Less Burn, More Lift

Internet companies have all made the same strategic shift: From "Get big fast" to "Cash is king." But how do you conserve cash without throttling back on growth? How do you spend less without missing huge opportunities?

A year ago, the flow of money at IntelliSpace Inc. seemed endless. Venture investors had just pitched in $35 million, and executives were betting that an IPO would soon bring in lots more cash. The company, which provides business clients with high-speed Internet access, was set to hire hundreds of people as it grew from its New York base into markets ranging from London to Los Angeles. Losses would mount, but that was fine: The search for profitability could wait.

Then the easy-money days came to an abrupt halt. By last summer, the IPO market had vanished, and the near-term outlook for raising money from other sources was bleak. IntelliSpace executives had to rethink their strategy entirely. "We were burning through more than $3 million a month," recalls Jeff Allen, 45, COO. The company needed to get a firm grip on its spending habits -- and fast.

Was it time for a hiring freeze? Massive cuts in travel and office budgets? Wholesale layoffs? No, no, and no, Allen decided.

"We weren't in a position where we could save our way into prosperity," he recalls. "We needed to keep growing revenue if we were going to build value." So he and a dozen colleagues sought ways to curb the company's spending -- without halting its growth. They renegotiated supply contracts, pushed bill payments further into the future, and trimmed their expansion plan. That helped IntelliSpace cut its burn rate almost in half, even as it kept hiring key people. (Earlier this year, the company secured a second round of funding.)

These days, just about every Internet executive would like to achieve a similar feat. The spend-anything, burn-baby-burn mania that lasted into early 2000 is clearly over. Cash is precious, and companies that run out of it aren't getting a second chance. And while plenty of ambitious young entrepreneurs still see great opportunities on the Net, they also understand that squandering everything on a speedy liftoff may actually hurt their ability to keep a business in orbit. So management teams and directors are massaging financial plans and looking for ways to implement thrift with a twist.

"CEOs know that they have only a few shots at raising money," says Michael Rolnick, a partner at ComVentures, a Palo Alto-based VC firm. "So if they have to rethink their strategy in order to improve their odds of getting funding, they're going to do that.

"In some cases," Rolnick adds, "it's just a matter of throttling back on marketing. In other cases, companies need to rethink how many new projects they can afford to have in development, or whether they can afford to have their own sales force and customer-service department."

Then there are the extreme cases. "Some companies' basic ideas are just too far ahead of what the market wants right now," Rolnick observes. As Rolnick puts it, the CEOs at those companies are saying to themselves (and to investors), "If I can survive the next two quarters, there will be a better game to be played in six months."

Craig Eisler, CEO of Action Engine, based in Redmond, Washington, is still trying to figure out which group he belongs to. After starting from scratch early last year, he has built a 50-person company that develops software for mobile commerce. Eisler got $7.7 million in venture financing early on, and he says that he is on the brink of completing another, larger round of funding. But delays have meant that his original financing has had to sustain the company longer than he had expected. So he has made do with only the bare essentials.

"We reexamined our marketing strategy last summer," says Eisler, 36, who used to be a manager at Microsoft. "We aren't running big ad campaigns. We're buying banners on very specialized Web sites, such as CNet's page for Palm users. That gets us in front of the audience that we want -- and the whole campaign costs less than $100,000."

Eisler has also learned a lot more about bootstrap financing than he ever needed to know at Microsoft. He bought almost all of Action Engine's computer equipment through an equity line of credit -- in effect, borrowing against the future value of his stock. That move has diluted the ownership stakes of other investors. But it has given him an extra $2 million in spending money over the past year. "If we hadn't done that," he said in late January, "we'd be close to running out of money by now."

Some attempts to economize get dangerously close to the bone. Eisler, for example, has let prime job candidates slip away if their salary demands seem to be out of line. "We're on an aggressive growth curve, and we've got to have a lot of people," he says. "Otherwise, we won't bring our product to market on time." But when engineers with three years of experience began demanding $90,000-a-year pay packages, he balked and kept his offers about $15,000 below that figure. "There was an overinflated job market," says Eisler.

Even though he hasn't always paid top dollar, Eisler claims that he has been able to recruit strong engineers by offering non-cash forms of compensation. Part of the draw comes from the inherent appeal of his company's projects. And for a pre-IPO company like Action Engine, stock options matter as well: While they don't carry the weight that they once did, they still have the power to sweeten a deal.

No cash-saving measure is completely painless, and the steps that Action Engine is taking may slow its growth rate slightly. But in an environment where profitability trumps soaring revenues, more and more Internet CEOs are willing to make such trade-offs.

At Respond.com, Lyn Chitow Oakes says that her goal is to make the online shopping-referral service profitable by 2002, while covering losses this year with money from Respond's last infusion of venture capital -- the $66 million that the company raised in early 2000. "We want to be self-funding after that," says Oakes, 39, who became CEO of the Palo Alto-based company early this year. Does she worry that Respond won't be able to pursue every business opportunity that comes its way? "That's probably good," she says. "You want to stay focused."

Some of the best advice on handling tough times comes from Allen, of IntelliSpace. In a previous job, he helped engineer post-merger integration for Frontier Communications when the Rochester, New York-based company expanded into New England. (Frontier was later acquired by Global Crossing Ltd.) That experience taught him a lot about what can be squeezed -- and what can't.

Among Allen's rules: Avoid major layoffs if at all possible. Sure, layoffs cut costs in a hurry. But they also send a loud signal to customers, suppliers, and remaining employees that a company has gotten way off track. EToys, for example, announced major job cuts in January but still failed to build momentum. (A month later, it fired its entire workforce.) And other Internet companies -- among them MarchFirst and priceline.com -- have found that even after headline-grabbing staff cuts, their stock prices have remained volatile.

It's important, Allen argues, to focus not just on reported profits or losses but also on the actual movement of cash. When he first arrived at IntelliSpace, for example, the company was keeping on hand as much as a 90-day supply of the routers that it needs to get customers hooked up to its high-speed data network. That amounted to $300,000 worth of inventory -- and a big drain on cash balances. So he encouraged colleagues to switch to just-in-time purchasing.

Allen's next rule: Communicate, communicate, communicate. Whenever his team initiated a small austerity measure, such as limiting the use of overnight couriers, Allen went out of his way to tell employees why the team was taking that step, how much the company would save as a result, and what he understood the overall health of the company to be. "If you don't do that, the weirdest rumors can get started," he says. "You never want to undercommunicate."

Finally, says Allen, the best way to slow down a burn rate is to keep growing: "We told people, 'Everyone sells. I don't care if you're in finance or marketing, rather than sales. The best way to help the company is to get people to buy our products.' We even got our purchasing manager to start asking vendors what their Internet service was and whether they'd like to hear what we had to offer."

With pride and delight, Allen adds, "I think our purchasing manager has completed three or four sales now."

George Anders (ganders@fastcompany.com), a Fast Company senior editor, is based in Silicon Valley.

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