Internet entrepreneurs invariably rush to launch their Web sites. They race to get up and running before another company grabs market share and positions itself as the industry standard. You know the script: Capture the first-mover advantage. Leap or languish. Work out the kinks later.
But don't tell that to Hank Williams, the CEO of ClickRadio (and no relation to the other musical H.W.'s). Almost two years ago Williams began developing a software program that would allow users to download music to their hard drives for a free one-month trial-but he didn't unveil his idea to the public until last June. Why wait? "It wasn't ready," Williams says. "And we're perfectionists."
At 35, Williams might seem a tad old to be CEO of an Internet start-up, and, indeed, ClickRadio's approach could easily be described as conservative. Instead of pushing controversial new technologies to market and declaring war on the recording industry-as MP3.com and Napster did-Williams and vice chairman David Benjamin first took the time to negotiate with record labels to license their music. Benjamin, a veteran music-industry lawyer, refused to believe that any digital music company could succeed without the cooperation of the major labels (as Napster has come to realize). Sure, distributing music for free-illegally-might win loyal followers, but that's no way to run a sustainable business, Williams reasoned. The recording industry wouldn't stand for it. Better to make friends, get access to the latest songs, and ensure that the moneyed interests would support the program. "Internet time" be damned.
The tortoise-not-hare model seems to be paying off. ClickRadio has signed licensing agreements with Universal Music Group, BMG, and Warner Music, and is negotiating with other labels. Those deals give the company and its listeners access-legal access-to millions of songs. By taking the time to develop partnerships, ClickRadio has been able to garner funding from venture capital firms like i-Hatch and Sierra, and is operating from a stable position as it seeks a second round of financing. "We're not coming to the VCs with a product and saying, 'This would be great if we could get these labels,' " Williams says. "We've got them."
In addition to partnerships, Williams has already lined up his first advertisers (ad dollars are expected to make up 95 percent of ClickRadio revenue, with the other 5 percent coming from music sales and market research that the company generates using listener data). Meanwhile, competitors like Napster and MP3.com are engaged in costly lawsuits with the recording industry.
As a result, Williams is downright disdainful of the notion that you need to be fast to succeed. "People have confused novelty with business," he says. "And you end up with these companies that have 10 million customers and no way to generate revenue. That," he says flatly, "is not a business."
Broken Rule TAKE THE MONEY AND RUN
Company Kana Communications
Location Redwood City, California
Founded 1996
Employees 1,100
When Mark Gainey began looking for funding for Kana Communications in April 1997, he was faced with a choice most entrepreneurs would kill for. On the one hand, Draper Fisher Jurvetson, a top VC firm, was offering $750,000 for a 40 percent stake in his company. (Kana sells software that helps e-commerce concerns interact with customers and partners.) On the other hand, a group of angels was offering a seemingly sweeter deal. They were prepared to fork over the same sum for a mere 25 percent stake. Plus, there was no talk of preferred shares or other red tape-just cold cash.
The following isn't something you hear every day: Gainey turned down the angels' money. He went with Draper Fisher, even though it was giving him a lower valuation and a more complex deal. Why? Draper Fisher had an impressive track record, and its portfolio companies included other e-commerce database firms, so Gainey knew he'd be able to draw on its expertise in developing his product. What's more, Draper Fisher had a history of providing ongoing support to its portfolio companies.
Did Gainey's heretical approach pay off? In September 1997, when Kana sought its second round of financing, Draper Fisher added a million bucks to its investment, which made it much easier to attract additional investors. "That's when Kana started picking up momentum," he says. "Quality investors are like magnets."
Gainey once again found himself with many solid choices. This time the firm offering less money was Benchmark Capital. One main draw was its fat Rolodex, which included e-commerce companies that could benefit from Kana's software. Gainey figured it would be wiser to forgo a short-term gain for greater long-term opportunities. As it turned out, one of Kana's first customers was a Benchmark portfolio company-a little-known auction Web site called eBay.
With two blue-chip investors onboard, Gainey had no problem raising still more money. In September 1998 he secured $12 million in two weeks. This past September, the company went public, and today the stock is trading at about double its IPO price, with a market cap around $2.5 billion.
Looking back on his financing strategy, Gainey sees things this way: "If you create a company that's as valuable as possible, it won't matter whether you have 20 percent ownership or 25 percent ownership. Everybody's going to be happy."
