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Dot-com carnage opens doors By Kevin 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 excited. 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 so on. With change comes pain 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 more. 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 starting." But why did dot-coms run out of steam? And what does that say about where things are going next? 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 pace. Behind the fall 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." The dot-com 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 industries. "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 with dot-coms. 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. Wireless: 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 boom. 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 Company Closed Business Employees APBNews.com June 5 News 140 Boo.com May 18 Retailer 400 Craftshop.com May 24 CMGI-backed craft toy store undisclosed Digital Entertainment Network May 18 Teen entertainment 200 Epidemic Marketing June 12 Software allows ads in e-mail 60 HealthShop April 12 Health-food store 60 Petstore.com June 13 Pet retailer 200 Red Rocket May 5 Viacom-backed toy store undisclosed SurfBuzz.com June 6 Internet portal and auction site undisclosed Toysmart May 22 Disney-backed toy store 170 Violet.com April 25 Boutique undisclosed Sources: The Associated Press, USA TODAY research