Beginner's Luck

In the Internet casino, the name of the game is IPO, and the players are looking to improve their odds. Meet five high rollers who think that their systems will help them hit the jackpot.

Welcome to Internet casino night! Play your cards right, and you could win the big IPO payout! But watch closely, and pay strict attention to how the cards fall, how the dice tumble, and how the wheel turns: Not every hand is a lucky one, sometimes you crap out, and your number may not come up this time around.

These days, it's easy to get the impression that everyone who either launches a dotcom or signs on to work at one has been issued the new economy's version of a winning lottery ticket, redeemable upon demand for a small fortune. It's a seductive image, exactly the kind of can't-miss marketing that brings a steady stream of players to the lounges of Las Vegas -- and to the office parks of Silicon Valley, where the odds at the Internet casino are no better than those at Caesar's Palace. But there are techniques and tactics that can improve your odds. And the more time that you spend learning about the different kinds of bets that are placed in this casino economy, the better your odds of figuring out a winning strategy.

Take, for example, the shrewd, hard-working players whom you'll meet at the casino tonight. Anna Zornosa came to the tables after learning the game from the outside, as one of the brightest high-tech journalists in the business. But her first and second bids to hit the IPO payout came up empty. It wasn't until she learned to play the odds more carefully and switched to a lower-risk, admittedly lower-reward game that she finally came away with a winning number.

Or learn from Matt Rothman. Early on, Rothman saw that by taking a job at just one company, he'd be betting all of his chips on one number. So instead of doing that, he spread out his bets by taking a handful of consulting jobs with different startups. That way, he can still win a million-dollar payoff -- but he can also go kayaking whenever he wants.

Myron Rosmarin and Scott Landress decided to go for broke. Sure, they could have gone the regular route with their dotcom idea -- negotiating with venture capitalists for funding and nursing the idea to a second round of financing, all the while aiming for the day when they could file for their IPO. But they saw a faster shot at a higher reward: They'd risk everything on one throw of the dice, betting that they could negotiate a partnership with the one player in their space who could make their idea take off. One roll of the dice, winner take all.

And then there's Jim Butterworth, an experienced entrepreneur and a seasoned businessman who decided that he'd never again suffer the kind of anguish that came with VCs who didn't keep their promises -- and the failed startup that he was left with as a result. The best way to beat the house, Butterworth figured, was to become the house. And so this time around, he's opened his own Internet incubator, where other players bring their best bets -- and where he gets a piece of the action.

No matter how you choose to play the game, you would be wise to let these experienced pros teach you a few key lessons: The odds will always be against you, and more people will lose big than will win big. Like the people you're about to meet, know your strengths, and play to them. Do whatever you can to improve your chances, and always remember: If you can't afford to lose, then don't play.

Anna Zornosa: Different Table, Better Odds

"Could you pick a worse day to IPO?" That's what Anna Zornosa remembers the CNBC announcer saying as the market quickly dropped to more than 200 points lower than where it had closed the day before.

It was October 15, 1999. The stock market was tanking, and Zornosa, 41, was undergoing a major attitude adjustment. The senior vice president at Women.com had gone to bed early the night before, knowing -- knowing! -- that the next day would be the big one. After 4 years and 3 Internet startup jobs, the former technology journalist figured that she'd finally picked a winner in the fledgling women's content provider. She had joined up a mere 9 months before the initial public offering, signing an employment contract that would give her a respectable 135,000 stock options (with a 4-year vesting period) in the soon-to-be-public company. If all went well with that day's $10-a-share offering, she would finally join the ranks of Silicon Valley's millionaires.

Little wonder that she was wide awake long before her alarm clock went off at 6 AM. Too excited to fall back to sleep, she wandered into the kitchen and turned on the TV. "They were talking about how Alan Greenspan had warned investors about underestimating the stock market's risk," she recalls of the CNBC broadcast. "It was all drama and doom, which I didn't really take seriously until the market opened. Then I realized that they hadn't been so dramatic after all -- that it was, in fact, a very bad day."

By the time her two children awoke, Zornosa had already braced herself for a day very different from the one that she had envisioned. "I went from being extremely happy to fretting about how we were going to spin our employees on a less-than-positive opening," says Zornosa, who practiced her reassurance spiel on her daughter.

Such emotional twists are hardly unique these days, with highs and lows turning on the luck of the draw, on the time of day, on a Greenspan phrase. You work hard to pick the right company, the right CEO, and the right team. You scrutinize the market, the competitors, the financial backers, and the board of directors. You take every diligent step that you can to ensure a winning outcome -- and you still risk falling victim to the vagaries of a casino economy, where bad luck and bad odds can humble even the most deserving determination or the most impressive smarts. "When I started with the Internet, I thought, 'I'll do this for two years, and then I'll cash out and perhaps never have to work again,' " Zornosa recalls of her earlier stint at PointCast Inc., one of the Web's first shooting stars. "But the truth is that no matter how good things look, you never really know how they're going to turn out."

That's not to say that you can't tilt the odds in your favor. At a time when job hopping is increasingly losing much of its stigma and developing a reputation as a shrewd career strategy, switching your Internet bets in the middle of the game may be the only way to boost the probability of a big-time payout. There is no honor -- and very little money -- in staying at a table where the cards have gone cold. The new economy's casino favors the bold and the lucky. But mostly, it favors those players who do the math to find the best odds of striking it rich. By going with the favorite instead of with the long shot, Zornosa's decision to leave an early-stage startup and sign on with the already-established Women.com bolstered her chance of cashing in a winning IPO ticket. And while, as employee number 200-something, she held a smaller stake in this new company than she did at the previous two startups she worked at, neither of those companies had come anywhere near achieving Women.com's IPO.

Zornosa had hedged her bet in another important way: She had chosen a company that she knew she could feel good about regardless of how the market received the current offering. "Of course, I want the upside," she says. "But ultimately, I chose this team because I believe in what it's doing."

