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ONLINE ENTREPRENEURS
September 7, 1998The NewsHour with Jim Lehrer Transcript |
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As the Internet continues to grow in popularity, more and more people are looking to cyberspace to make money. Following a report on one company's attempt, Phil Ponce and guests discuss how the Internet has changed the face of business.
JIM LEHRER: On this Labor Day a two-part look at how the Internet is changing the face of work in America. First, new entrepreneurs online, reported by our business correspondent Paul Solman of WGBH-Boston.
A RealAudio version of this segment is available.
NEWSHOUR LINKS:
September 7, 1998:
A Labor Day discussion on how the Internet is shaping today's economy and workforce.
April 3, 1998:
Technology firms explore new ways to train much-needed hi-tech workers.
February 12, 1998:
The technology of movies and special effects boosts California's lagging economy.
July 4, 1997:
A special report on the state of Online Commerce.
July 1, 1997:
The Clinton administration releases its position on the growing electronic commerce arena.
December 25, 1996:
A report looking back at the much-hyped and much-maligned Internet.
Browse the NewsHour's coverage of the cyberspace and the economy.
OUTSIDE LINKS:
The Knot: one of the new breed of Internet businesses.
The U.S. Commerce Department's Technology Administration.
PAUL SOLMAN: New York, like regions all over the country, has come up with its answer to Silicon Valley. So this is Silicon Alley, in lower Manhattan, where space that once housed sweat-shops has been converted for gung-ho enterprises like The Knot. Every day is bring-your-daughter-to-work day for the Knot's founders, David Liu and Carley Roney, NYU film school grads.
But the Knot's their baby too. The Knot is an Internet firm, basically, a wedding Web site, everything you need to "tie the knot" - instant access to more than 5,000 articles, help with budgeting a blessed event, picking the wedding photographer, and the Knot catalogues enough bridal gowns to marry off half of Manhattan. The high-tech partners have sky-high hopes.
Breaking new ground.
DAVID LIU: We're doing something completely unique, never done before, and we're hopefully breaking new ground in what we call traditional media.
PAUL SOLMAN: If manufacturing drove the economy a century go, on factory floors like this, services drive it today. And the hot money in services is on literally thousands of new firms serving up information via computer over the Internet.
DAVID LIU: I mean, everyone is like scrambling to try to get links and exposure and get their brand out there.
PAUL SOLMAN: Given all the competition, the strategy is rush, rush, rush - to become "the" Internet wedding site before someone else does.
CARLEY RONEY: I'm paging through this, I'm clicking on this -
PAUL SOLMAN: For new mom Carley Roney it means 80-hour weeks, nutrition on the run, forays all over town to lock up new partners. For David Liu, at the moment, it means a flood of resumes and a meeting. There are tons of meetings.
DAVID LIU: Right now, Bill is getting two okays a week from me.
CARLEY RONEY: How are you doing it? Are you doing it -
DAVID LIU: The developers - the developers are coding, the design specs are frozen --
PAUL SOLMAN: These are the new entrepreneurs, creating new firms at all costs, who seem to be driving the U.S. economy.
Creating something from nothing.
DAVID LIU: Part of the reason why we're doing this is the exhilaration. I mean, it is the satisfaction that we're creating something from nothing.
CARLEY RONEY: It's basically a bunch of people sitting together, trying to do a job -
DAVID LIU: Killing themselves.
CARLEY RONEY: Yes. Killing themselves to do a job.
PAUL SOLMAN: In the 90's entrepreneurs like these have helped squelch unemployment, stoke the stock market. But their company, like all start-ups, is built on a dream. Suppose it's a pipe dream. Will that turn the economic boom of recent years to dust? That depends on whether firms like these can actually make money. Already, the Knot sells ads that appear on its pages. And it's going all out to lure people to its cybersite, with its chat room, for instance, where advice and anxiety are shared. Joanne Van Vrankin is the Knot's new chat host.
