InformationWeek

November 13, 2000

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Been There, Done That

The failure of many dot-com companies has had a sobering effect on IT job seekers

By Elisabeth Goodridge and Diane Rezendes Khirallah

More on dot-coms:

sidebar:Banking Technology Veteran Makes A Move To Profitability

Older IT Professionals Struggle With Age Bias(10/9/00)

VARBusiness: Back to the Future -- Employees are returning to traditional companies as the allure of dot coms fades(10/30/00)

Internet Week: Casting A Wide Net For Web Talent(10/30/00)

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urt Dahlstrom had, in his words, a surreal experience on Sept. 14. While orbiting his company's headquarters in the South of Market neighborhood of San Francisco in an early-morning quest for parking, the 32-year-old dot-com graphics designer couldn't help wondering why six other employees had joined the usual smokers hanging around outside. At the door, Dahlstrom recalls, "one worker looked at my face and said, 'Oh God, you don't know yet, do you?' My heart stopped. 'We're closing,' she continued. 'RedLadder is closing. We're all laid off.'"

RedLadder Inc.'s dream was to revolutionize the way the $1.4 billion construction industry does business. With his business-to-business marketplace where contractors could bid for projects online, 40-year-old CEO Steve Peletz had hoped to streamline the vastly inefficient system used today. Venture capitalists last year bet $4 million in a first round of funding that the company would make it. RedLadder did develop scalable Web-based bidding software, and revenue from small contractors to a multimillion-dollar construction company quickly followed. The staff swelled to 80 people and offices opened in the startup mecca of SoMa. But while customers signed on daily, investment capital didn't follow. In the harsher economic times one year later, the dream was over.

RedLadder isn't unique. An October study from outplacement company Challenger, Grey, and Christmas reports that 16% of dot-com companies have failed since December, and dot-com layoffs number 22,267 since then. Job cuts for October reached 5,677, up a whopping 18% from the month before.

Nevertheless, the saga of the dot-bust, dot-bomb, dot-gone, dot-combust--whatever you choose to call it--isn't all gloom and doom for IT workers. The Wild West days may be ending, but a maturation of the Internet economy is taking its place. Thanks to the shakeout, wary IT staff and executives are doing more homework on potential employers, their culture, and business models. Even though many choose to remain in the risky world of startups, their eyes are wide open. And while the layoff numbers may be rising, they're still small when viewed in the context of the overall, robust employment rate.

In fact, the remaining startups, established IT companies, and other Internet companies are gobbling up many of the laid-off IT workers as valuable industry veterans. Although that's good news for the employees, it barely makes a dent in the labor shortage that the Information Technology Association of America pegs at 800,000 IT workers needed in the next year.

"There's still a huge gap between supply and demand," says Diane Tunick Morello, a Gartner Group VP and research director. "But it's not static. Though the supply is increasing, demand has continually paced ahead."

At RedLadder, less than an hour after the news hit, employees' mobile phones started ringing off their belt hooks with calls from recruiters, CEO Peletz recalls. Recruiters flooded RedLadder's office and even picked up the tab at the local pub where the newly laid-off employees went to drown their sorrows. In one day, Dahlstrom says, he received more than 50 phone calls from human-resources personnel and recruiters.

If laid-off IT employees from the CEO on down are having no problem finding positions in the industry, they have learned valuable lessons about career searches. Dahlstrom, for example, returned recruiters' calls selectively and turned down the first few offers--one received the next day--because he knows what kind of position and company he'd consider this time around--a higher-up position at a more-established company. VP of engineering Ziad Tleimat is also proceeding with care. So far, he's been approached by 10 companies, all of them pre-IPO startups, but he says he "doesn't want to jump the gun" and make a hasty decision.

These days, it's far more likely that employers are jumping through hoops to reassure candidates that their companies are worthy. That's OK with Bruce Baszucki, president and co-founder of InvoiceDealers.com. "People are looking to be involved with success," says Baszucki, whose auto Web site has shown six months of continuous profitability and has doubled its staff and revenue during the same period. InvoiceDealers is seeing an increase in resumes from qualified applicants, Baszucki says, because of its healthy posture in the marketplace.

Employee priorities seem to be changing for the better. Just 10 months ago, the primary consideration of IT pros who wanted to work at a dot-com was working with cutting-edge technology such as wireless and multimedia over the Web. Next came stock options: Their mere existence satisfied most applicants. As for business plans? A neat concept with a good story to tell was all it took to sign up.

