Even in this Internet revolution start-ups can fail

Taking their company public with visions of untold wealth is the dream of many Internet entrepreneurs.

Taking their company public with visions of untold wealth is the dream of many Internet entrepreneurs.

However, not all Internet companies have succeeded in even getting to the public stage. For every success story, there are nine times as many failures.

Breakfastnetwork.com, which organises breakfast meetings for the Silicon Alley community in New York, had a get-together last week for entrepreneurs and venture capitalists to talk about how to take an Internet company public and the pitfalls to watch out for along the way. Several of the panellists who spoke were entrepreneurs whose ideas paid off.

Ms Rosalind Resnick, chief executive officer and chairman of Netcreations, an opt-in e-mail marketing company, said when she and her partner set up the business all they had was $1,000 (€1,033) and their two computers. They decided not to accept any money from Internet venture capitalists, but instead financed their business by securing a bank credit line with her house.

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"We wanted to run our own show," she said. As recently as two years ago, Ms Resnick was offered $2 million for a 20 per cent stake in Netcreations. She refused, and since going public her company is now worth $800 million, of which she owns 75 per cent. In general, founder CEOs can expect their stock to be worth about $6.5 million if a company succeeds in going public.

There are two reasons people take their companies public, said Mr Bruce Strzelczyk, a partner and co-chair of the Internet/New Media Group at Richard A. Eisner & Co, a venture capital firm. "People go public for the valuation of their company," he said. "Secondly, the market votes on a public company everyday. So you can create a more valuable company by responding to market conditions."

Mr Strzelczyk is author of The Ten Commandments of Attracting Venture Capital and coauthor of The Ten Commandments of Going Public. His firm has taken equity stakes in 11 companies all of which will go public in the next two years. On average, venture capitalists finance only six out of every 1,000 business plans received each year and it is thought that fewer than 10 per cent of funded start-ups actually go public.

Mr Strzelczyk said when planning to do an initial public stock offering, companies have to raise capital. "These venture capital rounds are onerous," Mr Strzelczyk said. "People typically lose if they miss one of these steps. They need to tell their story about where the Internet is going and what their role is. They should never stop evaluating their position either privately or publicly."

He said the CEO's job was to craft a good account of the start-up's story. When a company is trying to raise venture capital financing, "your job is to convince", he said. This contrasts with the IPO rounds, "when your primary objective is to communicate to investors".

Mr Scott Kurnit, chief executive officer and founder of About.com, a company that provides a network of guides to help people navigate around the Internet, advised taking six months to raise money and accept more money than is needed. "Always have cash and raise more cash," he said. While the IPO roadshow can be a "gruelling process", said Mr Kurnit, "go the distance". When his company went public, shares were 25 times oversubscribed.

About.com used to be called the Mining Company and six months after it went public decided to change its name. "That could have been disastrous because the markets want consistency," said Mr Kurnit. "But we made a name change with a kind of PR punch. We did it right."

He believes a public company has a lot more flexibility than a private company. "A public company can acquire other companies much more easily and cheaply," he said High stock valuations have also meant Internet companies have found it hard to retain their staff once they went public. The average worth of the stock for all employees (not including key employees) on the date of any given IPO is about $100,000.

"We gave our staff cheap stock at $5," said Ms Resnick. The company's stock opened at $12. "Now we're a post-IPO company, we can't do that anymore," Ms Resnick said. It also means that she has to hire people "who buy into our vision and strategy as opposed to people who want to make a quick buck on an IPO".

The mistake Netcreations made, she said, was to stay small for too long. "I insisted on acting as my own chief financial officer for four and a half years," said Ms Resnick. "We should have been audited and gotten our financial statements sooner," she said. When her company did go public, interest in the stock was 8.5 times oversubscribed.

Mr Ron Bloom, chief strategic officer of Think New Ideas, an Internet and intranet systems development company, said a new company needs to hire a professional management team and have plenty of green money. "Get your story right and surround yourself with the management who'll take the company public," he advised. "Take two years to plan and make it an eight-month plan," he said.

Mr Bloom also suggested finding an investment bank "that can impact you and who you can impact. It is important to match the size and type of your company with the bank that takes you public," he said.

A common mistake for an entrepreneur, said Mr Strzelczyk, is to focus on an IPO rather than on the steps needed to build the business.

Ms Resnick concurred. She said the key to building a successful business was to come up with a great product. "You have to spot an opportunity, turn it into a business plan and get the right team around you."

Mr Bloom commented that starting a company meant having a lot of sleepless nights. "Question and refine everything about your business," he said, "and do not sleep until you find partners who share your vision."