Greg
I hate the term e-pinions.
http://www.nytimes.com/library/magazine/home/19990711mag-tech-startup.html
Instant Company
One new Internet idea, two enthusiastic venture capitalists,
six founders leaving behind millions at the jobs they quit, $8
million raised before a line of code was written, 12 -- count
'em -- 12 weeks. By PO BRONSON
hat were you doing 12 weeks ago?
Twelve weeks ago was Nirav Tolia's last day on a pretty enviable job.
He is 27, and in addition to managing the marketing of Yahoo!'s
E-commerce properties, he had represented the company on television
more than 100 times. Almost nobody leaves Yahoo!, but Nirav Tolia had
just heard a really interesting start-up idea from a friend, Naval Ravikant,
who had recently left @Home. It took Tolia about one day to decide,
and the following morning he resigned.
Soon after Tolia's last day at Yahoo! he and Ravikant were joined by
one of the highest ranking engineers at Netscape, Ramanathan Guha,
who was cooking up an idea very similar to Ravikant's on the back
burner of his big brain. By the end of the week, they were five strong.
Eleven weeks ago, despite not having a single line of code written or
even a paper sketch of the Web site they wanted to build, they got $8
million in seed financing from venture capitalists -- half from Benchmark
Capital, which had financed Ebay, and half from August Capital, where
Naval Ravikant was camping out as entrepreneur in residence. This gave
the start-up what is believed to be one of the highest seed-round
valuations ever.
Nine weeks ago, they brought on Lou
Montulli and Aleksander Totic, two of the
original six founding engineers of Netscape.
Eight weeks ago, they moved into a
second-floor gabled loft in Mountain View,
Calif., and began grinding out 15-hour
days, seven days a week -- but of course these guys had done that
before.
In a spring when it had started to seem to some Silicon Valley veterans
that all the big original ideas were gone, theirs was a lightning rod for
talent. The new director of business development, Dion Lim, began to cut
deals with other Web sites to import their data feeds. Seven weeks ago,
they started hiring category managers. Six weeks ago, it became clear to
Guha that enough of the original programming was already done, and he
could switch hats from coder to manager. Five weeks ago, their venture
capitalist from Benchmark, Bill Gurley, came by the office for his first
look-see. He was blown away: "This is, unequivocally, the fastest I have
ever seen a start-up move."
Four weeks ago, they began to cut distribution
deals; two weeks ago, they settled on their
marketing plan, and now, having reached a
critical mass of 31 people, they are set to launch
their Web site.
In 12 weeks, the amount of time it might take an
average person to decide what kind of hedge to
plant in the backyard, they built a company from
scratch. An instant company, or what is being called in Silicon Valley a
"second-generation Web company."
Not so long ago, it seemed incredible that a Web company could be
born in a mere two years. But rather than going back to normal, the pace
of creation in Silicon Valley now seems to be speeding up even more.
Any Web company that starts out today and takes two years to get up
and running is likely to be left in the dust.
In first-generation Internet companies, the founder and a few college
buddies moved into a garage that they decorated with Nerf guns and
green army men. In second-generation Internet companies, the staff
coalesces not from friendships but from respect for mutually
complementary skill sets. They skip the garage phase, engage two
real-estate brokers and make simultaneous bids on three office spaces,
hoping one comes through. They move in over the weekend and by
Monday have it decorated with Nerf guns and green army men.
In first-generation Internet companies, the staff resigned from monolithic
software corporations or took leave of business school or jumped ship
on brand-manager positions at Procter & Gamble. Nobody had Internet
experience; they learned by making mistakes, of which there were many.
The purpose of the Internet was unclear. Now, companies are being
formed by staff members who have years of know-how. And they see
the Internet, above all, as a place to buy things. Some $301 billion was
generated by the Internet economy in 1998, with an annual growth rate
over the past four years of 174 percent.
Because of the way high-tech employees are compensated, there are
likely to be a great number of second-generation start-ups in the next
year. The notorious stock options that add up to so much paper wealth
usually take four years to fully vest. For the early movers on the Internet,
the four years are coming up. And the golden handcuffs are coming off.
his particular second-generation Internet company has managed to
recruit top people who were still handcuffed -- what people in the
Valley call "the unhirables." Naval Ravikant walked away from what at
the time was $4 million worth of unvested @Home stock options.