As it turns out, her faith was rewarded. For although the stock market continued its slump that ominous October day, shares of Women.com soon opened 30% above the offering price. "Everyone let out a huge sigh of relief," says Zornosa. Workers at the company's Foster City, California headquarters watched as the WOMN symbol sped across the stock-market ticker -- from $13 a share to $17, and then to $23! She'd picked a million-dollar horse after all.

By all accounts, Zornosa should have made the millionaire's list years ago. After a meteoric rise to editor at CMP Publishing Inc. and then to associate publisher at Ziff-Davis's PC Magazine, the savvy marketer took a gamble on the future of Internet publishing after being wowed by a demonstration of a new software product called PointCast. She joined PointCast in 1995, just before "push" technology news services became red hot. Venture-capital backers were lining up to invest, as were such suitors as Rupert Murdoch's News Corp., which offered to acquire the company for nearly $400 million. Yet PointCast's board of directors had set its sights on the ultimate payoff: an IPO.

Zornosa, one of PointCast's first 50 employees, played a key role in its early success. As head of sales and affiliate development, she hired scores of workers to help her oversee the service's expanding content, while using her connections in print journalism to recruit partners like Ziff-Davis, Wired magazine, and the Washington Post. When she first joined the company, she had taken a $100,000 pay cut, but the stock options that she eventually accumulated all but assured her that she was in for a jackpot-size payoff.

That is, if it all worked out -- the big "if" of life in the IPO world. Primping the company for the upcoming IPO, the board of directors began searching for a marquee name to fill the CEO spot -- which prompted PointCast's mercurial founder to quit in anger, an act that demoralized the staff and left Zornosa one of three executives in charge of keeping the company afloat in the interim. Meanwhile, PointCast's bulky technology had bogged down customers' computers and corporate networks, leading to a backlash in the market: A growing number of PointCast users were removing the application from their systems.

For Zornosa, things came to a head at a 1997 conference on push technology. "The first speaker asked how many people in the audience had already taken PointCast off of their computers, the second speaker recommended that anyone who hadn't already done so should, and the third speaker showed them how to do it," recalls Zornosa, who was next in line to speak. "I was mortified. Here I was in charge of revenue for my company, and I was selling a product that everyone was suddenly bashing."

The boundless optimism that Zornosa had displayed in previous months began to give way to serious doubts. But she refused to let go of the dream that she had so fervently held -- or to abandon the team that she had helped convince to pursue it. "I felt so torn," she says of the months that she spent fretting over whether to respond to the flood of headhunter calls that she had begun to receive. "My intellect was telling me that the company wasn't going to make it. But my heart was saying, 'That can't be true!' I felt that if I left, then everyone else would think that I no longer believed in the company. And then we'd all give up."

In the end, she says that it took an "act of God to get me to leave." Divine intervention came in the form of a startup founder who had interviewed for the PointCast CEO job and turned it down. Bill Lohse, a charismatic former computer-conference organizer, didn't think that Zornosa should be at the company either, and his inside knowledge of its problems -- combined with a relentless flogging of his own brainchild for Internet success -- finally persuaded Zornosa to quit.

Lohse's company, a banner-exchange service that would allow small Web sites to promote themselves inexpensively, didn't have the emotional appeal that PointCast's product had for Zornosa. But this time, she decided to follow her head instead of her heart. "This had the germ of a great business idea," says Zornosa, who envisioned expanding Lohse's banner-exchange program into a whole suite of services for small Web-based companies.

Friends in the business warned her that Lohse, a onetime EST trainer, had a penchant for micromanagement, but Zornosa was intrigued by his willingness to make her chief operating officer of the fledgling company -- as well as by the sizable stake in the company that he offered her. "He made it clear that he was open to my ideas," says Zornosa, who joined up as employee number eight and soon convinced Lohse to change the company's name from NetWeb to one that she had coined: SmartAge.

But while Lohse promoted Zornosa to president after only three months, his penchant for aggressive managing began to emerge. Setting her sights on hitting the membership and revenue milestones needed to get the company rolling, Zornosa had feverishly begun hiring workers, revamping the Web site, and using her contacts to woo distribution partners. But her extemporaneous management style clashed with Lohse's methodical, process-driven approach, which required all managers to solicit weekly lists of goals from their direct reports and then to respond in detail. "I had a dozen direct reports, and I didn't have time to read and respond to goals that were changing faster than I could respond to them," says Zornosa unapologetically. "Bill saw that as bad manager etiquette."

She could feel a power struggle developing, and she wanted no part of it. At PointCast, she had felt the impact of similar conflicts: Repeated clashes between the board of directors and the founder had helped undo the company's early success. "I wanted out before it got to that point," Zornosa says. She decided to quit SmartAge after just six months on the job. "I told myself, 'If we break up now it's an annulment, not a divorce.' "

The breakup certainly stung less than her painful departure from PointCast. But for a woman whose pre-Internet career was defined by success after success, Zornosa now felt an intense pressure not to end up a three-time Internet loser. "I really felt like I needed a win this time," she says.

Despite her two bailouts, Zornosa was hardly damaged goods -- not in this economy. Given the high demand for managers with Internet experience, even a failure is widely viewed as a resume builder. And, among the high-tech elite, job-hopping only demonstrates that you know how to play the game and that you take your own career and potential worth seriously -- which, in turn, means that you are worthy of being taken seriously. But four years of dashed hopes had changed Zornosa's outlook. As a mother of two young children, her career ups and downs had taken a toll on her family life. And while she remained determined to ride the Internet wave, she began wondering if there weren't a less jolting way to go about it. "I've chosen to ride the rapids, but I don't have to sit right on the edge of the raft," Zornosa says. She pulls out a piece of paper and draws an X-Y graph, the horizontal and vertical axes corresponding to varying levels of "fun" and "risk," respectively. She points to a spot near the center signifying a blend of lower risk and more fun. "That's me," she says. "I've had many opportunities, but this is where I feel most comfortable now."

