carnage opens doors
Maney, USA TODAY
REDWOOD CITY, Calif. - Steve
Jurvetson is talking at Internet speed, which is the way
Jurvetson always talks. He's barely touched his lunch of pesto
gnocchi at a bayside restaurant as he ricochets among the
companies and deals and discoveries that get him
None of them are dot-coms.
Jurvetson is a principal at Draper
Fisher Jurvetson, a venture capital firm known for taking
gambles on borderline dot-coms along with doing more
substantial investments. But now Jurvetson is devoting his
time to trying to recruit scientists from a lab he won't name
to start a company based on a discovery that won't pay off for
years. He's diving into costly infrastructure companies. As
for dot-coms, the remarkable run of the past few years is
over, Jurvetson says: "The exuberance and craziness have been
brought back to earth."
Everybody in the technology
industry is feeling a great shift. Dot-coms - the narrowly
focused and more obvious companies such as Garden.com, eToys
and HotJobs.com - are starting to look like the training
wheels for the Internet age. The time for most of them is
passing, marking an important turning point in the evolution
of the Net.
When the training wheels come off,
the real fun begins. A next phase in tech is emerging - one
that will be deeper, more complex and more thrilling, say
venture capitalists, entrepreneurs and CEOs in tech.
It will also be harder. The Net
alone isn't enough to carry out the transformation of business
and leisure so long promised. The next phase will mix the
Internet with new and complex software, breakthrough
discoveries in areas such as materials science and lasers, and
deep integration of technology with the real, nuts-and-bolts
world. The winners might look more like Webvan, TeraBeam
Networks and Vivaldi Networks.
If a new company isn't in that
ballgame, analysts say, it's probably going to find itself in
a fast-maturing, consolidating sector where only one or two
players can win. The Web will support only a couple of winning
search engines, retailers, industrial-steel trading sites and
The bad news is that the shift will
be painful. Dot-coms by the dozens are shutting down
(Boo.com), selling out (Petstore.com selling to Pets.com) or
laying off workers to try to stay afloat (Salon.com). Dot-com
stocks have gotten steamrolled. The USA TODAY e-Consumer 50
stock index, which features the highest-visibility dot-coms,
is down 24% since January. Investors caught off-guard are
suffering. Some individual dot-coms are down 80% or
Yet, in the long run, the news is
good. The shakeout will make the survivors stronger. They'll
be able to pull in employees, customers and investment money
that had been stretched across many companies. "The dot-coms
are getting more reality to them," says Gordon Bell, who built
Digital Equipment's legendary VAX computer line in the 1960s
and now works for Microsoft Research while investing in and
advising tech start-ups. "That's really healthy."
The dot-carnage will also clear the
path for the next boom, which techies say is sure to come.
After all, says Sun Microsystems CEO Scott McNealy, we're only
0.5% into the e-commerce revolution: "This is just
But why did dot-coms run out of
steam? And what does that say about where things are going
Certainly some of it is the normal
boom and bust of new industries. Lester Thurow, a
Massachusetts Institute of Technology economist, compares the
dot-coms to the early auto industry. When cars were new,
hundreds of automakers sprang up. A handful became gigantic,
long-term winners. The also-rans went out of business or were
absorbed into the stronger players.
The same thing is happening now in
dot-coms. The one difference is that it's so easy to get into
and out of the Web business (no factories, warehouses,
distribution networks or stores to build or shut down), the
Darwinian evolution can happen at more of a fruit-fly
Put the magnifying glass to that
trend, and you can see a number of factors that have helped
pull down the dot-coms.
Many were started as narrow
businesses and are trapped there. Whole companies have been
built just to sell pet supplies or airline tickets to
consumers, or trade steel or agricultural supplies for
businesses. Even for the winners in each sector, growth is
limited by the sector's boundaries. Few have been able to
mimic Amazon.com and spread beyond the original business. "The
landscape is littered with bad business plans," says George
Shaheen, CEO of Webvan.
The dot-coms usually have no
financial safety net. They were started with venture capital.
When they burn through that money, they must raise a new round
of funding or go public. There are no deep pockets to keep
something going until it makes money. If investors are wary of
dot-coms - as they are now - new routes to money are cut off.
The dot-coms die.
"The past year, the average time
from initial financing to IPO has been 18 months," says Steve
Brotman of Silicon Alley Venture Partners in New York.
"Historically, it's been four to seven years. Clearly, we're
going to regress to the mean."
boom spread talent too thin. Like great pitchers in major
league baseball, there aren't that many great CEOs. So-so CEOs
have been running a lot of companies. The talent below them
has also been too thin and too hard to find. "It's much better
now," says Craig Forman, CEO of MyPrimeTime.com. "People
are coming here because we have a real business."