Ramanathan Guha walked away from probably more than $4 million (a
figure he is contractually forbidden to confirm) at America Online, which
had acquired Netscape. Sabrina Berry's previous employer,
CommTouch Software, was planning to go public. Berry walked away
from all of her shares in that company. For Lou Montulli to join, he
resigned from a hot, well-financed start-up called Geocast Network
Systems. At the time Nirav Tolia left Yahoo!, the unvested options he left
on the table were worth $10 million.
But, he insisted, it didn't matter to him if it was $20 or $20 million -- he
has a dream to pursue.
"People are going to think I'm nuts,"
said Tolia, rolling his eyes.
"Can we not talk about this
anymore?" said Guha. "It's painful to
dwell on."
Six weeks ago, the engineering team
walked to In-N-Out Burger for lunch.
They crossed an overpass above
Highway 101 and paused at the rail.
"This team has been responsible for
many of the key features of Netscape
Navigator," Guha said. "These guys
can point to any of these cars passing
underneath and say: 'That driver has almost certainly used my code. And
that driver. And that one.' We want to build something that has that kind
of influence. We want to build a site that everyone will use."
So what's the idea that is inspiring so many to jump? Until this week,
they've kept everything secret, operating under the code name "Round
One." In fact, not even people who come in to interview for a position
learn the idea their first day. Several hours of vague conversation seem to
be leading up to the grand presentation, but alas, the applicant is sent
home with a preliminary offer, setting out salary and options and title --
and no clear sense of what the company will do. If the candidate is sold
on the team, then she or he comes back for a second round. Only at the
end of that next day does she sit down in front of a whiteboard with
Ravikant and Tolia and hear something like this:
As the Web becomes an infinite supply of goods and services, goes the
pitch, people crave guidance on what and where to buy. So far, the great
number of on-line shopping guides present quantitative, machine-sorted
and machine-generated data: comparisons of product prices and
specifications. But what consumers need (Ravikant and Tolia contend) is
a recommendation that gets beyond that: the advice of someone they
trust, someone just like them.
Their solution is a Web site, Epinions.com, which they envision as a sort
of Zagat-for-everything, a site consisting entirely of consumer opinions or
reviews of anything you can buy. Epinions.com itself will sell nothing at all
-- it has no warehouse, no trucks on the back end. The money would
come from deals Epinions.com cuts with companies that do sell things:
every time an "E-pinion" prompts a reader to click "Buy," the company
will earn a tiny commission on the resulting sale.
At the start, the E-pinions on Epinions.com will be culled from existing
sources, guiding users through aggregations of expertise from the four
corners of the Web. But the key to the whole idea is to make
Epinions.com participatory, taking advantage of what I call the Tom
Sawyer model. Write and post a short review of any product on
Epinions.com, and you can earn a few pennies every time the review is
read by another user. By letting readers rate the usefulness of the
E-pinions, the most trusted ones will float to the top of every category.
As Ebay is a marketplace for products, Epinions.com seeks to be a
marketplace for ideas. If it catches on, like Ebay, then everything
snowballs, and these hobbyist-reviewers function as sliver-time virtual
employees who do all the work for you. "Everybody is an expert at
something," they kept repeating around the Epinions.com office; they
hope their site will be the place where everyone shares their expertise.
Similar logic has been welling up in the collective unconscious of Silicon
Valley, and most E-commerce sites are already adding some form of
E-pinion to their Web pages. Productopia, Deja.com, Cnet,
Amazon.com -- everyone's hiring editors and bringing back the
old-fashioned, well-trusted written word. Of course, sites that both sell
goods and review them are subject to criticisms of bias.
Epinions.com.com would be the first company to start up doing
E-pinions and only E-pinions, hoping to be as Jell-o is to flavored gelatin.
And that's it. Then again, what was Yahoo! at the start but just a Yellow
Pages to the Web? The point is that job recruits with demonstrable talent
are buying in to give it a go. And they know that in the short and
unpredictable history of Internet businesses, success has often come
down to getting the details right, fast.
"We don't need any more strategists," says Mike Speiser, a McKinsey
consulting alumnus who learned to curtail his own inclination to heady
analysis. This was 10 weeks ago.
"We need closers," agrees Nirav Tolia. "We need bulldogs."
"We need engineers who are execution machines," says Guha. "This is
not a strategy play. This is an execution play."
irst-generation start-ups raise small seed rounds to develop a
"proof-of-concept version," at which point the start-up has to go
back to dog-and-pony shows, negotiating for more money. Again the
second generation is different, faster. Prototypes, demos, alphas -- the
language of the hustle -- those words aren't even in the Epinions.com
vocabulary. Every minute spent dancing for investors is a minute stolen
from the finished product. Ravikant and Tolia's business plan (which
consisted of 16 sparse slides) had no financial projections and no budget.