So she declined a spate of job offers from early-stage startups and instead set her sights on finding a more-established venture. "I was looking for a company that was already in place," recalls Zornosa. "I wanted a big play, something with financial assets that hadn't yet been exploited in an IPO." She approached the task methodically, almost mathematically, paring down a list of 30 companies to the 3 best bets.

Women.com seemed the perfect choice. Formed in 1992, the women's content portal was one of the Internet's 30 most trafficked Web sites. It was the only one among the 30 that hadn't yet gone public or been acquired. The company's chairman and CEO, Marleen McDaniel, got along famously with the company's young founder and had the board of directors' full support. And while the company's strategy was in place and the IPO within sight, there was still room for a senior executive such as Zornosa to play an important role. "She's had a major impact," says McDaniel, noting Zornosa's responsibility for executing a merger that brought 11 Hearst magazines and 80 employees into the fold. "And I've since given her even more responsibility."

Of course, the Women.com job did have a downside: Zornosa's $175,000-a-year salary was only about half of what she could probably have earned in a conventional publishing job. Meanwhile, her relatively small stake in the company would never yield the kind of mind-boggling riches that increasingly define success in Silicon Valley. "And there's no guarantee that I'll cash in," says Zornosa, who notes that her 135,000 stock options require the standard four years to become fully vested.

Yet, even in the wake of the October 15 IPO, Zornosa feels satisfied with -- and rewarded by -- her decision. "The reward fantasy came about when I first started working in the Internet field," she says. "But I've done a lot of growing up since then. Maybe I'll end up with a new house or a new car. And that will be great. But what's important is that I made this decision with my list of priorities still intact."

Matt Rothman: Smaller Bets on More Numbers

Call it the billion-dollar button.

Matt Rothman knew that placing GetMedia Inc.'s electronic "buy" button on Microsoft's Windows Media Player and Internet Explorer 5 could put the fledgling Internet startup on the map. That one button could trigger a stream of revenue from music fans craving to own the CDs that they would hear via the browser's radio toolbar and Windows Media Player. And it would all but guarantee the venture capital needed to launch the four-month-old e-commerce company into orbit.

So when Rothman, 41, a former Sony Corp. of America executive turned strategic consultant, received a phone call from a Microsoft executive last May, he quickly moved to turn an opportunity into a deal. He'd already helped GetMedia's founder and chairman, Robert Goldman, to retool his promotional slide show into a slick investor pitch highlighting the huge market for impulse music buying via the Web. He had scheduled meetings with a dozen VCs; convinced two huge radio networks to install the San Jose, California company's buy button on hundreds of their stations' Web sites; and brought in a big-name public-relations agency and an executive recruiter to help carry out his "get big fast" plan to push the company toward an IPO and a billion-dollar market cap.

But the Microsoft deal would be the linchpin. Rothman worked the contacts that he'd made while leading Sony's online effort and set up a face-to-face meeting with executives from Microsoft. Then he and Goldman got on a plane and flew to Redmond, Washington. Five intense hours after entering a windowless conference room on the Microsoft campus, the two men emerged with a term sheet that ensured that GetMedia's buy button would lie within a finger's reach of tens of millions of Microsoft users. "It was really amazing," Goldman says of Rothman's deal-making prowess. "He should become a multimillionaire because of what he's done."

He just might. Although Rothman's consulting rate is more than $2,000 a day, it isn't his day rate that he's taking to the Internet casino. It's his system of placing a handful of smaller bets on a variety of different numbers, knowing that at least one of those numbers will hit. In a shrewd business deal with Goldman, Rothman had gotten himself not only cash but also a slice of the soon-to-go-public company. "My stake won't necessarily make me a millionaire," Rothman says of his small piece in GetMedia. "But, for four months' worth of work, it'll be a pretty good payoff." And that payoff is just one of seven that he will get: Rothman acts as a consultant to six other companies -- and has a stake in each of them.

Chasing big money and even bigger odds, thousands of would-be millionaires have pinned their hopes on a job at a startup. They have poured their souls -- not to mention countless hours -- into making sure that the Internet roulette wheel delivers their number. And while it surely has hit for a lucky few, many people who take full-time jobs with Internet startups end up with little more than a worthless stock-option ticket and a rueful career hangover.

But placing an all-or-nothing career bet isn't the only way to play the Internet startup game. At a time when equity is replacing cash as a currency with which to fund the growth of young companies, free agents such as Rothman are simultaneously getting a piece of the action and spreading their bets among multiple early-stage ventures. Dubbed "venture catalysts," these venture-capitalist-management-consultant hybrids use time (instead of money) as risk capital, negotiating with startup founders who are desperate for marketing, management, and technical expertise, and for whom equity is often the only currency available to buy the help that they need in order to grow fast.

"Having Matt [Rothman] around is like hitting the accelerator," says Peter Mansfield, chief executive at Brand3 Inc., a Los Angeles-based Internet startup that recently gave Rothman a chunk of shares in exchange for his help. "He's got contacts and ideas that we could probably stumble upon on our own if we had the time. But we have a limited window of opportunity." And while Mansfield says that he'd happily pay Rothman's day rate, "the reality these days is that people like Matt want a slice of the action."

In June 1998, when Rothman turned to consulting after a maddening stint leading Sony's online effort, it hadn't occurred to him that such arrangements were possible. The onetime Business Week reporter had joined Sony's New Technologies group as business-development director in 1993. After convincing Sony's Japanese executives to fund the company's first Web site, he drafted a business plan to create sony.com, an informational site that the company launched in 1994. Later, to meet the new demand for e-commerce, Rothman expanded his business plan to create the [ADDRESS], an e-commerce megasite that would pull together Sony's labyrinthine bureaucracy to peddle all of its electronics, music, video, and computer-game products from a single Web address. But just as his 150-person team neared the project's launch, a corporate reshuffling created new leaders -- leaders who were dubious of the security of e-commerce. "I couldn't convince them that it was safe," Rothman says. "They just didn't get it." At the last minute, the retail divisions decided to pull out of the project.

