When employees of Nets Inc. in Cambridge, Mass., and Pittsburgh were summoned to a meeting on May 9, they knew the news couldn't be good. Nets had been on the edge for months and layoffs were likely. But there also had been rumors that a financial savior, possibly from Malaysia, was near. Just days earlier, managers had assured workers that Chief Executive Jim P. Manzi "wouldn't let the company go bankrupt with his name on it," as one recalled.
Yet Manzi, talking from his home in Chestnut Hill, Mass., told employees gathered around speakerphones that it was "the worst day of my life." Nets, he announced, had filed for Chapter 11 bankruptcy protection. Despite his best efforts, including lending at least $1 million of his own money to keep Nets going in the previous few weeks, Manzi hadn't been able to land new investors.
It was a devastating crash landing. In January, 1996, when he took over at what was then called Industry.Net, Manzi boasted of building an entirely new electronic marketplace where buyers and sellers of industrial parts--from fasteners to turbines--could hook up through computer networks. Last June, when he merged his little company with AT&T's New Media Services, an online information provider, Manzi spoke of networks that would lower the cost of commerce for professions such as law and medicine. Nets was out to blanket the globe, collecting a commission on every transaction on its network.
But from the start, Manzi's reach exceeded his grasp. In bidding to lead the new market for electronic commerce, say insiders, customers, competitors, and analysts, he erected a much more expensive enterprise than Nets could support. He moved Nets' headquarters from Pittsburgh into tony Cambridge offices and hired high-priced executives from Lotus Development Corp., the software company he ran for nine years before selling out to IBM in 1995. He also spent heavily to develop the complex software required to realize his technological vision. "Jim wasn't going to do this as a small-time play," says one Nets executive. "He was swinging for the fence."
By the end, 5,000 subscribers a week were joining the online exchange, according to Nets. But most registered for free, and the big suppliers, which Nets had hoped would pay up to $200,000 per year to sell their wares online, never logged on. Investors were scared off by the lack of big customers as well as by the E-commerce efforts of giants such as General Electric Co. and IBM. Nets' monthly revenue fell from around $1 million when Manzi took over to $100,000 recently, according to insiders. (The company won't disclose financial results.)
FINANCING FLOP. Manzi declined to be interviewed. But employees say that at the core of the company's many problems lay a cultural tug-of-war between the free-spending, outspoken Manzi and Nets' flinty founder, Donald Jones. Homespun and well-connected to old-line industrial companies, Jones ran a tight-knit company, and was commonly found smoking on the loading dock with his workers. He also owned 32% of Nets' stock.
Jones hired Manzi to take over, hoping his connections would bring in long-needed financing. But on Mar. 29, three days after Manzi opened the Cambridge offices, Jones suffered a severe heart attack. During his months of recovery at the Cleveland Clinic, Manzi shifted the core operations from Pittsburgh to Cambridge, hiring 60 new engineers. Jones declined to talk to BUSINESS WEEK.
Manzi had his own ideas about funding. He nixed plans for a public offering and retained Goldman Sachs to arrange a private placement--which never happened. Insiders say that later in the spring, Manzi approached Cahners Publishing with an offer to sell a third of Nets for $175 million. Cahners didn't bite. Then, in July, he completed the AT&T New Media Services deal. From the outside, it looked like a coup: The new company was allowed to use AT&T's brand name along with its business network, which Manzi figured he could use to draw business to Nets. In return, he gave AT&T about 18% of Nets' stock.
Sources familiar with the deal say New Media Services was barely breaking even. But with the AT&T unit under his wing, Manzi began shutting down what he viewed as the low-tech side of the business: regional newsletters and parts catalogs on diskettes. Insiders claim the discontinued businesses were generating cash while electronic commerce was not. "Most of our leads were coming from the printed publications," says one. "Most of the industrial users were low-tech."
STARTLING RETREAT. Nets' cash flow began to dwindle. By January, it was clear to some insiders that Manzi's strategy was faltering. AT&T Business Network, essentially a Web site that collected business news, wasn't attracting many customers. But it was eating up at least $5 million a year in costs. In late January, Manzi pulled the plug on that business. He also announced a startling retreat: Instead of trading billions of dollars worth of industrial goods, he said Nets would focus on connecting customers and suppliers in such prosaic business services as maintenance.
At the time, the company was burning cash at a rate of $1 million a month, and Manzi and his team still were struggling to sign up customers. Nets retained Lazard Frres to sell a third of the company for $55 million--30% of what Manzi had sought a year before. By April, the asking price was $52 million for 40%. Jones and two associates resigned from the board on Apr. 9.
By May, Nets' money had run out. Supporters say Manzi by then was working around the clock to find new capital, in addition to fronting the company $500,000 a week for two weeks in late April. "He's an unbelievable fighter," says one Nets executive. On May 9, though, Manzi sent an electronic concession of defeat to employees. But, he assured them, "I believe in our vision and that this is one of the major business opportunities for the next decade."
Manzi's supporters say he simply underestimated the task of building an electronic commerce system on the scale he envisioned for Nets. "This is the kind of thing that happens when a company tries to break new ground," says Michael Porter, a Harvard business school professor who sits on the Nets board. "The odds here were always on the thin side." Manzi's outsize ambition, though, did little to improve those odds.