They negotiated for $8 million, enough that they wouldn't have to go
back for more until well after launch. They had no idea what it would
cost to pull together the E-pinions they would need to stock the site, but
they budgeted $5 million, just to be safe.
The group's biggest fear was the wrath of
prominent venture capitalists who did not get
an opportunity for a cut of the deal. A slightly
rattled Tolia played me several phone
messages left on his answering machine by
furious V.C.'s. One of the advantages of
combining August Capital and Benchmark is
that they occupy the same two-story building.
When the terms of the valuation were set with
August, Ravikant and Tolia walked upstairs to
Bill Gurley's office at Benchmark. Gurley had
joined Benchmark only a month before, and
Epinions.com would be one of his first big
plays for his new employer.
"I need to know if you're in," Tolia said.
Gurley was calm. He recounted some of the internal discussion among
the Benchmark partners. One partner, Gurley offered, had scored the
idea a 6.5 and the team a 9.5 on a scale of 1 to 10. But he wouldn't tell
them details of how the final vote was scored.
"So where does that leave us?" Tolia asked.
"Don't worry, it's done," said Gurley.
"Should I contact your lawyer or something? Draw up term sheets?"
"We don't do term sheets here," Gurley responded, offering his palm.
"We do handshakes."
In those first crucial weeks, the Benchmark investment was like having a
Hertz Club Gold pass. Every service provider is overbooked in Silicon
Valley -- realtors, phone-system installers, furniture suppliers,
headhunters. Dropping the Benchmark name was the way to impress
vendors without sharing the idea. Everyone wants to do business with
what may become the next Ebay, dreaming they'll be rewarded with
friends-and-family shares when the time comes.
Of course, they can't do everything. There was that first weekend in their
new digs, when the parts for their desks arrived from Home Depot -- 25
solid wood doors, 100 4-by-4 legs and 400 metal braces. Despite this
formidable team of engineering talent, in eight hours of off-and-on
tinkering they couldn't correctly assemble any desks. Finally they called a
carpenter who had done this before, and he started building two desks
an hour.
Fortunately, what they don't know about desks, they do know about
code. Hiring staff with seasoned Internet experience has allowed
Epinions.com to delegate like crazy. "We need to be told what to do but
not how to do it," said Luke Knowland, who had done it before at Wired
Digital.
"It would take four very bright first-generation engineers a full year to
program this site," Guha estimated. "But because we've done it before,
we can write most of the code in six weeks."
Everything is faster. Zero drag is optimal. For a while, new applicants
would jokingly be asked about their "drag coefficient." Since the office is
a full hour's commute from San Francisco, an apartment in the city was a
full unit of drag. A spouse? Drag coefficient of one. Kids? A half point
per. Then they recognized that such talk, even in jest, could be taken as
discriminatory in a hiring situation.
On the business-development side, "I no longer have to waste months
evangelizing," says Dion Lim, who has been cutting deals to aggregate
opinion material from existing Web sites. A couple of years ago, the
process would have been slow and painful. "Now, I just call, and they
have a syndication rate scale and a preferred data-feed format," he says.
Meanwhile, Epinions.com has kept up constant reconnaissance on the
competitors it will be jockeying with this fall, despite those competitors'
best efforts to keep their strategies secret. The Valley has what it calls the
"whisper circuit," which is not so much wild gossip as the ability to call in
old favors and threaten to pull people's teeth. A lot of whisper-circuit
surveillance leaks out the back door of companies through their
engineers, who often refuse to lie on principle or are very bad at it when
they try.
Through the whisper circuit the company learned that one potential
competitor was trying to wiggle out of a partnership so that it could
overhaul its product toward something like Epinions.com. The team
learned that a top job applicant, on the verge of accepting its offer, had
been grilled so hard by another venture capitalist that he cracked and
spilled the Epinions.com idea. (The offer was retracted.) Another V.C.
was trying to discredit Epinions.com by telling people he'd turned down
its deal, which he'd never seen.
And it was on the whisper circuit that the Epinions.com team learned that
Amazon.com had started flying writers and editors to Seattle and offering
them positions as category editors to cover a wide range of products --
food, video games and so on. The whispering was specific -- that
Amazon.com was offering a $65,000 salary, a 10-percent signing bonus
and options that could be worth $1 million in four years. (Amazon
declines to confirm or deny those details.) The entrance of Amazon.com
onto the scene seemed like bad news for Epinions.com. Everyone lost
sleep that night.
