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January 22, 2001

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Redefining Business

The End Of Internet Time

In those frenetic days, growth was all that mattered. Now business gets hard.

By Chris Murphy

Illustration by Brian Raszka
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mong the ripple effects of a weak stock market, especially one for initial public offerings of technology companies, none is more amazing than this: It's managed to slow down Internet time.

Internet time--that volatile mix of extraordinary opportunity, irrational exuberance, and blind panic. It was different than run-of-the-mill business pressure; this was a special kind of mania, a frantic mood so pervasive that it forced a geeky term like "24/7" to enter everyday lingo. Internet time operated on the assumption that business, rather than being a never-ending struggle, had become like a sporting event: The clock was ticking down, and when it hit 00:00, whoever was ahead would be declared the winner--forever. No one would remember second place, so nothing mattered more than fast growth. Profits, working infrastructure, and a healthy corporate culture had to wait until tomorrow. Venture-capital and IPO funding came so fast--from idea to startup company to IPO in months, instead of years--that investment cash became the goal in itself.

Laurent Ohana feels the change. Ohana is CEO of the New York new-media startup Inlumen Inc., which grew from 19 to 100 employees last year but remains seven or eight months away from making money. Ohana contemplated an IPO, but now concedes that such a deal would take "divine intervention." But he doesn't miss Internet time. With enough investor cash in the bank to keep operating, Inlumen has more time to get it right in today's market--to hire with an eye on profit and corporate culture, rather than on getting enough bodies in the door to accommodate enormous growth pressure. "I don't have to tell my HR director, 'Get me 10 people in here tomorrow or I'm dead,'" Ohana says.

Make no mistake--the end of Internet time doesn't translate into a laid-back business environment. Customers still expect immediate answers and no excuses. In many ways, it creates a less-forgiving environment. With venture-capital and IPO money tight, companies that don't achieve positive cash flow will be peddled to bargain hunters for pennies on the dollar of the original investments. But one thing will be different: Speed to market with products, or the time from idea to IPO, will go from being the all-consuming focus of the Internet economy to being tempered by other business values.

It's a subtle difference, but a real one for both startups and established companies. For Ohana, it means taking steps to stretch the $35 million in venture funding he raised in June. The focus now is on hitting profit milestones, slowing down hiring, and keeping a tighter watch even on routine expenses such as requiring two-week booking on travel or renting a studio apartment for visitors to the New York home office instead of paying lavish hotel bills. "It's chic to be cheap," Ohana says. "That wasn't the case last year."

Laurent Ohana Photo by Giorgio Palmisano Rest assured, speed still matters, says Jeanne Harris, who has interviewed more than 80 E-business managers in the past year as a senior research fellow for Accenture, formerly Andersen Consulting. Fast decision-making still makes her short list of most important skills. CIOs and other E-business executives aren't getting any more time to solve problems and implement solutions. But the past couple of years let many get away with thinking that first to market, even with something that didn't quite work, was better than being second. Without the obsession of Internet time, the best managers will see E-business as a three-legged stool: speed to market, yes, but also scalable technology driving it and a sound business model behind it. "It's easy to get dazzled by the speed issue or paralyzed by the scalability problems or overwhelmed by the business-model uncertainty," Harris says. "It's a real art to balance all three."

Still Money For Growth

Internet time was born from the stock-market boom, in particular an extremely generous IPO and venture-capital market obsessed with the Internet and IT. The Internet was seen as a finite chunk of land to be carved up piecemeal, and a smart, fast-moving company could put down a stake and own a slice forever. That money machine broke down at the end of last year, with the smallest number of venture-backed IPOs--16, raising a total of $1.4 billion--since the fourth quarter of 1998, according to research group VentureOne Corp. There were only three Internet-related offerings in the fourth quarter of last year.

Clark Spurrier, an investment banker with Morgan Stanley Dean Witter & Co., says most of the attributes a company needs to go public haven't changed: a significant opportunity, a leading market position, financial transparency, global prospects, and good management. The big change is that markets running on Internet time rewarded companies that were less mature--meaning further from profits and less proven--if they were pursuing aggressive growth. Now, companies have to show they're both growing and making money--or closer to it. "Companies today aren't growing the top line at the expense of the bottom line," he says. "Six or nine months ago, investors were comfortable with companies that were in leadership positions spending aggressively to increase market share."

Just because financial markets aren't on Internet time doesn't mean there's no money for innovation. Already, some companies--such as Lucent Technologies Inc. spin-off Avaya Inc. and KPMG's consulting arm--plan to buck the trend and go public early this year. Morgan Stanley's Spurrier isn't happy with the weakened stock market, and he warns that the environment can change from week to week, but he doesn't mourn the end of Internet time. Good companies can get funding, either private or public, even in a chilly stock market. "The market right now is instilling a certain discipline that we think is a positive thing," he says.

Photo by Shane Young Allen Alley knows all about trying to fund a growing high-technology company in a tough market. Last May, investors accustomed to ever-rising returns were stunned to see the Nasdaq go four straight days setting low-water marks for the year. It was an early hint that maybe this Internet rally would come to an end. On the fifth day of that losing streak, Alley went public with the company he founded, Pixelworks Inc., which makes semiconductors and operating software for flat-panel displays. "It was sort of like sailing into the teeth of a gale, where the Coast Guard is telling you turn back or they won't be responsible if you sail onto the rocks," he says.

The Portland, Ore., company managed to raise $60 million and, even after the market plunged in late December, Pixelworks' original IPO investors had still doubled their investment. And while Alley was warned against going public in those dark days of May, it turns out the market wouldn't have been much better anytime in 2000. "You can't predict when windows are going to open and close," says Alley, who is CEO and chairman. "When it looks like a window is closed, it may only get worse from there."

Oliver Curme, whose investment firm Battery Ventures backed Pixelworks and who remains one of its largest shareholders, says investors are taking a closer look at barriers to entry than they were during the Internet boom. They want evidence of market acceptance that can grow into a market standard or even a de facto monopoly. He says Pixelworks may achieve that because it has both the chip and operating system for flat-panel displays--sort of like mixing Intel and Microsoft on a very small scale. Much of the money that was lost fueling Internet-time development came from investors who believed spending on marketing plus speed would be enough to grab and defend a dominant position. "We went from the invisible hand of capitalism to the drunken hand of capitalism," Curme says, adding that he's glad to see the return of more rational business investing.

The end of Internet time will mean, bluntly, that many companies are completely out of time. Many will be unable to shift from a fast-growth business dependent on outside funding and will go bust. The process is well under way: Next week, Mercata.com, a retail group-buying site, plans to go out of business despite initial backing from powerhouse investors, including Microsoft co-founder Paul Allen. Scour.com, a Napster-style file-sharing platform backed by such high-profile investors as Hollywood deal broker Michael Ovitz, was auctioned off in bankruptcy court late last year.

Though it's easy to wag a finger at these ventures today, investors knew they were betting on early-stage companies that would need more funding, says Keith Shapiro, a bankruptcy attorney whose firm led the North American liquidation of failed E-retailer Boo.com. "In fairness to the operators, it was never expected that these companies would generate cash flow in the near term," he says. "They assumed that the capital markets would stay active."