The need to be profitable caught
dot-coms by surprise. Warren Packard of Draper Fisher
Jurvetson says that the markets a year ago were rewarding
Amazon.com for losing more and more money. So, he says,
entrepreneurs came in with business plans showing expanding
losses over time. It seemed logical, if absurd, that losses
were the path to rewards. Likewise, Henry Blodget of Merrill
Lynch estimates that of 300 consumer dot-coms, five are
profitable. So when, in the past few months, stock market
investors decided they wanted profitable companies, dot-coms
were left to twist on their own ropes.
The reasons for the dot-com demise
are all about faulty business plans and irrational short-term
markets. They don't add up to show that the Internet and
technology in general have reached a dead end.
Just the opposite. While the
outlook for many individual dot-coms is grim, all kinds of
projections for tech still point skyward. Blodget figures that
worldwide Web-based consumer buying will shoot from $45
billion in 1999 to $600 billion in 2005. Look in another
direction: U.S. companies, which had 11.5 million miles of
fiber-optics in the ground in 1999, will see that more than
double to 26.7 million miles in 2002. And Sun's McNealy says
the market for Java-based smart cards is growing 100% a year
for the foreseeable future.
In this next phase, the Internet
will broaden and deepen. Far cheaper and smaller computer
chips will carry it into materials - maybe wallpaper, maybe
your shirt - that never before had any smarts. Wireless
technology will make the Net mobile and spur businesses no one
has yet thought of. Other companies will integrate the Net
deep into industries in new ways that change those
"That means it's about stuff that
you're really going to use," Brotman says.
The kinds of companies that look
like winners in the next phase have only some shared genetics
Big and deep: Webvan is more likely to be a success than
Peapod, which is struggling. Why? On the surface, they both
sell groceries on the Web. But Webvan is a deeper, more costly
play. It's spending $1 billion to build distribution centers
in major U.S. cities. Inside those centers is some of the most
astounding automation ever attempted, marrying software,
robotics and the Internet in new ways. If Webvan succeeds, it
will change the economics of retailing.
Another retail-based example is
Vivaldi Networks, one of Jurvetson's favorite investments.
Vivaldi's technology gathers information from cash registers
and matches it with customers. (The customers have to opt in.)
The information is then integrated with the store's Web site.
So a store could give a customer personalized service on the
Web or in the store, and cross-reference the two. Order
something on the Web, and Vivaldi's technology could tell you
whether it's on the store's shelves right then and offer you a
personalized sale on that or other items. "It's the Holy Grail
of retailing," Jurvetson says.
Just about everybody says the mobile Internet boom is just
beginning. Infrastructure companies that bring Web-style
information to cellphones or hand-held computers will
One of those is Phone.com, which
makes the underlying software that goes into most Web-enabled
phones and guides Web information through wireless networks.
AvantGo makes software that allows Web pages to be compressed
and viewed on a tiny hand-held screen, so a Palm VII could
wirelessly grab a map or crossword puzzle off any Web site.
Transmeta has devised a new class of microprocessor
specifically for mobile computing.
Hard science: Burned by companies with low barriers to entry,
venture capitalists are now hot for companies with mountainous
barriers to entry. Chief among them are businesses that can -
or might - be built on laboratory breakthroughs. The VCs are
poking into areas such as plastic semiconductors, which could
make computing power nearly free and enmesh it into almost
anything. They're getting interested in the first rumblings of
nanotechnology, which could result in tiny machines the size
of molecules. Nanotech companies probably won't pay off for
five or 10 years.
TeraBeam is one company that fits
in the hard-science category. It's using breakthroughs in
laser technology to create wireless communications networks.
The networks use diffused light pulses to carry information,
instead of the usual radio waves. Another science-based
company is LifeF/X, which is creating realistic-looking,
computer-generated talking heads for use on Web sites. The
company is building on medical research technology developed
at the University of Auckland, New Zealand.
Back at lunch in Silicon Valley,
Jurvetson never does finish his gnocchi. He keeps talking
about how the next generation of companies has to be much more
profound than the first one. "They have to be a hundredfold
better" than the way things are done today.
If those companies create the next
boom, it's probably going to be calmer and more sustainable,
and will play out over a longer period than the dot-com boom.
At least that seems to be the hope of the weary folks
investing in the tech industry.
Some dot-coms that
have fallen through the Net
craft toy store
ads in e-mail
and auction site
Sources: The Associated Press, USA TODAY