Internet Strategies That Work (Maybe)

Startups For Grown-Ups

Nothing about Richard Wilkes suggests that he has a romantic view of business. He has built his professional life around hard, rational financial analysis. Wilkes, 54, has worked in the mortgage industry for nearly three decades, including six years running North American Mortgage Co., when it was growing into one of the largest mortgage lenders in the country. More to the point, Wilkes sharpened his edge by combing through the wreckage of the savings-and-loan debacle in the late 1980s, buying up gutted thrifts from government regulators, and turning their operations around. His partner and backer in that enterprise was Ronald Perelman, one of Wall Street's toughest speculators.

Yet even a gimlet-eyed rationalist like Wilkes lost his bearings during the Internet boom. His love affair with the dotcom world started like that of so many others. In Spring 1999, lured out of a comfortable consultant's life by John Hummer, founder and chairman of Hummer Winblad Venture Partners, Wilkes sold his home in Houston and moved to the San Francisco Bay area to run IMX Exchange Inc., a B2B Internet company that connects lending banks with mortgage brokers.

At first, the deal maker in him rebelled at the out-of-this-world financial logic of Silicon Valley. "When I saw how companies were valued, I thought that it was ludicrous," says Wilkes, who looks like he could be Oliver North's beefy older brother. "But it's easy to get seduced. You listen to the bankers who say, 'You're going to have a market cap of a billion dollars, maybe two billion.' And then this gorgeous woman comes in, and her name is IPO."

What happened next brought everyone back to earth. As Wilkes's company was preparing to go public, the bottom fell out of the NASDAQ. Wilkes says that he came as close as he's ever come in business to feeling heartbreak. "I had forgotten one of the lessons that I'd learned from Ron Perelman," he recalls. "Never fall in love with a deal. Be ready to walk away just before you sign the last document."

But Wilkes chose not to walk away. Hired for his industry smarts, his knowledge of mortgage lenders and brokers, and his operational experience, he decided to prove to himself and to his colleagues that a solid idea for an Internet startup can survive even the harshest market turmoil. Wilkes is trying to pull off a strategic trifecta that faces so many dotcom companies today: land new customers, find new capital, and generate a new business strategy, all at the same time.

"We're trying to beat a horse that's barely alive," Wilkes admits. "We've had four quarterly increases in a row in our lender and broker members, bids for mortgages, and revenues. Everyone who saw it said, 'We like your model.' But I've learned not to confuse a favorable comment with a 'yes.' In situations like this, you've got to change your business model and conserve cash."

Cash Is the Gas

The turnaround at IMX has been neither pretty nor easy. It has cut employees from its payroll three times since June 2000. The company probably would have become a casualty already if Wilkes had not been able to raise an additional $18 million from its existing investors, led by ABN Amro, Hummer Winblad, and Lehman Brothers. Pulling down more money for an Internet startup in the summer of 2000 was a minor miracle. "It was like pulling back teeth," he says.

Still, having real money makes all the difference these days. "It's like the movie The Road Warrior, where gasoline was everything and the guy who could find the gas was king," he says. "In this case, cash is the gas." Like Mad Max, the movie's self-reliant protagonist, Wilkes has become obsessive about hoarding the one commodity that stands between him and oblivion. Each week, he sends an email around to IMX's four senior managers, informing them how much cash the company has spent in the past week and how much is left. "I have to let them know that cash is a scarce resource now," he says. "It makes them think, 'What can we do to raise more revenue or to reduce the suction of cash out of the company?' Our assumption is that the $18 million we raised is the last chunk of money we will ever get from private investors."

Even with the world collapsing around it, IMX is steadily adding customers, and with the slowing of its burn rate, Wilkes says that the company could be profitable in under a year. The pool of customers is relatively small: The top 25 lenders account for roughly half of the total volume of mortgage loans made in the United States, and IMX is attracting business from big mortgage lenders like Bank of America Mortgage, First Nationwide Mortgage Corp., and Wells Fargo. On the other side of the market are about 2,300 mortgage brokers who act as the shock absorber for the large lenders, taking the bumps out of the loan-origination process by finding qualified borrowers and bundling them together.