This year isn't shaping up to be any better. For now, the best hope for many entrepreneurs is to position themselves as research and development labs for the giants. They can cook up their technology in pre-IPO obscurity, prove that it works, and then sell out to an acquirer with the wherewithal to turn their dreams into businesses.

Here's a sampling of some hot innovations from the Internet Era now being recycled into other companies:

NAPSTER: Co-founder Sean Parker is applying the music-swapping site's peer-to-peer technologies to automatically update electronic Rolodexes as changes occur. His new company, Plaxo, taps into Microsoft's popular Outlook program.

PYRA: Web search leader Google just bought the troubled startup, whose hosts 200,000 Weblogs, personal Web sites where people share insights and Web links with all comers. It beefs up Google's information storehouse.

FIREFLY NETWORK: Its collaborative filtering concept, which uses a rating system to match people with things they're likely to be interested in, is being used by online movie rental pioneer Netflix to keep its 1 million subscribers coming back for more.

LIQUID AUDIO: Anderson Merchandisers, a major distributor of music CDs, bought some of the assets of this digital-music pioneer. It could help create profitable online music distribution.

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