Broken Rule LOCATION IS EVERYTHING
Company SoftLock.com
Location Maynard, Massachusetts
Founded 1992
Employees 75
Conventional wisdom dictates that a new e-company be located in a city center. It's easier to hire employees and schmooze clients at trendy restaurants, to say nothing of the prestige that comes with a hot urban address. But when SoftLock-an electronic publisher that markets its clients' content on the Internet and ensures that the material can't be illegally reproduced-was looking for real estate in early January 1999, Boston office space was too pricey. "They wanted upwards of $40 a square foot," says SoftLock executive Pam Holscher. "It was crazy." The spaces were cramped and "ordinary with a capital O."
So SoftLock explored other options, and eventually turned its sights on Maynard, a small, unglamorous suburb about 25 miles northwest of Boston. The town had a relaxed, simple air, and office space in a handsome 1900 brick building complex (the former headquarters of Digital Equipment Corp.) was going for $15 a square foot-a savings of some $375,000 a month over equivalent space in Boston. In March 1999, SoftLock moved in.
With the money it saved on rent, the company was able to significantly improve working conditions. It hired a prestigious architecture firm to design a user-friendly space with a giant common room and a kitchen overlooking the Assabet River. Holscher believes that the first-rate digs "make workers feel good about coming here, and that makes them more productive." Today, there are 75 employees; SoftLock wouldn't have been able to afford that many workers in downtown Boston-and wouldn't have had anywhere to put them.
Over the past 18 months, humble Maynard has started to gain a reputation of its own as a hotbed of young Internet companies. SoftLock's office complex now houses more than a dozen such firms, which is good for networking. And restaurants and cafés are popping up in town, making it easy to entertain clients.
The greatest benefit is still to the bottom line. With a market cap of $53.9 million, SoftLock has developed 400 marketing affiliates-sites that will sell its clients' content. And about 50 content providers have approached SoftLock, including Stephen King, who uses the technology for his Internet novels. Would this be any different if SoftLock were in downtown Boston? "We wouldn't be who we are," Holscher says. "We'd be smaller, and we wouldn't get as much done."
Broken Rule DON'T HIRE RELATIVES
Company Mercury 2
Location San Francisco, California
Founded 1999
Employees 25
Christine Herron knew it was coming. Here it was, her first meeting with a prominent Silicon Valley venture capital firm, and she knew she was about to be asked the one question she hoped she wouldn't have to face. Herron held her breath as her inquisitor flipped through the materials on Mercury2, a company she had founded to provide software that helps e-businesses break into international markets.
"Josie Herron," the VC began, picking a name from the company's senior staff. "What's the relationship there?"
Christine didn't know what to say. She was trying to present Mercury2 as a serious, growing business. How would it look if she admitted that its director of systems was her mother?
"Why don't you guess?" she stammered.
Mercury2 didn't get funding from that firm.
Christine knew she would face skepticism when she hired her mother. Some investors would surely question the maturity of any CEO who would bring aboard her own mom. Others might fear that a 55-year-old systems director would not be able to keep up with Silicon Valley's long hours and constantly evolving tech wizardry. Still others might worry that as a "family business" Mercury2 would plow profits back into the company for the sake of future generations, instead of giving back to investors.
But Christine had witnessed her mother's devotion and experience firsthand over the course of Josie's 21 years in the information-technology field. She decided to ignore the potential scorn and hire someone she was certain was right for the job. "I knew that the business would benefit from someone with her experience," she says.
When Christine first offered her mom the job, Josie declined mostly because she was reluctant to move from Florida to San Francisco. Christine groveled. "She went pretty heavy on the 'Mom' approach," Josie remembers. '' 'Mom, I need you. Mom, I need you. Mom, I need you.' After a while that wears you down."
In May, Mercury2 secured more than $1 million in seed money. (This time, Herron was more forthcoming about her mother being an employee, and none of the angels seemed to mind.) The firm's advisory board now includes a former managing director of Deutsche Bank, a former general manager of Inktomi, as well as a former director of e-commerce sales for Sun-Netscape Europe. And Mercury2 recently struck a partnership deal with IBM.
Josie, meanwhile, has proved to be as valuable as Christine had hoped. She was instrumental in designing a complex system that provides Mercury2's users easy access to its database. And hiring a family member has other advantages, Christine says: "Think about it. You don't have to go through the song and dance of learning what people's hot buttons are. We just dived right in and did the work, without worrying about managing personalities."
Does Josie ever get special treatment? Apparently not. "I work all night and sleep on the floor," she says, "just like everybody else."