PAUL SOLMAN: Everything was great, and then all of a sudden he's not sure if he wants to get married. It's called cold feet; it'll pass, Quequay says. "I hope so. I've been crying for days." Then what are you going to say? I was going to say the same thing. He'll be okay. That's you. So you're just sort of facilitating the conversation, making her feel better.
JOANNE VAN VRANKIN: If there's a lull, I try to get it going again, try to draw everybody into the chat room.
PAUL SOLMAN: Three new employees started the week we shot, among them, Abby Senzler, being introduced by VP of sales, Rob Casina. Right now, the Knot is spending far more than it's making. So, who's footing the bill? Investors of VC, that is, venture capital. Ann Winblad, one of the country's top VC investors, and Bill Gates' former girlfriend.
Enter venture capitalists.
ANN WINBLAD: A venture capitalist takes money from major corporations and universities and we then look for new companies. We give them money for part of their equity, their shares of ownership, and then we help them grow a big company. What my job is, is every day I get to audition the future.
PAUL SOLMAN: Winblad and her team made a typical VC offer to the Knot: $3 million for some 20 percent of the firm. Other VC firms actually offered somewhat more, but Winblad is known as a winner and has returned 40 percent a year on her investors' versus less than 20 percent for stocks as a whole. So Winblad comes with a whiff of self-fulfilling prophecy. Moreover, says Bill Sahlman of the Harvard Business School --
BILL SAHLMAN, Harvard Business School: If you get her to invest in your company, she's not investing in another potential competitor, and that's a very important part of the process.
PAUL SOLMAN: On the other hand, Internet sites are easy to start. In business-speak there are few barriers to entry in this industry. So there are plenty of competitors, both real and imagined.
CARLEY RONEY: They're literally Modern Bride, Wedding Channel and Brides. I mean, Brides is a big question mark. We don't know what they're doing, so we consider them a competitor.
PAUL SOLMAN: It's David Liu's turn to take the baby - his mom will be in later as usual to watch for the rest of the day -- while Carley Roney showed us the key to the firm's success - a Web site wedding registry, where couples will supposedly register gifts they want and wedding guests will supposedly buy them. The Knot will function as a store and take a cut on every sale. Carley has put great entering into coming up with the right roster of products.
CARLEY RONEY: We basically started with every product possible out there on the market and sort of from there said, okay, what do today's bride and groom really want, and sort of tried to determine different lifestyle bride and grooms. Like there is the sort of adventurous couple, they're always like traveling and going like biking and hiking and things like that. Then there's your sort of more kind of romantic couple that might like stay home and likes to go out to nice dinners and likes to cook together.
PAUL SOLMAN: Finally, there's the casual couple, which might register for glasses like these being shot for the Web site at a nearby studio. On average, by the way, people spend $75 on a wedding gift. The registry is scheduled to launch soon and is being counted on to provide the bulk of the Knot's revenue. But other wedding Web sites - it turns out - already have registries. The team needs to persuade the venture capitalists that it's got a better approach, and it needs to persuade itself.
DAVID LIU: I often think that to be a good entrepreneur you have to be very naïve, and you have to say to yourself, I think I can do this; sure, we'll try to do this. And until you actually try to do it, you don't realize what it takes to do it. And as a result, you know, you kind of have to be in a constant state of ignorance - to think that you can do things and roll into it, you have to do it, the survival instinct kicks in and you get the job done.
ANN WINBLAD: I'm here to see David and Carley.
PAUL SOLMAN: The venture capitalists arrive, greeted by a brand new temp filling in at reception.
ANN WINBLAD: David is your CEO.
RECEPTIONIST: David who?
ANN WINBLAD: David - that's David, right there.
PAUL SOLMAN: Ann Winblad, knowing the chaos of start-ups, is unfazed that the receptionist doesn't even know who the CEO is.
CARLEY RONEY : Hi.
ANN WINBLAD: Good to see you. Last time I was here it was bring-your-daughter-to-work day and you had your baby stashed in the back. Is she here today?
CARLEY RONEY: She's actually not here for right now, but not because you were coming.
PAUL SOLMAN: On a whistle-stop tour of her East coast investments Winblad is squeezing lunch in here. Given her experience and contacts, there should be plenty to squeeze out of her, as well. Should they, for example, hold off PR for the official launch of the registry?