Steve Peletz Photo by Robert Houser Executives quickly followed suit, lured by new challenges and the possibility of having greater influence in company strategies. In the last year, heavy hitters scored big moves: For example, CIO Maynard Webb left Gateway Inc. to join eBay Inc. as president of eBay Technologies; and Ken Harris left Nike Corp. to lead the retail Internet initiatives at Gap Inc. Another surprise was Andersen Consulting CEO George Shaheen's leaving the IT consulting firm to become CEO and president of online grocery service Webvan Group Inc.

But reality is setting in. Many companies opened shop ill-prepared, resulting in "a lot of mismanagement, pointless projects, and badly designed processes," says Gartner Group's Morello.

Since the stock market began sliding in April, investors are hesitant to get involved with companies with profitability prospects three or four years down the road, and even former high flyers are taking a hit. Webvan shares now trade at 96 cents, a drop from the 52-week high of $9.31 on July 13, and a huge plunge from the initial public offering price of $15. Many IT workers and executives are fleeing the cash-burning companies before layoffs hit.

"Everyone looked around to see their options, and, as the market conditions changed, those not confident about the business model started to leave," says an employee of now-bankrupt Ivendor Inc., a back-end E-commerce service provider.

Compelling business models top the list for IT applicants as they approach prospective employers. Next come two more essential criteria: the opportunity to work with cutting-edge technology, and a capable management team or board of directors. Stock options round out the requirements list, though they hold nowhere near the same priority in career decisions as they did previously. Earlier this month, in a survey of 1,400 CIOs conducted by RHI Consulting, 39% of respondents said that, other than salary and traditional benefits, IT candidates evaluating an employment offer are most interested in a company's stability. Just 13% of CIOs cited stock options as a primary incentive.

Kelly Cannon, Nationwide Insurance Co.'s VP of IT, has had his share of calls this year from recruiters representing dot-coms. "Anyone in this business had to be interested in what was happening in the Internet space," he says, "but I found it always looked like a bubble [about to burst]." Cannon stayed at Nationwide because he's "interested in making a contribution to an organization with a clear, long-term future." That's something Cannon says many Internet organizations can't offer.

Many employees and managers still have the dot-com urge. Even those who've been burned by one company aren't likely to become dot-com shy, says Laurence Stybel, president of Boston outplacement firm Lincolnshire, Stybel, Peabody Inc. "People who go to dot-coms tend to stay in dot-coms," he says. But instead of jumping headfirst into the next big thing, they're showing more sophistication. Most eschew early-stage companies in favor of more established companies with stable funding and a grounded business plan.

Though Internet commerce infrastructure company Ariba Inc. hasn't yet reached profitability, director of staffing Janel Canepa is seeing a spike in talented job applicants. She says the change is fueled by Ariba's name in the industry, as well as the recent dot-com layoffs. Applicants are looking to industry leaders, she says, but "most applicants are digging in and asking questions about costs, profit paths, and other issues. They're still starry-eyed about options, but they now have a dose of reality."

At the executive level, job seekers are taking company background checks to the next level, says Randy Schoenfeld, president of executive search firm Redwood Partners, which specializes in dot-com recruitment. "Those at the corporate level--CEO, COO, CTO, or CFO--aren't just asking about the business model," he says. "They take the company's financial information back to their own legal and accounting firms to determine if the company in question is viable."

Janel Canepa Photo by Richard Morgenstein "Either you like the environment or you don't," says RedLadder's Tleimat. And there's also a marked difference in how 20-something dot-com employees and their 30-and 40-something counterparts approach their work. Younger people want to be more focused on interesting and challenging projects, while older IT professionals consider how one job will serve as a stepping stone to the fourth and fifth one beyond.

RedLadder's Dahlstrom, who took a job at E-Trade Group Inc. as senior graphics and user interface designer, enjoys the industry despite his dot-bust experience. "I like the feeling of adventure, I like the possibility of making something," he says. "It's like an adrenaline rush."

Alan Russell, 50, was twice burned by dot-coms but still isn't giving up. He was CEO of Document.com, which went belly-up when a major corporate partner pulled out of a make-or-break deal at the last minute. More recently, the Boston dot-com incubator that had recruited him ceased operations after last spring's market correction made prospective corporate investors skittish.

Now, a few weeks into his own self-marketing phase, Russell says he "absolutely would work for an Internet startup, and would apply the same sort of stringent analysis I've always applied." But he says he'd take a different tack this time. "I don't think I'd be any more cautious, but I'd be aware of what works and what doesn't," he says. "I might be less willing to go with a dot-com in an early stage."

