Check your equipment first.

A two-year veteran of Merrill Lynch's technology investment banking group, Benjamin Sun, then 25, ditched his $80,000-a-year job with visions of a public offering dancing in his head. The fact he barely knew how to use e-mail didn't deter him from starting Manhattan-based Community Connect, a builder of ethnic on-line communities, launching the first site, AsianAvenue.com, in July 1997.

Sun ran the site with a $2,000 desktop PC and some free Internet software. He neglected to install enough servers to support future growth or back up the system in case of an outage. Within weeks AsianAvenue.com crashed on a daily basis as hundreds of users hit the site. Sun wasted three months moving the system onto a more powerful and expensive platform—$60,000 worth of Sun Microsystems hardware and new database software.

That still wasn't enough. Over the next year traffic grew 20% a month, while Sun added only 10% more capacity. He couldn't afford to buy more hardware, so his tech staff spent days rewriting applications to squeeze more capacity out of existing machines.

He finally plunked down $30,000 to license Oracle database software—a spanking-new version that he later concluded was still unstable and riddled with bugs. (Oracle says that its technical support group found no evidence that its software was faulty.) When the site went down for two and a half weeks on the eve of his first $1.3 million round of venture funding, investors stalled. Sun eventually downgraded to a more reliable, older version of the software and the financing went through. But frustrated users pelted him with nasty e-mails and advertisers pulled out. "You forget that technology is at the core of this business," says Sun. As for those visions of a hot public offering—they're still a ways off. "First we have to put in a technology backbone that will allow us to grow without looking back," he says. A second round of $3.5 million, raised in June, will allow him to beef up the system, and to introduce a site for African Americans in the fall.

Trust no one.

Two years ago Joseph Park, then 25, walked away from a $100,000-a-year job as an analyst at Goldman, Sachs to start a nifty Web business that he characterized as "Amazon in under an hour." Kozmo.com was launched out of his New York City apartment as an on-line convenience store that delivered goods—starting with video rentals and snacks—in 60 minutes.

Trouble was, Park blabbed to the wrong people about it, then didn't move fast enough. Last March he trotted his idea out to a group of potential backers, five hedge fund managers at Integrity Capital Management who seemed ready to participate in a $3 million round. "We literally handed them our business plan," says Park, who disclosed confidential information on warehousing and operations. Integrity declined to participate.

When the fund folded at the end of April, after suffering heavy losses, three key employees from Integrity Capital reinvented themselves as Web entrepreneurs, quickly raising $2 million for Urbanfetch.com. Their pitch to investors: "Amazon in under an hour," says Chief Executive Ross Stevens, who is lining up another $10 million in venture capital.

Park says Urbanfetch stole his business model and intends to take legal action. Stevens counters that his company is nothing like Kozmo, which he claims deals mostly in adult videos, while Urbanfetch's selection of movies is porn-free and substantially larger. No matter. When Urbanfetch kicks off this fall with a $5 million print and TV ad campaign, it will also sell gift items like DVDplayers and PalmPilots, music CDs, magazines and books. Meanwhile, Kozmo is limping by on a projected $3 million from sales in nine cities this year.
"Be paranoid," advises Park.

Leap before you look.

John Rigos earned $200,000 a year at Jesup & Lamont helping oil and gas companies raise money. But fundraising in the oil patch moves at a fraction of the speed it does on the Internet. That fact would haunt Rigos from the time he launched Manhattan-based CDuctive.

The company licenses music from independent record labels, which it sells in the form of digital downloads over the Internet. "Traditional thinking is the worst mistake you can make on the Net," says Rigos, 32.
Example: Last year Rigos turned down an offer from William Gross' Idealab, an incubator for Web startups, to make the right introductions in return for 49% of the company. Rigos thought he could expand the company on his own over time without giving away all that equity. "That's way old-school," he says. "The new school says be big as fast as you can."

Since then, well-funded competitors—including Musicmaker and MP3.com—have hit the scene. Some have been bidding up the prices for digital distribution rights by as much as 1,000%. "It has totally thrown our budget out of whack," says Rigos, who is scrambling to come up with another $10 million before the end of August. Among the well-heeled contenders is Emusic.com, which raised $31 million in a private placement in March.
A key investor: Bill Gross' Idealab.
 

Source: Silvia Sansoni , Forbes, Aug. 09, 1999