Dots Dashed

Josh Newman

Consultant
Oakland, California

In a startup, most of your hand is dealt at the very beginning. You bet that you're going to get a good hand. The rest is about doing your best with what you have.

At Petstore.com, there were remarkably few opportunities to make decisions that would have greatly changed the outcome. One was an early offer for funding at a lower valuation than we were looking for. Perhaps if we'd taken the money then, we could have established enough of a lead to block the competition.

But who knows? After all, it was war from day one. We hadn't expected that. When we first started talking to VCs, we were the only player in the category. But to raise funding, you have to educate the market -- which can stimulate your own competition. We went from being the only people talking about the pets category to being one of 20.

Even so, we were still first on many dimensions. We went from zero to 300 people in 10 months. By February 2000, we were shipping 4,000 orders a day. But the competition stayed nip and tuck, copying our every move.

All of this was happening in a market environment that looked rosy. Then, overnight, things fell apart. Our biggest partner lost its appetite for investing heavily in the space. We'd had essentially free money, and then we had no money. Next time around, I hope to do something that's structured to succeed with fewer people -- and to work in a field where people are motivated by the project, rather than by the chance to make a billion dollars.

Josh Newman (jnewman@altgate.com) founded Petstore.com in October 1998. He served as the company's CEO until its acquisition last July by Pets.com. (Pets.com subsequently closed its operations in November.) Newman is now working at his sixth startup, this time as a consultant and an angel investor to London-based Altgate Capital, an Internet company that provides financial products to private European banks.

Philip Kaplan

Founder
FuckedCompany.com
New York, New York

Since last spring, the Internet has been like a body rejecting a liver transplant. Even now, some 95% of dotcom managers should not be running Internet startups. And 12 months from now, they won't be. Why? They're not fit to survive because they aren't passionate about the actual business that they're building, let alone the industry. Many joined the revolution because of the glamour and the promise of a quick buck. But here's the dumb reality: Just because every business can be on the Internet doesn't mean that every business should be.

We're better off because of the shakeup. When the tough get going, the e-holes get lost. Fading fast are the opportunists who fell into cyberspace for extraneous reasons, peddling bad ideas.

Philip Kaplan (pud@fuckedcompany.com) founded FuckedCompany.com, the virtual rumor mill on the demise of struggling dotcoms, in June 2000. Since then, more than 1,300 companies have been inducted into the "dotcom deadpool." Kaplan is also the founder and president of PK Interactive, a New York - based Web shop, and he has held positions at Booz-Allen & Hamilton and Think New Ideas Inc.

Bill Stensrud

General partner
Enterprise Partners Venture Capital
La Jolla, California

Entrepreneurs who complain about the fickleness of VCs are right. I've been on the other side of the table, trying to fund a company, so I understand that feeling. But I also know that worse than not getting funded is getting money when you shouldn't -- and pouring years of your life into a bankrupt business model.

The last two years took a lot of people down that road. Probably three times as much money was pumped into the venture industry than should have been. Today, without a thoroughly defensible business model, you won't get funded. Do people get mad when they're told that their plan isn't fundable? Sure. It's like saying that their baby is ugly. But sometimes, that's what they need to hear. What I look for today in business plans are the same things that I looked for before last April. First is a huge market. Second is a sustainably disruptive solution: The idea has to fundamentally change how a customer does something -- and it has to be sustainable, so that somebody with a buck more than you can't copy it. Third is a great team.

Ninety-nine percent of the plans that come across my desk fail the second test. They don't offer a quantum increase in value, and the value isn't something that they can defend against competitors.

The best opportunities on the Net will belong to companies that use the medium to do something that no one could do before. Successful companies will leverage their place in cyberspace to reinvent how business is done -- not just how products are bought and sold.

Bill Stensrud (stensrud@ent.com), whose career includes a stint as a roadie for the Grateful Dead, was president and CEO of Primary Access Inc. and founder of two other successful high-tech companies before joining Enterprise Partners Venture Capital in 1997. A boutique business builder and one of the largest VC investors in the San Diego area, EPVC has about $800 million invested in 110 emerging companies.