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Building Internet Camelot

Successful entrepreneurs love to talk about their companies. Pick their brains for ideas about your company.

Want the shortcut? See E-business 101: the basic steps.

The rage of the late ’90s was for young, enterprising types to quit their day jobs and start their own businesses at the forefront of the Internet revolution. Venture money was relatively easy to get, and entrepreneurs didn’t need to be particularly business-savvy to get it. All they needed was a cool concept, plenty of tech know-how, and a bit of charisma and away they went.

That was then, this is now. The Internet revolution was over almost before it started. Wide-eyed entrepreneurs who sank three years of their lives and their personal savings battling for brain share now stumble off the battleground bleary-eyed, in full retreat to their day jobs. But those who realized early on that market share is more powerful than brain share and margins are the most accurate arrows in their quivers have found the courage to fight on. And the survivors have shown their investors that they have the mettle to succeed.

Still others are taking this reality check as a challenge and are starting Internet businesses without the naiveté of the Internet glory years. These folks are inspired by their concepts and are determined to succeed despite tighter venture financing and smaller margins for error.

Do you have what it takes to start an Internet business? Nowadays, starting an Internet business isn’t as easy as putting up a Web site and waiting for the dollars to roll in. It takes a quest of Arthurian proportions, an understanding of the dangers that lurk between you and your goal, a cast of noble knights willing to follow you wherever your quest takes you, and a business culture not unlike the Round Table, where each collaborator has a say in how the quest will be realized.

The quest

Austin, Texas-based Questlin provides a comprehensive resource to design engineers looking to research, compare, and buy materials and components. CEO and co-founder Mike Schultz got his idea after being in the electronic-component marketplace in one way or another for more than 30 years.

“The marketplace that we’re in is one that I’m intimately familiar with,” he says. And because of that familiarity, he was able to see a need that nobody else saw–providing the design engineer with easier access to information on electronics components.

“I think that with any Internet start-up, you need to find areas of specific need,” he says. “In our case, it turns out that the most important part of the process for any manufacturing company is getting to the design engineer, and helping that design engineer make a decision that is favorable to the supplier and the manufacturer.”

But Schultz realized that design engineers don’t want to be influenced. “They hate negotiation,” he says. “They don’t like sales pitches. So here’s this community of people who don’t want to be sold to, and don’t want to have a human interface to the extent that they can avoid it, but who requires substantial amounts of information to make quality decisions.” Schultz’s realization that this market existed was the first step, and creating an online marketplace that served their specific needs was the key to success.

Merlin’s magical mystery tour

Once you internalize the concept and feel the quest in your bones, the next step is to get others to believe in it. This is part sales, part charisma, and part evangelism. And it doesn’t hurt to have a powerful Internet wizard (otherwise known as an angel investor) influencing mind and market share.

Diana Jovin, co-founder and CEO of CascadeWorks, a services e-procurement provider based in San Francisco, says that commitment is crucial in launching an Internet company. “You have to believe in your concept,” she says. “But although you believe in your concept, you also have to make others believe in it. That’s what we did the first couple months,” adds Jovin. “We went out and talked to prospective customers, prospective partners, and prospective competitors. We focused our first year primarily on getting customer feedback and building the product.”

In her market-research phase, Jovin gained a lot of valuable allies that eventually helped to make her company the success it is today. Although the first calls Jovin and her co-founder made were based on previous connections, they also found more than 30 companies willing to talk just through cold-calling.

The value of talking to potential customers even before you have a product is enormous. You may not have anything to sell them just yet, but Jovin says that “a lot of them contributed quite a bit to our product development effort.” The final result is a product that was created based on customer feedback, not just on one person’s vision. And of course, a lot of those companies that participated in market research went on to become not only customers, but evangelists for CascadeWorks as well.

Finding your knights

So you’ve got a killer concept and some momentum in the market. You’ve attained some seed money to go forth and find collaborators who can complement your skill set and form a competent team. How do you put the team together?

