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The Great Minds of
the Internet Revolution
An inside look at the new
breed of Internet
The Internet has rewritten the rules of business. Never before have there been so many successful new companies established in such record-setting time, and an unprecedented percentage of those with the foresight and ambition to go for the gold have been rewarded handsomely for their efforts. Whereas it historically took companies decades for their stock to rise and build a solid market capitalization, Internet companies have been known to eclipse their brick-and-mortar brethren on their first day of trading. The Internet revolution makes anything possible. The only limitation is the extent to which creative minds can dream up new applications for the Internet.
Who builds and runs these Internet companies? Where and why do they thrive? And what about the culture that defines them? This chapter introduces the background on the industry that is fueling the new economic engine.
Who Is the Internet Entrepreneur?
Internet entrepreneurs come from everywhere. There is no prescribed recipe for success. Anyone can make it, and potentially make it big, regardless of his or her previous experience, or lack thereof. You don't need to have a degree from Stanford or a Harvard MBA, only the hunger to succeed and the ambition and innovation to get you thereand, by some accounts, a constitution that needs very little sleep. Internet entrepreneurs are ex-CEOs and MBAsas well as college dropouts and techno geeks. Regardless of their background, all individuals who succeed work extremely hard and have unparalleled ambition and the courage to dream very big.
It is interesting to note the number of big-time executives leaving plush corporate lifestyles for a start-up opportunitya move that almost always means cramped office space, a huge pay cut, grueling hours, and a lot of uncertainty. What motivates them to do it? Although it is different for each entrepreneur, there is an undeniable adrenaline rush to most start-ups. Some of these executives have already made big money; others are looking for their chance to lead; still others are just tired of the corporate grind. Most, however, are in search of the pot of gold at the end of the rainbow, pursuing a chance to cash in on an initial public offering (IPO) or sell their business at a profit. For those who succeed, there is nothing sweeter. However, it always takes a lot of hard workharder work usually than these individuals have ever encountered. Being part of an Internet company is an altogether different experience than the corporate track. Although most Internet companies do not survive and thrive, the experience of starting such a company is an unforgettable ride that frequently enhances an individual's skills in the end (probably because the entrepreneur has to do the jobs of at least four people).
Universities, too, are encouraging entrepreneurship, either by forming their own venture funds, as Columbia University has done, or holding entrepreneurial contests, which is the case at Massachusetts Institute of Technology (MIT). Venture capitalists have even made their way into college campuses to fund start-up ventures by individuals still enrolled in school. The fact of the matter is that great Internet entrepreneurs do not need to be tucked a way in a large corporation for twenty years to develop business skills. They need to be able to act decisively, alter a business model on a second's notice, and accurately forecast the future of their industry. Someone who is twenty-eight can just as easily meet these requirements as someone who is fifty-eight years of age. This does not mean that the older individual with more experience isn't a highly qualified candidate; it means only that individuals who in the past may not have been given a chance may be equally qualified to run their own businesses. For those with the right skills and experience and (not inconsequentially) the right personnel working with them, the door is now open for everyone to take a shot at becoming an Internet entrepreneur.
Not content with having started one successful Internet business, often the great minds of the Internet revolution quickly move on to new ventures, thus spawning a new type of entrepreneurthe serial entrepreneur. Take, for instance, Sabeer Bhatia, the founder of Hotmail. Bhatia sold his business for hundreds of millions of dollars to Microsoft Corp., and one year later, he was back with another top-secret start-up, spending countless hours in cramped office space and eating leftover takeout. Another example is Jim Clark, founder of Netscape Communications and Silicon Graphics, who after making more money personally than most Fortune 500 companies in a matter of a few years, added two more feathers, Healtheon and Shutterfly.com, to his cap. Both men's stories attest to the fact that there is an undeniable magic about starting and growing an Internet company. They further prove that, for some people at least, the allure of the Internet start-up goes beyond just getting rich quick.
Start-ups are really the new American dream. From the perspective of employment, some argue that the real prestige in business now lies with Internet and technology firms. There used to be a lot more prestige associated with working for a big-name firm that has been around for a long time and offers stability. People would work for the same company for thirty years and the company, it was thought, would take care of its people. Although this is still true to some extent, working for a start-up is now a very good thing. People dream about getting in on the ground floor of a start-up, with a fistful of options, going public within a couple of years, and then retiring early. This is impossible to do when going to work for an older public company. First, in the established public company, stock options are usually reserved for senior managers; second, the stock is unlikely to be as active as that of an Internet company's stock.
