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| 2017-06-07T14:49:07.000Z | Instant Company (1999) | https://www.nytimes.com/1999/07/11/magazine/instant-company.html | pdog | 54 | 13 | 1496846947 |
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14506879 | 1999 |
In 12 weeks, the amount of time it might take an average person to decide what kind of hedge to plant in the backyard, they built a company from scratch. An instant company, or what is being called in Silicon Valley a ''second-generation Web company.''
Not so long ago, it seemed incredible that a Web company could be born in a mere two years. But rather than going back to normal, the pace of creation in Silicon Valley now seems to be speeding up even more. Any Web company that starts out today and takes two years to get up and running is likely to be left in the dust.
In first-generation Internet companies, the founder and a few college buddies moved into a garage that they decorated with Nerf guns and green army men. In second-generation Internet companies, the staff coalesces not from friendships but from respect for mutually complementary skill sets. They skip the garage phase, engage two real-estate brokers and make simultaneous bids on three office spaces, hoping one comes through. They move in over the weekend and by Monday have it decorated with Nerf guns and green army men.
In first-generation Internet companies, the staff resigned from monolithic software corporations or took leave of business school or jumped ship on brand-manager positions at Procter & Gamble. Nobody had Internet experience; they learned by making mistakes, of which there were many. The purpose of the Internet was unclear. Now, companies are being formed by staff members who have years of know-how. And they see the Internet, above all, as a place to buy things. Some $301 billion was generated by the Internet economy in 1998, with an annual growth rate over the past four years of 174 percent.
Because of the way high-tech employees are compensated, there are likely to be a great number of second-generation start-ups in the next year. The notorious stock options that add up to so much paper wealth usually take four years to fully vest. For the early movers on the Internet, the four years are coming up. And the golden handcuffs are coming off.
This particular second-generation internet company has managed to recruit top people who were still handcuffed -- what people in the Valley call ''the unhirables.'' Naval Ravikant walked away from what at the time was $4 million worth of unvested @Home stock options. Ramanathan Guha walked away from probably more than $4 million (a figure he is contractually forbidden to confirm) at America Online, which had acquired Netscape. Sabrina Berry's previous employer, CommTouch Software, was planning to go public. Berry walked away from all of her shares in that company. For Lou Montulli to join, he resigned from a hot, well-financed start-up called Geocast Network Systems. At the time Nirav Tolia left Yahoo!, the unvested options he left on the table were worth $10 million.
But, he insisted, it didn't matter to him if it was $20 or $20 million -- he has a dream to pursue.
''People are going to think I'm nuts,'' said Tolia, rolling his eyes.
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''Can we not talk about this anymore?'' said Guha. ''It's painful to dwell on.''
Six weeks ago, the engineering team walked to In-N-Out Burger for lunch. They crossed an overpass above Highway 101 and paused at the rail. ''This team has been responsible for many of the key features of Netscape Navigator,'' Guha said. ''These guys can point to any of these cars passing underneath and say: 'That driver has almost certainly used my code. And that driver. And that one.' We want to build something that has that kind of influence. We want to build a site that everyone will use.''
So what's the idea that is inspiring so many to jump? Until this week, they've kept everything secret, operating under the code name ''Round One.'' In fact, not even people who come in to interview for a position learn the idea their first day. Several hours of vague conversation seem to be leading up to the grand presentation, but alas, the applicant is sent home with a preliminary offer, setting out salary and options and title -- and no clear sense of what the company will do. If the candidate is sold on the team, then she or he comes back for a second round. Only at the end of that next day does she sit down in front of a whiteboard with Ravikant and Tolia and hear something like this:
As the Web becomes an infinite supply of goods and services, goes the pitch, people crave guidance on what and where to buy. So far, the great number of on-line shopping guides present quantitative, machine-sorted and machine-generated data: comparisons of product prices and specifications. But what consumers need (Ravikant and Tolia contend) is a recommendation that gets beyond that: the advice of someone they trust, someone just like them.
Their solution is a Web site, Epinions.com, which they envision as a sort of Zagat-for-everything, a site consisting entirely of consumer opinions or reviews of anything you can buy. Epinions.com itself will sell nothing at all -- it has no warehouse, no trucks on the back end. The money would come from deals Epinions.com cuts with companies that do sell things: every time an ''E-pinion'' prompts a reader to click ''Buy,'' the company will earn a tiny commission on the resulting sale.
At the start, the E-pinions on Epinions.com will be culled from existing sources, guiding users through aggregations of expertise from the four corners of the Web. But the key to the whole idea is to make Epinions.com participatory, taking advantage of what I call the Tom Sawyer model. Write and post a short review of any product on Epinions.com, and you can earn a few pennies every time the review is read by another user. By letting readers rate the usefulness of the E-pinions, the most trusted ones will float to the top of every category. As Ebay is a marketplace for products, Epinions.com seeks to be a marketplace for ideas. If it catches on, like Ebay, then everything snowballs, and these hobbyist-reviewers function as sliver-time virtual employees who do all the work for you. ''Everybody is an expert at something,'' they kept repeating around the Epinions.com office; they hope their site will be the place where everyone shares their expertise.