Launched with only video and game sales in 1997, the Station nonetheless grew to become one of the Internet's most trafficked Web sites, with 4.5 million registered users and 500 million pages viewed every month. "But I was a mess," Rothman recalls of his final months at the company's New York City headquarters. "At the height of the launch, I broke out with a terrible rash and was experiencing pain in my shoulders."

Regardless, Rothman's Internet experience had made him a hot property among venture capitalists, who increasingly pestered him with job offers from such promising startups as Bertelsmann's Books-Online, Encompass Inc., and Junglee Corp. Laden with equity, the offers marked an enticing contrast to Rothman's Sony contract, which, despite its six-figure salary, came without stock options. Yet friends in the business advised him to hold out. "Don't knee-jerk out of Sony and take the first brand-name job offer that comes your way," counseled Peter Sealy, a Coca-Cola executive turned venture capitalist who urged Rothman to take a similar path. "You can create your own brand: Matt Rothman Inc."

For a man who had long defined himself by the name-brand business cards that he carried, the prospect of leaving Sony to strike out on his own was unnerving. "All my life, I'd been trained to move from one job to the next and to base my identity on the company that I worked for," Rothman says of his 18-year career in journalism and business development. "I was worried that people would think that I'd fallen off the face of the earth."

While his Sony job was pushing him toward the brink of physical and emotional collapse, the thought of diving into another 80-hour-a-week Internet job was equally chilling. What he needed was a career break. So, after quitting his job in March 1998, he moved to San Francisco, bought a kayak, and began paddling around the San Francisco Bay. "I figured that I'd work part-time and paddle part-time," Rothman says. "But as time went on, my transitional period was increasingly becoming a permanent lifestyle."

Within weeks of his move, Rothman was hired to help Ericsson and Visa International develop their Web strategies. Soon a venture-capital friend engaged him to write a business plan for Protozoa Inc., a 3-D animation company that produces the technology used by the BBC, Disney, and MTV to make television cartoons. While the company was succeeding in the broadcast industry, it needed an Internet strategy. So Rothman crafted a plan to marry the company's software with a data-streaming player that would allow animated cartoons to be played on the Web.

The plan called for the company to establish a new division -- which Rothman dubbed DotComix -- that would produce cartoons, and license and distribute them to entertainment Web sites, thus creating an entirely new revenue stream for the company. Devoting a mere two-and-a-half days a week to the project, Rothman soon put his plan in motion by securing an investment from Intel Corp., whose soon-to-be released Pentium III chips really showed off the power of the DotComix animation. He then forged distribution agreements with such companies as Excite, Snap.com, and Time Warner's Entertaindom.

Protozoa's board of directors was thrilled. And although Rothman's per diem contract had called only for cash payments, the board soon announced that it would grant the fledgling consultant a package of stock options. "That changed everything," Rothman says of the day, in the fall of 1998, when the company's founder informed him of his first-ever equity stake. "I realized then that I could have a big impact on a company without having to sign on full-time. And I saw an incredible opportunity in working for venture-backed startups that could give me a piece of the action. I never worked for a big company again."

Since that day, Rothman has received six more consulting-for-equity stakes in early-stage e-commerce, wireless, and business-to-business startups, steadily refining a strategy not unlike that of the venture capitalists who have brought him many of his clients. Says Rothman: "What I look for is what they look for: a terrific concept that has enough revenue potential to give the company a billion-dollar market cap, an intelligent team that can go out and execute that idea, and smart money willing to bankroll it."

Rothman believed that he found most of those qualities when Robert Goldman approached him last spring about GetMedia, the music-buying service. "Here was a very smart guy with a very elegant e-commerce solution that had lots of revenue opportunity," says Rothman. "He already had some seed-round money, but it was obvious that he was going to need more funding -- and fast."

Rather than impeding things, Goldman's lack of financing presented Rothman with a timely opportunity. Convinced that he could sway his venture-capitalist colleagues to back GetMedia, Rothman proposed a consulting contract that would exchange half of his $2,000 daily fee for shares that would immediately become vested. Goldman was happy to oblige. "Paying him partly in equity was a way to make sure that our interests were totally in sync," Goldman says. "Now he's playing the odds with the rest of us, and he's betting his own money on the quality of his results."

Rothman quickly embarked on a two-pronged plan to ensure that his bet would pay off. First, he refocused Goldman's pitch, turning it from one that featured GetMedia's whiz-bang technology to a more market-driven approach that showed why the consolidating radio industry needed revenue sources like GetMedia's buy button. Then, while he and Goldman arranged meetings with venture-fund managers, Rothman made a hit list of the nation's biggest radio stations and began forging marketing deals that would give each station a portion of the buy-button profits. "Every time that we'd sign another marketing agreement, we'd up the number of radio stations in the investor pitch," Goldman recalls of the marketing list, which soon ballooned to more than 1,000 radio stations. "The more stations we had, the better we looked to the investors."

Then, last August, they inked the Microsoft deal. And suddenly, GetMedia's founders were in a position to pick and choose among more than a dozen eager-to-invest venture-capital firms. Flush with $10 million in funding from leading VC firms, GetMedia's first-round venture funding closed a month later. Thanks in part to the marketing deals that Rothman had spearheaded, the backers now valued the company at $34 million, tripling the worth of his shares after only four months of work.