Because the Internet is so young, it remains to be seen what impact the number of younger professionals opting away from the larger companies will have on their bottom line in years to come. Will there be a whole new class of larger companies to emerge from the Internet era, fueled by younger and more ambitious individuals? Will the new venture capital model of fewer employees who are all partners outlive and outperform larger firms, such as PriceWaterhouseCoopers, Deloitte and Touche, and Andersen Consulting? Although there is no way to tell for sure, these firms may not have the abundance of talent in the future that they have today.
MBAs, for example, have always been an excellent bellwether for the current state of the economy. How much are they earning fresh out of graduate school? What are the hot industries? What types of positions are they being offered? Over the past three years, the answers to these questions are 180 degrees different from previous years. Especially at the top MBA programs, such as Stanford, Harvard, and Wharton, where the McKenzies, Morgan Stanleys, and Goldman Sachs of the world go for their fresh talent every year, fewer and fewer graduates are taking the corporate route. They are instead opting for positions in venture capital, an Internet company, or they are starting their own businesses altogether.
Success at Light Speed
The past five years have seen the creation of record-setting wealth for many people involved with a single industry. Renowned Internet entrepreneurs like Steve Case of AOL and Jerry Yang and David Filo of Yahoo! have helped to produce hundreds of instant millionaires, from every type of employee. Not only has it been incredibly lucrative for their employees, but the general public has been able to cash in as well. If you had invested $1,000 in AOL at the beginning of 1998, it would have been worth approximately $118,400 only two years later. Thus the great minds of the Internet revolution are not only creating wealth for themselves, they are also creating it for everyone around them and helping to fuel the economy as a whole. And while it is true that for every success story it is impossible to ignore the equal number of start-ups that won't survive, both those that make it to the public markets and those that are bought out are, on average, cashing in for millions.
The Land of Opportunity
The number of new Internet companies that have achieved a powerful position within our economy is unprecedented. One reason is that it is relatively easy to start an Internet company. Get a URL (i.e., a Web address and domain name) and a logo and print up business cards and you "officially" have your own business. In addition, the amount of venture capital pouring into new ventures has been staggering. The most amazing part is that the Internet industry is still in the early stages of development and there'll be a whole new wave of companies within the next five to ten years.
What's next for Internet entrepreneurs? The Internet is still extremely underused by the majority of the United States and the world population. An incredible overseas explosion in use of the Internet is anticipated. The Internet is also still too expensive for many individuals. The costs associated with buying a computer and paying monthly charges will soon disappear or be drastically reduced as new programs bundle services together and as broadband access permeates the homes of Americans, who will be able to access the Internet through either their televisions or high-speed phone lines. For those individuals for whom the Internet is already an integral part of their lives, their reliance on online communication and commerce will only continue to grow in popularity as new services are introduced. For the would-be Internet entrepreneur, the key is to stay a couple of steps ahead of the Internet revolution and determine which products and services are going to be needed next.
Where Are the Digital Cities of Tomorrow?
Silicon Valley was first and remains the most renowned Internet community, but now there are Internet enclaves all across the United States. From Silicon Alley in New York City to the Netplex in Washington D.C. to Route 128 in Boston, Internet fever is spreading fast. What makes for an Internet community? Usually it starts out with a major Internet company establishing a presence in the area, followed by a number of smaller Internet companies setting up offices nearby. Sometimes it is the presence of a strong venture capital firm that is dedicated to making local investments in Internet and technology companies. Other times it is an incubator firm such as idealab! or eCompanies that hatches some very successful newcomers that are committed to staying in a given geographic location.
It is extremely important for Internet companies to be located near other companies that could become future partners or customers. Although the global nature of the Internet would make it seem that physical location would be irrelevant, the opposite is true. Because great importance is attached to strategic relationships with other companies, Internet start-ups are eager to be brought under the wings of a community in hopes they will break through with a couple of mutually beneficial deals. Venture capital firms, for example, are known for brokering deals between companies they have investments in and forming their own keiretsu, or network, of companies. Even city councils are getting involved. Recognizing the effect that a wave of Internet companies can have on a local economy, they are trying to create advantages for companies to set up shop in their cities. The number of valleys of Internet entrepreneurs across the world will only increase. As new areas become the digital cities of tomorrow, major population centers that do not attract such businesses soon will be in danger of losing economic steam.