The first step is to find people you’re familiar with–and who believe in your concept–and get them to commit to being part of the core collaboration team. Typically this team comprises four or five like-minded people who ultimately end up with a ‘C’ and an ‘O’ in their titles, should the company succeed. “The most important thing is the founding team,” says Jovin. “It’s very difficult to found a company as an individual.” This founding team will fill in the gaps where you may fall short. “All of you are going to be wearing a lot of hats initially,” she says. “So if you have an entrepreneur who has a great idea and some technology that can do some really cool stuff, then the right partner is going to be someone who can help that entrepreneur get to market and make those connections.”

In the beginning, with just seed money and headquarters in a home office or low-rent temporary space, the knights will have to bear the brunt of the battle. But once you are in a position for the first round of venture financing and you have a space that reflects your round-table culture, the next step is to get some foot soldiers who can execute your concept while the core group focuses on strategy and evangelism.

Getting the right men-at-arms is just as important as assembling your knights. The job market is tight, and if you don’t have a track record, it may be hard to find good people. In the aftermath of the dot-com swoon, people are a little more hesitant about going to work for a start-up. “A lot of people coming out of that environment are looking for more stability in the company,” says Jovin. “People are doing a lot more due diligence on the companies they’re looking to go to.”

Something as mundane as staffing will have a big impact on the success or failure of your company, especially if your success hinges on intellectual property. Once you do manage to find qualified staff, you’ll be hard-pressed to keep them happy, keep them out of the clutches of the competition, and prevent them from taking your ideas and going into business for themselves.

You won’t find your workforce by putting an ad in the classifieds. Some of the more effective methods include posting opportunities in online job boards like Dice.com, listing jobs on your own Web site, and attending recruiting fairs. Another way to get solid help (although it’s a little devious, and you hope nobody does it to you) is to raid competitors. But regardless of where you find them, you have to exercise caution.

“Be very careful in the way you approach hiring people,” Schultz warns. “Be sure you’re hiring people who really want to be with your company because your company has value, and they believe in that value. Otherwise, you’re hiring mercenaries who are only in it for the money. Somewhere around 11 o’clock at night on a really tough day, the mercenary just stops working. The people who believe in the value and believe they’re doing something worthwhile stay.”

Making use of college interns can also be an excellent way to get good people. In the old days, interns worked for free or for a low, token wage in order to gain experience. In the modern high-tech economy, this is no longer the case. Granted, you won’t have to pay them as much as a seasoned engineer with 10 years of experience, but you’ll have to make a competitive offer.

The king’s coffers

There was a time, however brief, when putting dot-com after virtually anything would generate interest, and more than likely, some venture capital. That shining moment is gone, and in the big picture, it’s for the best. Contrary to some claims, there has been no crash of the dot-com economy. There has, however, been a leveling out, as venture capitalists and financiers have come to realize that there are, in fact, some dot-coms that will never make any money and are not worth funding. The result of this Darwinian realization is that only the best dot-coms will get funding, and consequently, the survival rate of the average dot-com will increase.

If you have a great idea for a new Internet business, the new new economy bodes well for you–but beware, for you must have your path clearly before you. The dot-com sector has become more professional, and expectations are higher than ever.

“People are only giving money to people who have done this before,” says Mike Davies, COO of San Francisco-based start-up Verb. During the Internet bubble, that manic time of loose money and fast profits (or losses, as was more often the case), any 20-something with an idea for the next Yahoo! could start a company, but this is no longer true.

If you have the greatest concept since Excalibur, but don’t have the money, track record, or connections to make it work, don’t give up. You can look for partners that have all those things, advised Jovin. “Look for what you’re missing, and then look at what skill sets you need to have on the team to cover as much breadth as possible.”

Successful entrepreneurs love to talk about themselves and their companies, and are often more than willing to spend an hour or so chatting about their experience. Learn how to schmooze. Seek them out, get them talking, and the lessons you learn will be extremely valuable. If they like your concept, they may even make some introductions for you.

Venture capital is only one of several ways to get funding for your company, and there is both an upside and a downside. A VC will want to take a substantial equity stake in your company, and will want an exit strategy that allows it to take its profit and walk away after two or three years.

You’ve got to get people who believe in what you’re doing, says Questlink’s Schultz. You have to have a compelling story. Questlink began its funding cycle with an angel, an investor typically in the same industry with a strong interest in helping the company succeed.