With swarms of equity offers from other companies eager to receive his help, Rothman has continued to add to his portfolio. While only one of Rothman's investments has yet to yield an IPO payout, the cash portions of his consulting contracts have kept food on his table. And, because his schedule is flexible and part-time, Rothman has ample time for kayaking -- and none of the anxiety that comes with putting all of your IPO chips on one number. "I'm pretty confident that at least one more of my holdings is going to pop," he says. "And if none of them do, then I can always go back to having a real job."

But he doesn't expect to do that anytime soon. Strategically positioned in what he calls the "equity economy," Rothman believes that the opportunity cost of taking a full-time job has never been greater: "If I invest all of my time in one company, a lot of factors that are beyond my control could wash me out. So why gamble everything on one company when I can spread my risk with a mutual fund?"

Myron Rosmarin and Scott Landress: One Throw of the Dice

Myron Rosmarin's big idea hit him as he sped down a California freeway. "As I was driving past Butterfield & Butterfield, I noticed that the company's sign read, 'Auctioneers and Appraisers,' " recalls the 38-year-old software marketer. It was a moment of entrepreneurial epiphany. "The firm's online sites did the auction part, but I realized that the appraiser part was missing. So I thought to myself, 'What if someone tracked the online auctions and used the information to help buyers and sellers figure out how much their stuff is worth?' "

His inspiration cast a glimmer of hope on an otherwise gloomy outlook. Five years earlier, in 1994, Rosmarin had moved to Silicon Valley from New York and was already onto his third startup job. And, just like the two other early-stage companies that he'd gone to work for, the prospects for this latest one were questionable. A mediocre salary and still-worthless stock options had put his modest dream of buying a house in a decent school district (he has two young children) on what felt like permanent hold. With Valley real-estate prices surging, his family had begun pressuring him to move back east. "It's a bipolar way to live," Rosmarin says. "Either you make it big, or you can't afford a decent life here."

Unwilling to pack his bags just yet, he decided to try a new job -- one at a more established company where a stock-option payout, though small, was at least a possibility. So, in March 1999, he logged onto an online job site and found a listing on Yahoo! for a senior producer for the Internet portal's new online-auction business. A longtime collector of fountain pens, Rosmarin had become fascinated with online auctions while trading on eBay, the web's biggest such site. "It sounded pretty cool," Rosmarin says of the job listing. "Yahoo! is a great company, and I was really interested in online auctions. So I figured, 'Why not?'"

As he readied himself for an interview, he began brainstorming about how he would answer the inevitable questions: "How would you add value to our company?" That's when he passed by the Butterfield & Butterfield building -- and his mind began to race. His idea for online appraisals would surely give Yahoo! a leg up in the online-auction market. And, as the creative mind behind it, he would have an easy time convincing his interviewers that he could make a difference for the company. But as he spun the idea out further in his head, he began to wonder whether his value proposition for Yahoo! might not be better leveraged to fatten his own bank account. If the idea was so great, he thought to himself, why waste it on securing a rank-and-file job? Why not instead start his own online-appraisal company?

Rosmarin's quandary was hardly unique. With the media awash in stories of everyday people who have turned smart -- and sometimes not-so-smart -- ideas into overnight fortunes, the notion of ditching a secure job to start your own company has never seemed more appealing -- or more plausible. The price of entry into the games is preposterously paltry: Plunk down a couple hundred dollars for an Internet domain name and some e-business-in-a-box software, and you too can establish and online brand. And with venture-capital funds ballooning into the billions, and flocks of angel investors opening their wallets for even the most obtuse dotcom brainchild, bankrolling at leas the early stages of an Internet startup these days isn't much tougher than securing a home loan.

Yet founding a startup remains one of the riskiest bets that you can make on the Internet roulette wheel. The same fallen barriers to entry that let you in can also open the door to anyone who cares to compete with you. And with practically every entrepreneur and corporate chieftain in America rushing to stake an Internet claim, the sudden crush of competition has squeezed profit margins to next to nil, while quickly raising the odds against even the most conservative business plans. Add to that the administrative hurdles of getting any new business off of the ground, and it's easy to see why even the most bullish Internet analysts foresee a major shakeout down the road.

The long odds, however, haven't stopped people like Rosmarin, who had fantasized about starting his own business long before the Internet's siren song finally wooed him into following through with his dream. With his best friend and college roommate, Scott Landress, Rosmarin had sat up nights brainstorming his way through a series of ideas -- everything from founding a real-estate-development company to creating a business that would recycle used computers. "But it was all pretty much daydreaming," says Rosmarin. "We were never in a position to do something with any of our ideas."

But not the timing seemed right. While Rosmarin was looking for a way out of his job, Landress had already struck out on his own. Now 38, the investment banker had relocated from New York City to San Francisco in 1997, taking a lucrative job as managing director of Bank of America's investment-banking group. But an unexpected corporate merger with NationsBank led him to cash in on a generous golden parachute in March 1999. And although he'd received a flood of calls from headhunters, he'd become captivated with the growing Internet frenzy and decided to take time off to develop his own ideas for starting a company.

So when the two met up at a party in April 1999, Rosmarin sprung his brainchild on his friend. "I know this guy who's got this great idea," Rosmarin said as he proceeded to explain the online-appraisals concept. "But he needs someone with your expertise to take the helm. What do you think? Do you want to meet him?"

"Definitely," Landress replied.

"Great," said Rosmarin. "You're talking to him."

The more they vetted the idea, the more excited Rosmarin became. Within a week, he had plunked down $70 to secure an Internet domain name -- eppraisals.com. Landress, meanwhile, was having some doubts. While he liked the online-appraisals idea and thought that the moniker was as good as any, he questioned whether the business could deliver the fat financial upside that he was looking for. "If this was going to be our big swing for the fence, I figured we should each have some reasonable chance of landing a $10 million payday," says Landress, who guessed that their chances of reaching that lofty goal were, perhaps, one in 10.