The Internet Culture
The management style of some Internet entrepreneurs has also generated a lot of attention. Internet entrepreneurs have used varying levels of creative management and work styles to attract and retain their employees, from allowing pets at work to providing all employees with BMW Z3s to accepting jeans as the work uniform of choice. In such a hot marketplace for individuals with technical and other Internet-related skills, it becomes increasingly important to make sure your employees are very happy at every level. This can mean anythingfrom throwing pizza parties once a month to having happy-hour meetings to discuss how to create a better work environment. Most Internet companies have their own unique environment, usually created by the employees who work there. The key is allowing these individuals to turn the workplace into the type of environment they want, instead of mandating a rigid office culture.
Options, Options, Options
The new breed of Internet entrepreneurs wants options, and lots of them. From entry-level positions to entrepreneurs forming their own companies, stock options are the path to riches for everyone. Often, start-up Internet entrepreneurs even work solely for equity, forgoing a paycheck to put the money back into the company to hire additional employees or purchase necessary assets. In fact, individuals at every level are taking huge cuts in salary to get a larger number of stock options. The term stock options has taken on almost a magical ring in the last couple of years. It has also become the most powerful currency when trying to hire a key manager or member of the management team. Stock options, simply put, have become the most fantasized about and, in many cases, realistic path to wealth for hundreds of Internet entrepreneurs, employees, and investors.
What About Profitability?
Profitability was once the primary bellwether of success for a company. Even in the Internet age, the move to profitability is beginning to be prized in commerce companies instead of the empty calories of top-line growth. For private companies, it is in most cases only a matter of time before they fold if they remain unprofitable. For public companies, if they are not profitable or moving toward profitability, it means declining stock prices and investor dissatisfaction. These fundamentals hold true even for Internet companies.
Although it undoubtedly takes time to grow any business, venture capitalists have generally felt that the opportunities presented by the Internet are so great they have been willing to bankroll an Internet company longer than usual to make sure they are able to position themselves properly in the marketplace. Many private Internet companies received millions of dollars in venture capital knowing they would not record profits for years into the future. Even a public Internet company such as Amazon. com, with a market capitalization of more than $20 billion, has yet to earn a nickel of profit. In fact, the majority of public Internet companies are unprofitable. The business model has instead been more focused on registered users, page views, and other intangibles believed to create value over the long term. This often has meant building the technology, attracting unique users, and inking the right strategic partnerships that will enable the business to go public or be sold. Because so many companies made it to the public markets without ever having been profitable, it became a much more "digestible" business model to forecast negative earnings for the foreseeable future. The owners, employees, and investors are all getting very richbut the companies are not making any money. So who's losing?
The reality is that a business can only stand to lose money for so long. In the end, it is investors who are left holding the bag if they hold shares of stock that plummet in value. Not surprisingly, the values on which Internet companies are built and measured are reversing themselves to a degree, now that Wall Street is refusing to look the other way on issues such as profitability.
The stock market has been a major impetus in the creation of new wealth for Internet entrepreneurs, and although Internet companies are coming under greater scrutiny after some failings, the public and investment community at large remain convinced that the Internet sector is just in its beginning and there is no time like the present to try and get in on the ground floor to reap rewards in the coming years. Will some of these stocks eventually fade away with little to no trading volume? Probably. Yet those that make it will become the Coca-Colas and Gillettes of tomorrow.
Though not actually an industry itself, the Internet has fundamentally changed almost every industry, opening the doors to a wave of entrepreneurship within our country. You can now do almost anything online, from buying a car to bidding to get plastic surgery. The number of new businesses being started is unprecedented and will only continue into the foreseeable future. If you do not think the Internet is going to affect your business or industry, you are wrong. As Andy Grove of Intel Corp. has noted, any business that does not have an Internet component will be gone in five years.
So sit back and learn from some leading Internet entrepreneurs. This book shares the secrets of nine Internet executives, each at various stages of development with their businesses, although all are still gunning to make their start-ups bigger and stronger.
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