Similar logic has been welling up in the collective unconscious of Silicon Valley, and most E-commerce sites are already adding some form of E-pinion to their Web pages. Productopia, Deja.com, Cnet, Amazon.com -- everyone's hiring editors and bringing back the old-fashioned, well-trusted written word. Of course, sites that both sell goods and review them are subject to criticisms of bias. Epinions.com.com would be the first company to start up doing E-pinions and only E-pinions, hoping to be as Jell-o is to flavored gelatin.
And that's it. Then again, what was Yahoo! at the start but just a Yellow Pages to the Web? The point is that job recruits with demonstrable talent are buying in to give it a go. And they know that in the short and unpredictable history of Internet businesses, success has often come down to getting the details right, fast.
''We don't need any more strategists,'' says Mike Speiser, a McKinsey consulting alumnus who learned to curtail his own inclination to heady analysis. This was 10 weeks ago.
''We need closers,'' agrees Nirav Tolia. ''We need bulldogs.''
''We need engineers who are execution machines,'' says Guha. ''This is not a strategy play. This is an execution play.''
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First-generation start-ups raise small seed rounds to develop a ''proof-of-concept version,'' at which point the start-up has to go back to dog-and-pony shows, negotiating for more money. Again the second generation is different, faster. Prototypes, demos, alphas -- the language of the hustle -- those words aren't even in the Epinions.com vocabulary. Every minute spent dancing for investors is a minute stolen from the finished product. Ravikant and Tolia's business plan (which consisted of 16 sparse slides) had no financial projections and no budget. They negotiated for $8 million, enough that they wouldn't have to go back for more until well after launch. They had no idea what it would cost to pull together the E-pinions they would need to stock the site, but they budgeted $5 million, just to be safe.
The group's biggest fear was the wrath of prominent venture capitalists who did not get an opportunity for a cut of the deal. A slightly rattled Tolia played me several phone messages left on his answering machine by furious V.C.'s. One of the advantages of combining August Capital and Benchmark is that they occupy the same two-story building. When the terms of the valuation were set with August, Ravikant and Tolia walked upstairs to Bill Gurley's office at Benchmark. Gurley had joined Benchmark only a month before, and Epinions.com would be one of his first big plays for his new employer.
''I need to know if you're in,'' Tolia said.
Gurley was calm. He recounted some of the internal discussion among the Benchmark partners. One partner, Gurley offered, had scored the idea a 6.5 and the team a 9.5 on a scale of 1 to 10. But he wouldn't tell them details of how the final vote was scored.
''So where does that leave us?'' Tolia asked.
''Don't worry, it's done,'' said Gurley.
''Should I contact your lawyer or something? Draw up term sheets?''
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''We don't do term sheets here,'' Gurley responded, offering his palm. ''We do handshakes.''
In those first crucial weeks, the Benchmark investment was like having a Hertz Club Gold pass. Every service provider is overbooked in Silicon Valley -- realtors, phone-system installers, furniture suppliers, headhunters. Dropping the Benchmark name was the way to impress vendors without sharing the idea. Everyone wants to do business with what may become the next Ebay, dreaming they'll be rewarded with friends-and-family shares when the time comes.
Of course, they can't do everything. There was that first weekend in their new digs, when the parts for their desks arrived from Home Depot -- 25 solid wood doors, 100 4-by-4 legs and 400 metal braces. Despite this formidable team of engineering talent, in eight hours of off-and-on tinkering they couldn't correctly assemble any desks. Finally they called a carpenter who had done this before, and he started building two desks an hour.
Fortunately, what they don't know about desks, they do know about code. Hiring staff with seasoned Internet experience has allowed Epinions.com to delegate like crazy. ''We need to be told what to do but not how to do it,'' said Luke Knowland, who had done it before at Wired Digital.
''It would take four very bright first-generation engineers a full year to program this site,'' Guha estimated. ''But because we've done it before, we can write most of the code in six weeks.''
Everything is faster. Zero drag is optimal. For a while, new applicants would jokingly be asked about their ''drag coefficient.'' Since the office is a full hour's commute from San Francisco, an apartment in the city was a full unit of drag. A spouse? Drag coefficient of one. Kids? A half point per. Then they recognized that such talk, even in jest, could be taken as discriminatory in a hiring situation.
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On the business-development side, ''I no longer have to waste months evangelizing,'' says Dion Lim, who has been cutting deals to aggregate opinion material from existing Web sites. A couple of years ago, the process would have been slow and painful. ''Now, I just call, and they have a syndication rate scale and a preferred data-feed format,'' he says.
Meanwhile, Epinions.com has kept up constant reconnaissance on the competitors it will be jockeying with this fall, despite those competitors' best efforts to keep their strategies secret. The Valley has what it calls the ''whisper circuit,'' which is not so much wild gossip as the ability to call in old favors and threaten to pull people's teeth. A lot of whisper-circuit surveillance leaks out the back door of companies through their engineers, who often refuse to lie on principle or are very bad at it when they try.