He had done the math. Unlike this friend, who would merely be giving up a moderate salary at a flailing company, Landress would have to turn down job offers with salaries that neared seven figures. "I approximated my opportunity coast at somewhere around $1 million a year," he says. "So if I was going to do this for three or four years, while betting on a 10% likelihood that it would fly, then the payday had to be big." In other words, if venture capitalists, investment bankers, and the litany of others who'd likely get their fingers in the equity pie left him with, say, a 10% piece, then the company's stock would have to be worth at least $100 million for him to achieve his goal. And, says Landress, "It was hard to imagine having an online-appraisals company that was worth that kind of money."

Poring over anything that he could find that might yield a clue as to how he could make the most out of his friend's idea, Landress picked up a copy of Bloomberg by Bloomberg (John Wiley, 1997), an account of how Michael Bloomberg turned his Web site, Bloomberg.com, a niche provide of real-time stock-market news, into one of the nation's biggest financial-news organizations. "That's when the lightbulb went off," Landress says. Bloomberg's story, he realized, could serve as a blueprint for his own business. "If he could build a multibillion-dollar business providing stock-market information, why couldn't we do the same in the online-trading world? We could be the Bloomberg of the personal-trading market."

Landress soon formulated a business plan -- one that expanded Rosmarin's online-appraisals business into a broad news service that would track online auctions in the same way that Bloomberg tracked the stock market, providing detailed charts, graphs, and news reports on everything from used computers to Beanie Babies. Estimating that the online trading market would soon swell to more than 10% of the $180 billion person-to-person trading market, Landress compared the company's potential to that of established financial-news services such as Bloomberg and Reuters and came up with an estimate of what eppraisals.com's market capitalization could one day be worth: upwards of $1 billion.

Convinced that the company's core business had now outgrown Rosmarin's original idea, the partners renamed their endeavor OOMA.com (an acronym for "objects of my affection") and set about putting the finishing touches on a 50-page business plan. Landress then set up meetings with more than a dozen investment-banking, venture-capital, and dotcom colleagues back in New York City. "The response that we got was amazing," he says of the five days that he spent delivering the OOMA pitch last July. "At one point, one of the investors who had read the plan called my parents' house and said to my mom, 'Your son is going to make $100 million!' That was incredibly validating."

Yet the validation, which included commitments for nearly $3 million in seed funding, could hardly guarantee the company's success. A spate of new sites that aggregated auction listings and combined them with market news had popped up on the Web, and several had announced multimillion-dollar venture-capital investments. Although none of those sites offered the detailed pricing analysis that would distinguish OOMA's service, it seemed only a matter of time before they caught on to the idea.

OOMA would only be able to get a leg up if it could nail down an exclusive partnership with the industry's biggest player, eBay, which controlled more than 90% of auction market sales and, therefore, the bulk of the online-pricing information. "We could have just done what the other guys were doing and spidered eBay's site for data. But I believed that we could make a strong case to eBay that sharing its data with us would be in the company's best interest," says Landress, whose business plan called for eBAy to receive licensing fees and perhaps even an equity stake in OOMA.

Inking the eBay agreement was not only crucial to OOMA's long-term business model; it would also bolster the founders' hands in negotiations with their venture investors. "The company's valuation would likely rise by three or four times after it partnered with eBay," says Elliot Levine, an angel investor who had enthusiastically offered to take a stake in OOMA. "If they raised the money first, the company's valuation would be very low and they'd have to give up a big portion of the company. So I suggested that they nail down the eBay partnership first."

Others, however, counseled the partners to take the financial bird in hand. "People though that we would be crazy not to accept the funding and get things started," says Landress, who had already begun searching for office space in San Francisco's SOMA district and interviewing candidates for the executive team. "They said, 'If you've got the pledges, you shouldn't keep them waiting.'"

But with new competitors rapidly encroaching on their idea, Rosmarin and Landress felt that the prospect of raising money, hiring a staff, and ramping up the complex site -- all in hopes of landing the eBay deal -- was both daunting and too time-consuming. Determined to secure the linchpin relationship quickly -- and to nail down the fat equity stake that went along with it -- the two soon agreed to go double down on their Internet bet and to delay OOMA's seed funding. They then recruited a small team that was willing to aid the eBay pitch and to sign on if the deal went through. In the meantime, Rosmarin quit his day job as director of marketing at Geometrix Inc., sold his eppraisals.com domain name for $10,000, and committed the proceeds to help the team woo eBay with a slamdunk presentation.

The strategy that they had chosen piled risk on top of risk. They were betting all of their chips on one bold roll of the dice, rather than playing a game with more conventional odds, such as placing smaller bets backed by traditional venture funding. The logic behind their gamble was clear: If they could strike a deal with eBay quickly, they would vault ahead of the competition and ensure their substantial stake in OOMA. But, at the same time, there was a potential downside: If they failed to win such an agreement, or if the deal took too long to consummate, they would fall behind the growing horde of competitors and seriously compromise their chances of ever receiving funding from investors.

But the one-throw-of-the-dice plan also had an upside: Whether the plan hit or missed, Landress could always say that he had done his best to deliver on his promises to his investment buddies. "One of my biggest risks going into this was asking my friends and colleagues for seed capital," he says. "I could go to them once, maybe twice in a lifetime with this kind of proposition. So before I played that card, I wanted to make sure that we had the best possible chance for a payday."

Meanwhile, the decision to forego both building a live Web site and hiring a staff kept OOMA's expenses at almost nothing and allowed the partners to focus solely on the eBay pitch. "We've reduced our risk by minimizing what we're risking," says Rosmarin. "Yeah, I quit my job and invested some time into this. But Scott and I have invested very little money so far. So if things don't work out, all we'll have lost is time. And I could live with that."

But in the high-risk, high-speed world of Internet startups, time is often more precious than money. And although the partners approached eBay within a month, the auction behemoth proved preoccupied with other, more pressing issues. Software glitches had taxed its ability to keep the site up and running, and users had complained about fee increases. Meanwhile, the company had become embroiled in a running battle with upstart auction aggregates, whose spiders had begun combing eBay's listing and displaying the results on their own sites.