But their exuberance returned with dawn. "Amazon is supersmart," said
Naval, marching out of Benchmark Capital's Sand Hill Road offices with
his teammates in tow. "But we're a start-up. We've got focus. Nobody
will be able to move as fast as us. I pity the fools!"
ther than that first night with Amazon, I haven't lost a single
hour's sleep over our competition," Nirav Tolia said four weeks
ago, when he was only rationing himself four hours a night anyway. "All
the sleep I've lost has been over our internal conflicts."
Indeed. By hiring so many bulldogs and execution machines who were all
used to being No. 1, Tolia feared the competition between employees
would tear the company apart. For the first month, without a product to
obsess about, they focused on their responsibilities, and the closest proxy
for their responsibilities was their title. That they had given up so much
money to be here made them a little testy -- they wanted constant
assurance that their career decision wasn't a mistake.
Everyone kept demanding an org chart, preferably with his or her name
in a box near the top. In first-generation Web companies, the premise
was that no task was beneath you: you did whatever it took to succeed.
This wisdom seems not to have been passed down. "How do we go
from a team of champions to a championship team?" Tolia kept asking.
Bill Gurley had turned Naval Ravikant on to complexity theory. "Truly
alive systems exist only at what is called 'the edge of chaos,"' Ravikant
said in one meeting. So though it was causing him to lose hair, he was
running the company on the edge of chaos, rallying people to risk making
mistakes. "I don't want to be a company that plays it safe." He gave his
employees an org chart, and then another one every week. Their titles
became vague, more fungible.
Going through the start-up experience usually bonds a team together.
There are those occasional "Breakfast Club"-like days when workers'
inner lives get revealed to each other. This bedrock of goodwill gets the
team through hard times later. Going through it at second-generation
speed only allows brief bonding moments. Mike Speiser covered Internet
companies as an investment-banking research analyst, but he hadn't
worked at one before Epinions.com. A few weeks ago he said: "You
know what I miss? I miss those good old days, when we had the run of
the place at August Capital, hanging out and brainstorming." Those
halcyon days, six weeks earlier.
Nirav Tolia came up with what he thought would be a solution to distract
the champions from their fiefdoms. At the all-hands meeting five weeks
ago, Tolia announced that he would shave his head if the company met its
offical launch date. This is a guy whose E-mail was
"the-face@yahoo.com" for a good reason -- a hair is never out of place
on his head. "When you're wondering why you're here at 2 in the
morning, think about my cue ball," he said.
Everybody howled with laughter. Then Aleksander Totic went over to his
computer and pulled up an ancient Web page, from way back in 1994.
Digital photographs were posted from the period when the original
Netscape engineers shipped Navigator 1.0. There at the top of the page
was a picture of Lou Montulli -- who is even more of a sharp dresser
than Tolia -- with his head completely shaved. Then everyone really
laughed.
"If we're going to be a second-generation Web company, Nirav's going
to have to come up with something better," Totic chuckled.
atching an instant company get built has been slightly
disorienting. Silicon Valley is sustained by the myth that you can
come here from anywhere with sheer smarts and a firm handshake and
make good. Second-generation Internet companies seem to seriously tip
the favor to those already here. Four weeks ago on the whisper circuit,
Tolia learned that an entrepreneur from Arizona was in town to shop a
business plan for a company, called Publicopinion.com, with some of the
same basic concepts, like rating reviews. Tolia took the challenge
seriously -- Publicopinion.com already had a prototype on line and
needed financing to take the next step. But the truth is that if the guy from
Arizona is only now trying to get an audience with venture capitalists, he
probably doesn't have a chance to catch up.
After Ravikant left @Home, he would still see old colleagues at parties.
The comment he heard from them time and time again was: "It's amazing
you walked away from all that money. I wish I was brave enough to take
the chance."
So why did they walk away from all that money? Take it as a given that
they all believe in the commercial viability of the idea, but beyond that,
their comments are all over the map. One guy talked blatantly about
wanting "plane money," and how you weren't even a player in the Valley
with less than $100 million. A few plead that they just want to live the
start-up experience, and the money they've earned has bought them the
unconditional freedom to pursue that dream.
Now they are at the takeoff point, and their first-generation experience
can't help them. The next 12 weeks will be an even greater challenge: the
goal now is to turn a brand-new site into a hive, one that has 80 percent
of all E-commerce categories covered well in advance of the crucial
Christmas buying season. They are blindly gambling that they have the
right incentives and the right filtering mechanisms in place. Ready. Fire.
Aim.
Table of Contents
July 11, 1999
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