ANN WINBLAD: People rarely hold their powder until a launch event because it's too late in case somebody else has declared victory ahead of you. So you've got to leave a lot of bread crumbs on the way to the launch.
PAUL SOLMAN: Winblad's worried that the team doesn't see the big picture. Her mantra: Declare victory from the start.
A mantra for success: Declare victory from the start.
ANN WINBLAD: You can't wait until you're lined up on the starting line with everyone else and say, hey, look at us, we're going to be the winner. They have to already be told you won before you got there.
PAUL SOLMAN: It's time to unveil the registry. Wedding gifts are a big business, $17 billion a year. But only 10 percent of new businesses make it past the first five years. So VC's like Winblad are taking big risks. No wonder they demand big returns.
ANN WINBLAD: So, on the adventurous one, do you say, if you've never slept in a tent together, don't go into this section?
CARLEY RONEY: Basically yes, things like that.
PAUL SOLMAN: Winblad cares about targeting couples for the registry but mainly because such details affect the prospect of future profits. She's got 20 percent of the Knot's stock, remember, and the promise of profits is the basis of any stock's price. So she's thinking ahead.
ANN WINBLAD: Once we own a customer and their gifts go unfulfilled, do we go back on holidays or anything like that? I mean, can people go back into that and say, gee, you know, Bob and Sue never got that toaster, maybe I'll buy it for Christmas or -
CARLEY RONEY: We get ourselves into discussions like these, and then all of a sudden it's like, oh my God, what are we doing? We gotta focus...But this is a good question, though.
PAUL SOLMAN: Winblad's long-term perspective runs counter to a common complaint about venture capitalists, that they're vulture capitalists, in it to get a company just far enough to sell their stock in an initial public offering, or IPO, to gullible investors like you and me. To Harvard's Bill Sahlman, though, most VC's are in for the long haul, and that's critical for the economy.
BILL SAHLMAN: You're trying to create companies that 20 years from now people will say thank goodness somebody did that. So if it's Yahoo or Federal Express is a very, very good example - Federal Express took quite a long time -- and if the venture capital community had not been patient, Federal Express wouldn't be here today. And we now take this for granted.
Today's venture capital boom.
PAUL SOLMAN: Patient investors betting on driven entrepreneurs, who, in turn, live on faith, hope, and venture capital. But wait a second, today's venture capital boom is even greater than that of the 1980's, flooding a market, the Internet, that's yet to prove profitable at all. What about the recent VC disaster, just a decade ago, when a new type of computer disk drive was all the rage and 43 different firms were funded to manufacture it?
BILL SAHLMAN: Each of those 43 venture-backed companies was trying to get 10 percent of the market. It just doesn't work out that way. And eventually you get down to a point where you have two or three viable competitors in an industry.
PAUL SOLMAN: And all the other firms lose, as do their investors. In the disk drive business there were simply more venture capitalists than business opportunity. Is the Internet cycle now cresting?
BILL SAHLMAN: I don't know where we are in the cycle. I can't predict that tomorrow it's all going to come crashing down and be disappointing. But I can say that capital has got a strong head of steam and ultimately will overwhelm opportunity.
ANN WINBLAD: Almost everything is getting funded.
PAUL SOLMAN: Well, then doesn't it make you, as a funder, worried that bad things or things that won't pan out are being funded?
ANN WINBLAD: It doesn't make me worry about the companies I invest in, because I am using a lot of discretion. What it makes me worry about is returns for the whole industry will go down, because not all of my colleagues are using discretion, and so our job of raising new money to invest in entrepreneurs may get harder.
PAUL SOLMAN: And that leads to a few final, unanswerable questions. Is the Knot an example of over-optimism, over-investment? Are venture capitalists flocking, like lemmings, to an over-hyped industry, the Internet? Is today's entrepreneurial economy built more on hot air than hard economics? Well, maybe, but to the extent that any business, any economy really, is just effort based on belief, we'll never know unless they try.
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