Through the whisper circuit the company learned that one potential competitor was trying to wiggle out of a partnership so that it could overhaul its product toward something like Epinions.com. The team learned that a top job applicant, on the verge of accepting its offer, had been grilled so hard by another venture capitalist that he cracked and spilled the Epinions.com idea. (The offer was retracted.) Another V.C. was trying to discredit Epinions.com by telling people he'd turned down its deal, which he'd never seen.
And it was on the whisper circuit that the Epinions.com team learned that Amazon.com had started flying writers and editors to Seattle and offering them positions as category editors to cover a wide range of products -- food, video games and so on. The whispering was specific -- that Amazon.com was offering a $65,000 salary, a 10-percent signing bonus and options that could be worth $1 million in four years. (Amazon declines to confirm or deny those details.) The entrance of Amazon.com onto the scene seemed like bad news for Epinions.com. Everyone lost sleep that night.
But their exuberance returned with dawn. ''Amazon is supersmart,'' said Naval, marching out of Benchmark Capital's Sand Hill Road offices with his teammates in tow. ''But we're a start-up. We've got focus. Nobody will be able to move as fast as us. I pity the fools!''
''Other than that first night with Amazon, I haven't lost a single hour's sleep over our competition,'' Nirav Tolia said four weeks ago, when he was only rationing himself four hours a night anyway. ''All the sleep I've lost has been over our internal conflicts.''
Indeed. By hiring so many bulldogs and execution machines who were all used to being No. 1, Tolia feared the competition between employees would tear the company apart. For the first month, without a product to obsess about, they focused on their responsibilities, and the closest proxy for their responsibilities was their title. That they had given up so much money to be here made them a little testy -- they wanted constant assurance that their career decision wasn't a mistake.
Everyone kept demanding an org chart, preferably with his or her name in a box near the top. In first-generation Web companies, the premise was that no task was beneath you: you did whatever it took to succeed. This wisdom seems not to have been passed down. ''How do we go from a team of champions to a championship team?'' Tolia kept asking.
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Bill Gurley had turned Naval Ravikant on to complexity theory. ''Truly alive systems exist only at what is called 'the edge of chaos,''' Ravikant said in one meeting. So though it was causing him to lose hair, he was running the company on the edge of chaos, rallying people to risk making mistakes. ''I don't want to be a company that plays it safe.'' He gave his employees an org chart, and then another one every week. Their titles became vague, more fungible.
Going through the start-up experience usually bonds a team together. There are those occasional ''Breakfast Club''-like days when workers' inner lives get revealed to each other. This bedrock of goodwill gets the team through hard times later. Going through it at second-generation speed only allows brief bonding moments. Mike Speiser covered Internet companies as an investment-banking research analyst, but he hadn't worked at one before Epinions.com. A few weeks ago he said: ''You know what I miss? I miss those good old days, when we had the run of the place at August Capital, hanging out and brainstorming.'' Those halcyon days, six weeks earlier.
Nirav Tolia came up with what he thought would be a solution to distract the champions from their fiefdoms. At the all-hands meeting five weeks ago, Tolia announced that he would shave his head if the company met its offical launch date. This is a guy whose E-mail was ''the-face@yahoo.com'' for a good reason -- a hair is never out of place on his head. ''When you're wondering why you're here at 2 in the morning, think about my cue ball,'' he said.
Everybody howled with laughter. Then Aleksander Totic went over to his computer and pulled up an ancient Web page, from way back in 1994. Digital photographs were posted from the period when the original Netscape engineers shipped Navigator 1.0. There at the top of the page was a picture of Lou Montulli -- who is even more of a sharp dresser than Tolia -- with his head completely shaved. Then everyone really laughed.
''If we're going to be a second-generation Web company, Nirav's going to have to come up with something better,'' Totic chuckled.
Watching an instant company get built has been slightly disorienting. Silicon Valley is sustained by the myth that you can come here from anywhere with sheer smarts and a firm handshake and make good. Second-generation Internet companies seem to seriously tip the favor to those already here. Four weeks ago on the whisper circuit, Tolia learned that an entrepreneur from Arizona was in town to shop a business plan for a company, called Publicopinion.com, with some of the same basic concepts, like rating reviews. Tolia took the challenge seriously -- Publicopinion.com already had a prototype on line and needed financing to take the next step. But the truth is that if the guy from Arizona is only now trying to get an audience with venture capitalists, he probably doesn't have a chance to catch up.
After Ravikant left @Home, he would still see old colleagues at parties. The comment he heard from them time and time again was: ''It's amazing you walked away from all that money. I wish I was brave enough to take the chance.''
So why did they walk away from all that money? Take it as a given that they all believe in the commercial viability of the idea, but beyond that, their comments are all over the map. One guy talked blatantly about wanting ''plane money,'' and how you weren't even a player in the Valley with less than $100 million. A few plead that they just want to live the start-up experience, and the money they've earned has bought them the unconditional freedom to pursue that dream.
Now they are at the takeoff point, and their first-generation experience can't help them. The next 12 weeks will be an even greater challenge: the goal now is to turn a brand-new site into a hive, one that has 80 percent of all E-commerce categories covered well in advance of the crucial Christmas buying season. They are blindly gambling that they have the right incentives and the right filtering mechanisms in place. Ready. Fire. Aim.