Eager to protect what it considered its proprietary data and to ensure that OOMA's pricing data didn't rile eBayers, who use the site in hopes of getting top dollar for their items, the company put off OOMA's initial overtures. As negotiations stretched from weeks into months, OOMA and eBay finally reached an agreement. But weeks later, in February, the U.S. Department of Justice opened an antitrust investigation into what it alleges to be eBay's efforts to thwart aggregates -- and that legal development has the potential to derail OOMA's deal.

"It's been very frustrating," Rosmarin says. "I've started asking myself how long I can continue before I say, 'That's it. I can't spend any more time on this.' There comes a point when you have to admit that it's not really worth putting your life on hold hoping for a home run. The big hit would be great, but I realize now that it isn't a prerequisite for a good life. If I continue to take these kinds of gambles, it won't be fair to my family."

He soon posted his resume on an online job site and signed a contract with Netscape to work as a product-marketing manager. "It's not a home urn," he says with a relief-filled grin. "But I'm in scoring position."

Landress, meanwhile, refuses to give up his dream and is still hoping to turn OOMA into a living, breathing company. But he's hedging his bet and is now pursuing a new startup idea for a digital-entertainment company. "With OOMA, we took a big risk by putting all of our eggs in one basket," he admits. "This time around, I won't be beholden to any one partner."

Jim Butterworth: Odds Favor the House

"Daddy, what did you do in the Internet revolution?"

Jim Butterworth knows exactly what he doesn't want to say when his future child ask him that question: "Well, son, I started one of the first Internet companies -- but you've never heard of it."

That's why, more than two years after a gut-wrenching experience with his first Internet startup (an online radio-broadcasting service that failed to win its third round of venture funding), the 38-year-old founder of Netcast Communications Corp. is getting back in the game. "I want to be able to say that I had an impact on the revolution," says the lanky former Lehman Brothers investment banker. "That in the end, I made a difference."

Determined to wrest his Internet destiny back from the venture capitalists who had once controlled it, Butterworth decided that the next time he bellied up to the Internet blackjack table, he would find a way to shift the odds more in his favor. So, instead of signing on as CEO of one of the venture-backed startups that had approached him, instead of acting on any one of the scores of startup ideas that he'd cooked up since Netcast's 1997 demise, instead of groveling at the feet of venture capitalists who had balked at delivering the funding that he had so desperately needed in the past -- instead of staying on the side of the table that made him just another one of the players struggling to get a big casino payoff -- Butterworth devised a strategy that would, in effect, make him the house.

Last fall, he and his partner, Albert Wenger, another recovering Internet entrepreneur, worked their respective networks of business colleagues and friends and raised nearly $40 million in investment capital. They then set themselves up in a large, open office in the heart of new York City's Silicon Alley, and, in January, they launched the city's first full-service venture incubator.

"LaunchCenter 39" -- named for the NASA space facility that catapulted the Apollo astronauts to the moon -- helped fill a niche that Butterworth and Wenger felt had been abandoned by traditional venture capitalists whose ballooning funds had steered them toward bigger deals and away from the early-stage ventures that they had once catered to. "The early-stage venture-capital system is broken as a result of its success," Butterworth says, pointing out that venture-fund capitalists now invest 10 times what they once did in a single venture. "VCs used to be very hands-on. But now that their funds are so huge, they can't afford to make small investments or to spend much time with entrepreneurs." And while a growing number of angel investors have stepped in with smaller chunks of startup capital, those investments are called "dumb money" for a reason. "Very few angels are sophisticated enough to offer much value beyond cash," adds Butterworth, "especially here in New York."

LC39, however, would do more than just help bankroll young companies with up to $2 million in funding. By supplying everything from office space to accounting and recruiting assistance, it would also help startup founders overcome the myriad management and administrative hurdles that can slow progress for a young company whose time is of the essence. In return, LC39 would receive both an equity stake and a say in the startup's future -- all at an early stage, when the company's investment could be best leveraged.

The idea wasn't exactly new. A Silicon Valley firm called Tech-farm has been nurturing semiconductor and software startups since 1993, and idealab!, which has specialized in Internet startups since 1996, has already fostered nearly a half dozen of its progeny through IPO christenings, among them toy retailer eToys and a free Internet service called NetZero. But while another half dozen dotcom nurseries have sprung up in the past several years, few have targeted New York's Silicon Alley, a place where sky-high real-estate prices, acute labor shortages, and countless bureaucratic hurdles make for one of the toughest places in the country in which to hatch a successful business. "That's our sweet spot," says Butterworth. "The need for what we do is even stronger here than it is in California, so we've got a real competitive advantage. We have everything that a startup needs in order to be successful."

The situation is a far cry form the one that Butterworth faced five years ago, when he left a seven-figure job doing telecommunications and media deals to start Netcast out of his TriBeCa apartment. An incorrigible brainstormer whose ideas defy conventional wisdom, Butterworth had foreseen the convergence of the Internet and the cable-television networks, which he believed would soon deliver high-bandwith Internet communications to every home in America. "Jim made a jump that, even today, people are only beginning to make," says Brad Burde, who attended Dartmouth's Tuck School of Business with Butterworth. Burde recalls the first time that his friend approached him with his idea for starting Netcast. "He'd been doing cable-company deals for Lehman Brothers, and he recognized the tremendous value in owning pipelines into millions of homes. He figured that if he could leverage the Internet to create a virtual cable network within the existing telephone network, then he could broadcast to millions of homes without spending a dime on infrastructure. If you think about it, it was a very compelling idea."

