Dot-Com Survivors Rediscover Business 101
Excess, hype, and getting rich quick are out. Efficiency, hard work, and the long haul are in. Now that VCs with buckets of cash have disappeared, small, young companies must get their money by actually earning it. Suddenly, the venerable path to success -- getting customers, building credibility, generating revenue -- once again represents standard operating procedure. As for those who've been toughing it out all along, they have little sympathy for the poor little rich companies that just couldn't make the grade.
"Small, scrappy, organically grown companies are coming back into their own," says Nathan Clement, chief operating officer of LatPro.com, an employment site for Latin professionals that fits neatly into that category.
Clement and LatPro founder Eric Shannon were working together at another company when they wrote their business plan. In 1997, Shannon took a few thousand dollars in savings, moved to Guatemala, where expenses were low, and started the company. For two years, he was the sole employee while his wife's job supported the business. By 1999, when she joined the company, it was just starting to turn a profit, Clement says.
THOSE DARN ADS.
Early last year, LatPro, now relocated to Plantation, Fla., got $1 million from an angel investor in Miami. The money was needed to survive against newborn competitors that were raising huge amounts of capital -- $26 million in one case -- almost overnight. "It was their advertising that we had to compete against," says Clement. "It was easy for them to aggressively expand with that kind of money."
Those sort of ads also got under the skin of Paul Cooper, the founder of Perceptual Robotics Inc. in Chicago, which develops and markets Internet video software. "At the peak of the hype, there was buying and selling of dreams," he says, adding: "A legitimate provider can get lost in the noise." And in the cash. Competitors with as much as $40 million in seed money were paying customers to sign on in the mistaken belief that it would build their brands. In the end, many simply couldn't deliver the goods.
Cooper, who started his company in 1996 with a few thousand dollars from friends and relatives, was its only worker for six months. After landing his first customer, Microsoft, he invested in a new computer and hired his first employee. Eventually, he picked up half a million dollars from angel investors and an Illinois State matching-grant program. More than once -- as Cooper recalls with a relieved "Thank God!" -- a customer's payment came in on the same day that the payroll was due.
By 1999, Perceptual Robotics was established as a multimillion-dollar company with high-end customers. That's when it got about $16 million from Motorola and Divine interVentures, a Chicago incubator. Although Perceptual Robotics is still in the red, it has plenty of money in the bank which Cooper says will allow for expansion in step with a growing customer base. "We started with expectations of building a company for the long term," he explains, "and today's climate is a reinforcement of our core values."
The return to basics is squeezing out the "subsidized competition" that has pervaded the Internet for a couple of years, notes Clement. "There were so many companies with millions of dollars to spend that it was difficult to stay alive. There was so much money flowing around, it was like fog." Now that the haze has cleared, Clement is keeping his eye out for foundering rivals. LatPro recently received another $300,000 from its angel investor because "we believe there may soon be bargains out there."
"In the recent venture environment, it's the discipline that went away," says Richard Shapiro, managing partner at Crosspoint Venture Partners, a $1 billion-plus fund based in Silicon Valley. Companies that raise $100 million in the first round of funding tend to behave like lottery winners, he observes. "There tends to be a lot of waste," he says. "Today, identifying entrepreneurial talent that would have been fundable three years ago, before the bull market, is back in fashion."
Christina Bauer, president and CEO of Mindful Technologies in Newton, Mass., a year-old company that develops software for e-business customer service, has been seeking $2 million in venture capital. Late last year, the company got $500,000 through a Boston-based VC firm. If she doesn't get the rest from investors, she'll obtain it through sales, says Bauer, who is now generating revenues from her first customers.
TOO MUCH, TOO SOON.
"The fact that venture money is more scarce today can be better, because you have to focus on your customers earlier than you might have otherwise," says Bauer. "Raising venture capital has become a milestone, and it never was in the past. Making money, getting customers -- those were the milestones in the past, and then you used the VC money to expand," she says.
A small company can be a fragile thing, one that might easily collapse under the sheer weight of too much cash. "We would have loved getting a lot of money," says LatPro's Clement. "But I suspect, in retrospect, it would have destroyed the company. If you can give people money and they use it well, venture capital is a great model, but...it's very easy for people to be corrupted by it."
While the survivors have known it all along, trend-watchers are now taking note of the new golden rule: Deep pockets are out, bootstraps are in.
By Theresa Forsman in New York
Edited by Robin J. Phillips