DOT-Com Founders Are Stepping Aside -- Internet Priorities Shift
Seattle Times Eastside Business Reporter
In May 1998, Terry Drayton gave birth to the idea of selling groceries on the Internet when he launched his Bellevue company, Homegrocer.com. Then he began to shop for his replacement.
Drayton had run operations with several hundred employees before, but not the kind of company that he intended Homegrocer.com to become. In one year alone, management planned to enter five new markets and add roughly 1,400 employees to its rolls. Drayton stared at those numbers with, as he put it, "a sort of mock horror."
In September, after interviewing top management prospects, including a chief executive officer of a Fortune 100 company, Drayton replaced himself with Mary Alice Taylor, a former Federal Express and Citigroup executive, whose expertise lies in delivery operations and national rollouts.
Drayton was not surprised at the deep well of executive talent that vied for his spot. "They have a chance to be on the ground floor of change in the world," he said. "It sounds a bit much, but I think this whole industry is unprecedented in terms of how much is happening."
Homegrocer.com's announcement touched on a growing trend: Many Eastside dot-com companies are expanding so rapidly that many are not being run by their founders. While it's not a new phenomenon for entrepreneurs to eventually step aside, the speed at which these companies are recruiting senior management teams is shifting the paradigm of American business.
"It's all about time compression and the first to market," said John Ballantine, managing partner and CEO for Seattle-based Istart Ventures, a business incubator. "As a result, companies are trying to move fast and figure out the chemistry of a world-class management team at a much earlier stage."
Alex Knight, managing director for Arch Venture Partners in Seattle, said he looks for senior management teams that can both recruit great people and dispose of bad recruits quickly. Timing in the e-commerce world, he said, is key.
"I think the No. 1 thing that I preach as a mantra to our Internet companies is to make as many noncatastrophic mistakes as quickly as possible and not to make the same mistake twice," he said. "It sounds like trite venture-capital advice, but, in reality, when you hire experienced people, they've sort of risen to levels where the people around them are the ones that make those types of mistakes."
For recruited executives, the proposition turns out to be a quid pro quo. Dot-com companies need top managers who have clout in a specific industry and can sway large decisions, and those managers are enticed by the possibility of becoming quick millionaires.
"The allure of the Internet company is very high," said Point.com founder Court Lorenzini, who announced last month that he's searching for his replacement as CEO. "There are so many stories in the press every day about pre-IPO and post-IPO net worth."
Jerry Taylor, manager of Executive Recruiters in Bellevue and a headhunter for software, Internet and e-commerce companies, said he looks for roughly 30 different criteria in executives, from the size of their last company to their management style and education.
Taylor is brokering a deal now that would place a chief financial officer with a local technology company, which he declined to name. The potential CFO has executed three initial public offerings and has contacts in Wall Street - details, he said, that any company would be happy to place in its prospectus.
Peter Neupert, a former Microsoft executive who now heads drugstore.com, said the most important element of building a great company is to hire the right people on the front end.
"Companies want to build a culture, and they think about it after they've hired the people," he said. "You build the culture one person at a time."
A rapidly growing company also requires a level of detail and communication between managers that he said is unusual for a large organization, but is needed to make sure everyone is headed in the same direction.
"What separates great e-commerce companies from everybody else is great execution," he said. "If I learned something at Microsoft, it was execution."
Norman Behar, a former Egghead executive who is now president and CEO of employeesavings.com, said the Internet provides a level of scalability that is virtually impossible to match in the brick-and-mortar world, allowing a company to grow quickly.
"There's no shortage of opportunities," Behar said. "Our most difficult decision is sorting out which opportunities we pursue and which opportunities might dilute our focus."
Employers say there is a premium placed on growth and speed in acquiring customers, building brand-name recognition, and becoming a leader in a space. While the actual skills are not that different from a traditional business model, it's the compression of time that makes the experience different.
"It's like playing baseball on the moon," said Gary Hansen, a professor who oversees the Program in Entrepreneurship and Innovation at the University of Washington Business School. "It would be a different game with the absence of gravity."
Hansen shows his students a slide of a busy highway, blurred by headlights. The freeway, he said, represents a mature business environment.
E-commerce, he said, is much different. The freeway is sparsely populated and those who drive up the ramp can't merge in at 60 miles per hour; they have to speed up to 120 instantaneously.
With all the buzz about companies growing - and making money - so rapidly, Hansen warns that it may set a dangerous precedent.
"There's an awful lot of companies that have a high market value that are not making money," he said. "What happens is they become role models for other companies. At some point in time, investors want a return. The (successful) people I talk to have really thought through the business model, not the PR model."
But Suresh Kotha, associate professor for strategy and e-commerce at the University of Washington, said the days of venture capitalists throwing money at e-commerce start-ups are slowing.
"They're not well received like they were two years ago," Khota said. "(Investors) are beginning to discriminate. They can get traffic data on the Web on these companies. There's better predictability with whether they can convert traffic into successful customers."
The company Go2Net is an anomaly in this field. Founder Russell Horowitz is still running his business, cushioned by senior management executives from the outside.
Horowitz describes e-commerce as a melting pot of industries and business models. It includes a technology element, a practical business model and a media element, which requires particular skills in and of itself.
Horowitz said the Internet provides tools that were previously available to Fortune 1000 companies, leveling the playing field as to who gets access to what information. It also means building alliances with other companies to accelerate progress - something uncommon in traditional business models.
"When you shift from the environment that we all lived in to one where the Internet becomes the platform of distribution, the economic model is transformed," Horowitz said. "It creates something that doesn't have historical precedence."
Khota, the UW professor, said it's amazing to realize that a revolution is taking place in our back yard. And keeping up with all the change is virtually impossible.
"I think it's wonderful to watch, especially being an academic," he said. "It reminds me of Woodstock: You can watch it from afar, participate in it, or read about it a few years later."
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