The e-gang

By Elizabeth Corcoran, 07.26.99
Forbes Magazine
http://members.forbes.com/global/1999/0726/0214056a.html

RULE 7 Don't just quit the club--defy it About 18 months ago, William Hambrecht, 63, broke with Valley investment bank Hambrecht & Quist over an idea: that on-line stock offerings would benefit investors by letting the marketplace, not investment bankers, set the price of new stock issues.

His premise threatens the rich spreads that investment banks have come to expect from new issues. In a traditional technology offering, the stock rises on the first trading day. The banker pockets a 7% underwriting margin and also doles out deliberately underpriced shares to clients.

Using the Web, Hambrecht takes a company public with a Dutch auction. Investors say how many shares they want and at what price. Once the bids are in, the auctioneers calculate the lowest price at which all shares can be sold. Since the bids have already tested what the market will pay, the price is less likely to skyrocket on opening day.

So far, his first two public offerings have had modest results. Ravenswood Winery saw its one million shares climb 37.5 cents from their opening price of $10.50 in April and stay steady. In late June, Salon.com finished its first day 5% lower than its opening price of $10.50. Hambrecht has fun baiting H&Q. "They look on me as a competitor," he says. Rule 8 Reinvent your startup When Robert Knowling Jr. joined Covad Communications, he thought he'd be running a rapid-fire upstart that would put to shame the bureaucracy he had endured in 21 years at Ameritech and US West. He was wrong. "Early in the game, I'd run into a conference room and 20 or 30 people would be in a meeting because joint-decision-making was 'the startup way,'" says Knowling, 43.

Covad was classic geekdom: Three expatriates of chip king Intel aimed to sell high-speed Net access to homes and businesses, based on new digital-subscriber-line technology.

Those who preceded him had signed up for a startup experience. Knowling, who became chief executive a year ago, saw his job as building "the next $10 billion-to-$20 billion enterprise." By contrast, a startup need think only of going public or getting acquired. Knowling confined meetings only to those with the power to make a decision. But Covad won't grow if it's a dictatorship, he concedes. "You have to celebrate the people who skin their knees," he says. "That's what will make the company." RULE 9 Put strategy before technology At first glance, Eric Brewer fits the Silicon Valley type too well. The 32-year-old recently won tenure at the University of California, Berkeley. He is well-versed in the arcana of operating systems. The firm he cofounded, Inktomi, conjures up search algorithms. But Brewer's lesson for the Web isn't about technology at all. It's about creating a clear vision of what a company is trying to accomplish for its customers. In 1995, Brewer decided that searching the Internet looked like the biggest problem around. So he and his colleagues developed searching tools, selling the software that other companies like Yahoo and NBC Snap use to provide service to the public. In its early days Inktomi's engineers outnumbered its marketers by as much as 8-to-1. Engineers still reign at Inktomi, though marketing is gaining. Brewer's bottom line: Lose money now to earn future revenue. Rule 10 Make your technology invisible Christopher McCleary, 46, stepped into the Net in 1996 when he joined Digex, an early Internet service provider near Washington, D.C. Digex, like many ISPs, had a simple business plan: Hook people up and charge them for it.

Three years later the business shouldn't be focused simply on selling some high-tech widget; it should be about making things work, says McCleary. That ethos defines the firm he cofounded, USinternetworking in Annapolis, Maryland. The firm gets a flat fee for running a client's in-house software, but only when the system functions well. It guarantees the systems will stay up and running; fixing glitches is no extra cost. Rule 11 Create a scene Pamela Alexander is the consummate press agent of the Internet era. She formed the firm that carries her name in 1987 and sold it to Ogilvy last year. These days Alexander Ogilvy has a payroll of 203 and 100 clients, including Etoys, Idealab, Critical Path and Mindspring.

Alexander, 44, has been at the forefront of turning high-tech from a geeky business overrun with acronyms into a cool, cultural phenomenon. Her doctrine: Cultivate your consumers--they may also be your investors. To do that, startups have to start the public-relations push early, creating a brand image as they create their products. For Alexander, pr is about defining the agenda. RULE 12 Go public first, make money later Mary Meeker, an analyst and managing director with Morgan Stanley Dean Witter, is the court counselor who whispers advice to kings--Internet chief executives. She explains why the Net is unlike anything before it. All other technologies, she says, had to endure a chicken-and-egg phase, but by the time Web browsers hit in 1995, 150 million people around the world already had a pc. Web access was a trifling extra expense. The result has been an explosion of companies going public. In 1997, 16 Internet companies went public, and even now only 3 can boast a profitable quarter. In the first half of this year 57 Net firms did initial public offerings. Only 2 have seen profits.

Are we in an Internet bubble? No, says Meeker, 39. The next trend--businesses selling Internet-based services to other businesses--will dwarf revenues of the past four years.

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