Butterworth and Burde soon drafted a business plan for creating a multimedia network that would combine individual channels of high-fidelity music, news, and sports talk with Web pages featuring links and information designed to promote user communities on each channel. The network would draw revenues from advertising targeted specifically at each user community. They then presented their idea to their colleagues in investment banking and venture capital, and, within two years, they had raised about $3.5 million in seed funding.

Butterworth became CEO, Burde filled the chief financial position, and the set up an office in New York's Silicon Alley, quickly hiring the first of Netcast's 20 full-time employees. In order to deliver their data-intensive service to customers, they licensed a proprietary audio-compression technology from Bell Labs, and Butterworth assembled a team of engineers to integrate that technology into a specialized Internet application that would simultaneously deliver Netcast's audio and interactive content to users. While the technologists worked to complete the application, other staffers set about recruiting advertisers and creating the content needed to fill the network's initial 12 channels.

But in the 18 months that it took to ready the product for launch, the rapidly evolving market began to overtake the new company. The advent of RealAudio and other streaming audio programs had suddenly made Internet radio commonplace. And although Netcast's high-quality sound and synchronized content had clear technological advantages, the proprietary system required a minimum of 28.8-KBPS Internet connection in order to function properly. The trouble was, the vast majority of potential customers were still using connections that topped out at half that speed. And Netcast's strengths could best be shown off by higher-speed cable connections that, at the time, were years away from broad distribution.

Meanwhile, with a burgeoning payroll and a monthly overhead that approached $100,000, the company had already burned three-quarters of its investment war chest. When Butterworth and Burde approached their angel backers for more money, the investors balked. "They totally failed to see the long-run potential," recalls Butterworth. "They just weren't on the same page as we were."

So the two men began pitching to the venture-capital community, stepping onto an emotional roller coaster that sent them racing around the country in an attempt to land a deal that would keep Netcast's launch on track. With time and money running out, they signed a terms sheet with a leading New England-based firm that specialized in backing Internet companies. "But then they started dragging their feet," Butterworth recalls of the nail-biting days in the summer of 1997, when he was waiting for the money to come through. "It was awful. We had one payroll left, and everything was dependent on these VC guys."

Desperate to seal the deal, he and Burde soon arranged a meeting and drove up to Massachusetts to plead their case to the firm's chief executive. Remembers Butterworth: "The guy told us, 'This deal will be done within a week. If it's not, then I'll bridge you $500,000 to tide you over.' I remember walking out of there and giving Burde a pinky high five."

But when the next week rolled around, the firm backed out of the deal. Butterworth was furious. He was convinced that the collapse of a deal with such an influential firm would doom any future deal that he might try to strike with smaller venture backers. So he swallowed his pride and called his entire team into a conference room to break the bad news: He was pulling the plug on the company. "It was the most emotional experience of my life," he says. "It was like breaking up with 20 girlfriends at once. I never, ever want to repeat that experience again."

Not that he would need to. Although he had poured plenty of his own money into Netcast, he still controlled two potentially lucrative patents that he had won while developing the company's broadcast technology. Meanwhile, his Internet stock-picking prowess, combined with a short but lucrative consulting stint and a TriBeCa apartment that had nearly tripled in value, helped him to rebuild the small fortune that he had amassed during his Lehman Brothers days. "I certainly had enough money and time to live the lifestyle that I wanted," he says of the year and a half spent "pulling arrows out of my back."

Splitting his time among rock climbing, dodging calls from recruiters, and serving on a growing handful of Internet-company boards of directors, he had even entertained the thought of bagging New York City altogether and moving to Colorado to climb and ski. Yet, as he watched others cash in on ideas that he'd once entertained, his longing to leave a mark on the Internet revolution began to gnaw at him -- as did the uncomfortable notion that he would miss out on the event of our times. "I wanted to be able to tell my future kids that I didn't just sit on the sidelines," he says, matter-of-factly comparing the rise of the Internet to the fall of the Bastille. "This is the biggest thing to happen in my lifetime, and I realized that I didn't want to read about it from some mountaintop in Colorado."

The only question was how to get himself back in the game. He knew from recent experience that neither sitting on boards of directors nor consulting would satisfy his yearning to have an impact. And although he had entertained plenty of job offers to run Internet startups, he says, "going into someone else's startup wasn't for me either. Being CEO is a very passionate thing, and I didn't want to assume someone else's passion." Meanwhile, in the wake of Netcast's demise, the very notion of turning his ideas into another company was deeply unnerving. "I wasn't mentally prepared to place all of my bets on one company again," he says. "If I pursued any one idea, then it would consume my life again, and the other 999 ideas would never get done. So I started asking myself, 'How do I avoid getting hitched to a company and yet still get the satisfaction of shaping its destiny?'"

Then, in June 1999, he met Albert Wenger at an industry conference, and the two began talking about the hurdles that they had faced, both as founders of and as consultants to various startups. "We realized that every company faced common problems, so we started brainstorming about how to solve all of them at once," recalls Butterworth. "That's when we came up with the idea for LC39."

The more they brainstormed the idea, the more Butterworth liked it. "This was what I really love to do," he says. "I love putting pen to paper and turning ideas into real companies. But instead of putting 100% of myself into one company, I can put a little bit into building a bunch of companies. And once a company is no longer a startup, we begin working on the next one."

The incubator concept was hardly revolutionary -- which was, in a way, an advantage because it helped LC39 avoid the fate that Netcast had succumbed to. "We're on the leading edge this time, not the bleeding edge," says Butterworth. "And it's a much more rewarding proposition."

Best of all, he still gets the satisfaction of starting a company from scratch, while spreading his financial risk and reducing his dependence on potentially fickle outside investors. "I'm much more in control of my own destiny this time," he says. "I'm back in the game. I've created my perfect job, and -- who knows -- if I play my cards right, I might still have something to tell my kids about."

Alex markels [alexm@email.com], a former Wall Street Journal staff writer, last wrote for Fast Company about Solectron Corp. [November 1999].

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