A stronger business model might have pre-empted a layoff for 41-year-old Doug Bates, now employed at Aquent Partners, a Web development outsourcer in Boston. He was laid off when Nequity .com, an Internet-delivered business services company, folded in 1998 after it lost its bid for second-round funding. Its business model was this: The company planned to charge subscribers $20 per month to access the content--but the content was almost all advertorial, so its value to the customer was questionable.

"We all knew we were about to run out of money," says Bates. It was no secret to Bates and his co-workers that in its last month of operations, Nequity brought in only $72 in revenue. Nonetheless, when it shut down, the company bought out his contract, even though there was no work for him to do. "I never believed in their business model," Bates says. He says he took the job because he wanted to get a dot-com on his resumé.

In another case, even after Kibu.com Inc. founders explained their business model to 25-year-old systems administrator Bryan Harris, he "still had no concept of how it would work." The Web site for teen-age girls attracted more than $22 million in funding from investors that included Netscape founder Jim Clark and venture-capital firm Kleiner Perkins Caufield & Byers, but it folded in October when investors thought the company wasn't moving initiatives fast enough.

For his part, RedLadder CEO Peletz learned about business models the hard way. Even with an MBA and 12 years of experience in the construction industry, he forgot that it's hard to change the way people do business--and that's what he hoped to do for this niche market. "The construction business isn't one of the high-tech adapters," he says, "and though you can start a business on early adopters, waiting for general acceptance proved too much. I won't make a bet like that again with my career." Currently weighing his options--which include joining a highly profitable developer of infrastructure hardware, as well as startup initiatives--Peletz says he learned a lot from his experience.

The largest of October's announced layoffs, 240 employees, came from beleaguered Stamps.com Inc. Employee No. 36, Web developer David Nett, 27, was prepared for bad news when he discovered while on his honeymoon that his CFO, chief operating officer, president, and comptroller had all resigned. Nevertheless, Nett says he's game for another dot-com experience--but this time he'll conduct his own due diligence on any prospect's business model first.

While enjoying the relaxing time between jobs, RedLadder's Tleimat is also studying the business models, key management, board of directors, designated market space, and advisers of possible employers. The 38-year-old wants to consider his career path as well as one other major consideration: "Two years from now," he says, "I want to be able to see the product being used instead of sitting on the shelf."

As lead tech HTML developer, Rich Hampton was among 65 employees in the room Oct. 3 when Kibu CEO Judy McDonald disclosed a board-mandated shutdown of operations.

Although the 33-year-old Hampton had a lot at stake--he had relocated from Pennsylvania to the Bay area in December with his 12-year-old niece, whom he's raising--he has no regrets. "I got the whole dot-com experience in just seven months," he says. His relatively sanguine reaction isn't unusual. When IT workers look back on the experience, they tend to consider it a necessary rite of passage, more than failure. In fact, at the executive level in Silicon Valley, tales from the cocktail and networking circuit involve IT and business executives proudly describing failed efforts, sometimes in great detail, all in the context of what it taught them. It's a marker of status in the fast-moving valley.

As a result of his experience with Kibu, Hampton is wiser. "I'll be careful of content sites in the future," he says. Right now, he's looking forward to the Web-development job he started late last month at Leapfrog Toys, a brand of Knowledge Kids Enterprises Inc. in Emeryville, Calif. He would consider another dot-com--as long as it meets his own career strategy, which calls for getting involved with increasingly sophisticated Web development.

The weeding out of inept managers and staffers will be one repercussion of the dot-com layoffs. "The rise of the Internet allowed employees to take jobs that exceeded their abilities and experience level," Peletz says. "I found it challenging to find experienced, seasoned managers."

CEOs aren't immune to the pace of change at dot-coms, either. Challenger, Grey, and Christmas reported that a record 129 chief executives left their positions in October, with 25 of those leaving dot-com companies.

"Many execs are scared and freaked out," says Jay Whitehead, CEO of EmployeeService.com Inc., a company that outsources HR needs. "I had a CIO in my office last month who was acting as if he was in a firefight in Cambodia, he was so scared he wouldn't find another job."

Led by entrepreneurs better at developing ideas than executing them, many businesses failed when strong leadership was needed to take the company to the next level. "What we ended up finding in this model is that the entrepreneur who stays for a year but can't make the leap to be a manager will be filtered out," says Gartner's Morello.

On the other hand, if the New Economy follows Darwinian theory, the recent upheaval will strengthen those still standing. "This is the weeding out of bad business models and the weeding out of the weak at heart," says Redwood Partners' Schoenfeld. "These battle-tested veterans are ready to go and build the next major initiative online." Will these business models be a success? Says Schoenfeld, "Yes, without a doubt."