“As we began to build this, and it became obvious that we had something that was worthwhile, we brought in venture-capital folks. Convincing a VC to fork over three to five million bucks is not an easy task,” says Schultz. “You have to convince them that you have all the right ingredients. The first is a marketplace that’s large enough where you can be successful and return a substantial reward to your investors. The second thing is a management team who either is steeped in capability, usually technical, or has the depth of experience to execute in this marketplace. The third thing is the right idea that will work. It has to be something you can make money at.”

You are unlikely to get anywhere by writing a business plan and mailing it out to 100 venture capitalists. Almost all venture deals are made through a personal connection–so learn how to schmooze and start talking it up.

Making Camelot

The people who gain profit most consistently in Silicon Valley are landlords, and if you need 10,000 square feet in downtown San Jose, be prepared to pay big money. But Silicon Valley isn’t the only place to start an Internet company.

Alan Warms, founder and CEO of Chicago-based Participate.com, provider of online community management services, says launching a dot-com in the industrial Midwest is no more challenging than launching one in Silicon Valley, and there are advantages. Real estate is cheaper, and being in the center of the country provides easy access to either coast. “Chicago is still the distribution hub of the United States, and considering how much business my firm does today on the East and West Coasts, there’s no better place to be located.”

Wherever you decide to sink your roots, be creative when it comes to site selection and interior design. Your business culture is determined as much by your office’s style and feng shui (the art of arranging work areas to engender optimum energy) as it is by the unique characters who live in this business habitat.

The holy grail-profits

It has happened (in fact, it has happened many times) that a new dot-com with a great idea received several million dollars in funding, operated for a year without producing a viable product or earning a single nickel, burned through the money, and then returned to the same venture capitalist for more. Incredibly, the venture capitalist provided it.

This is not going to happen to you.

The venture capitalist, your bank, your employees, your spouse and children, and everyone else concerned wants you to make money, and make it quick. If you are self-funded, how long you last without turning a profit is dependent on how deep your pockets are. And regardless of where your money comes from, in today’s Internet economy, because of the scarcity of funds, you have to get traction very quickly, said Davies. You don’t have a whole lot of money to burn. Your efficiency has to increase quite a bit.

For this reason, many successful dot-coms set out to create multiple revenue streams. If you provide a service as an ASP, you may also license your technology for others to resell, or offer consulting. If you have a retail Web site, you may want to establish several affiliate marketing programs to earn a few commissions on the side. If you have a product you’re planning on selling to Fortune 1000 companies for $100,000 a seat, you may want to create a lite version for small businesses and peddle it for $29.95 while you’re waiting for General Motors to come calling.

In simple terms, it’s “not keeping all your eggs in one basket,” Schultz says. He compares it to growing asparagus. “You get two or three cuttings off an asparagus plant. With corn, you get one. We’re in the asparagus business; we have lots of cuttings.”

E-business 101: the basic steps

Create a business plan. Once you have your idea, you have to have a business plan–not only to show potential investors, but also to use as a blueprint as you move forward, although it may change dozens of times.

Make a prototype. Before you approach anybody to ask for money, you have to have something to show them. If your business revolves around a Web site, create a working prototype of the site. If it’s a product, have at least a demo version that shows what it can do.

Get funding. This may mean getting $5 million from a VC, mortgaging your home, or just taking a few thousand out of savings to bootstrap your baby dot-com into existence.

Promote your company. This is where public relations and marketing come in. Once you have launched your dot-com, you have to make others aware of it, through news releases, interviews, and advertisements.

Make money. This obviously is the most important part of the whole process. Establishing multiple revenue streams–or to put it more informally, not keeping all your eggs in one basket–will help this step get under way quicker.

Exit. A serial entrepreneur is someone who starts a company, takes it to a certain level and then moves on to the next challenge. If, like most entrepreneurs, your forté is start-up and early operations, you’ll get bored once your company has become established. Here’s where you let Microsoft buy you for $50 million or so. And in fact, it takes a different sort of person to run an established company than it does to run a start-up, and the time to move on to bigger and better things may come sooner than you think.

Dan Blacharski writes about e-commerce and technology from Santa Cruz, Calif.

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