As a corporate lawyer, Allen Morgan wore a suit every day for 20 years. But since joining the Mayfield Fund, he's gotten used to the more casual uniform of the venture capitalist - Levi's, plaid shirt, company-logo fleece vest. Somehow that didn't make him feel especially relaxed one morning in January 2004. It was the firm's quarterly offsite retreat. He'd been a Mayfield partner for five years - mostly bad times for the VC firms that line Sand Hill Road in Menlo Park, California. Things had been no easier for Morgan, who specializes in funding new media and consumer Internet companies. Now he was about to propose something that he knew was going to sound a little bit radical.
It was getting near lunchtime. The half-dozen partners around the conference room table at the Seal Cove Inn in Moss Beach, about 20 miles south of San Francisco, had been briefing one another on their portfolios and new projects. Finally, it was Morgan's turn. He sat up even straighter than usual and cleared his throat. "I've been thinking that there are a lot of good ideas that got thrown out with the bad in the past few years," he said. "I think we should start taking another look at some of those dotcom business plans from 1999 and 2000."
Thud. The reaction wasn't exactly overwhelming. The partners listened politely, barely acknowledging that Morgan was proposing a return to the bad old days. He continued talking for a few minutes, but the response remained muted at best. "I guess I'd call it benign neglect," he says. Then the meeting moved on to more pressing matters, like what was for lunch.
Venture capitalists could be forgiven for not applauding the resurrection of the tattered business plans of the bubble era. Mayfield had flown high during the tech boom, investing in IPO stars like BroadVision, Redback Networks, and Tibco Software. But when the public markets soured on tech, Mayfield took some nasty losses. Morgan's dotcom investments were hit hard. "When you're the new guy," Morgan says, "it's bad when two of your first five deals go out of business."
The Mayfield VCs wanted to put the boom - and bust - behind them. In 2002, they agreed that the partners were spending too much time trying to extricate the firm from its failed boom-era investments. Partners would henceforth spend at least half their time looking for new opportunities.
But Morgan had become convinced that there was plenty of gold left behind when the rush ended in 2001. The idea took root in fall 2003, while he was reading The Victorian Internet, Tom Standage's history of the telegraph. Just like the most ardent promoters of the Internet, the telegraph's early boosters claimed that the fledgling technology would do everything from helping save lives to ushering in world peace. Over the half-century between the telegraph's rise to prominence and its eclipse by the telephone, it did change the way people lived and worked, but not in the ways its evangelists had predicted. "The lesson was that while new communications media do change the world," Morgan says, "they do it much slower than the early adopters think they will."
From there, it was a small step to the realization that perhaps some of the ideas from the Internet boom might simply have been a few years ahead of their time. Morgan began to revisit the startups he'd put cash into - those that had failed and those that were still breathing. "I was getting reinterested in consumer Internet plays," Morgan says. "Some of the companies I'd invested in were starting to look like they had made it through the nuclear winter, and Iéwanted to figure out exactly how they were different from the ones that hadn't made it." He set about systematically distilling the lessons of the recent past and applying those lessons to his evaluation of each startup that he considered funding.
In October 2004, he led Mayfield's part of an $8.5 million investment in an Austin-based startup called Pluck. To his partners, he boasted that Pluck was a pioneer in the hot area of RSS aggregation. But to Morgan, it was just as significant that Pluck was a retooled version of a company he represented as a lawyer in 1997: PointCast, a famous bubble flameout.
Now Morgan wants to help launch the next generation of Yahoo!s, Googles, eBays, and Amazon.coms. He says he'll find them by digging through the rubble of the bubble and then pumping Mayfield's money into some of the same schemes that bombed five years ago.
In his office at the northwest corner of Mayfield's Sand Hill Road building, Morgan dispenses a pearl of wisdom. "Having a dialup connection," he says, "really sucks."
Pronounced in a slightly patrician clenched-jaw drawl, this statement is jarring in two respects. First, hearing Morgan say "sucks" is like hearing your great-uncle say "rad." Second, the idea is obvious in the extreme. But Morgan is a master of the lawyerly art of making a novel case by stacking up ordinary, indisputable assertions.
And that's how he crystallized his counterintuitive contention about the viability of some late-'90s business models. While many chalk up the dotcom extinction to the catastrophic impact of a single asteroid called economic rationality, Morgan holds that it was actually a series of fundamental factors - broadband access, consumer buy-in, search technology, and Web advertising. Five years ago, he says, they were the Four Horsemen of the Apocalypse. Today, he says, they should be known as the Fantastic Four.
The Four Horsemen were killers. First, online access was spotty and slow. Second, consumers weren't accustomed to operating online. They didn't trust ecommerce sites with their credit cards and hadn't figured out how to form online communities. Third, search technology was weak. With the advanced algorithmic breakthroughs of Google still years away, it was hard to find what you were looking for. And finally, the online advertising business wasn't yet mature. Marketers didn't entirely believe in it, and nobody had developed a sound model for placing the right ads on the right Web sites. For a long time, Morgan says, "it was unclear that relying on online advertising was a workable business model."
Then, jotting down his points as he talks, Morgan explains how the Horsemen transformed into the Fantastic Four. First, always-on broadband connections are becoming ubiquitous. Second, the average American is now comfortable buying things over the Internet, and millions of users - not just early-adopting geeks - are enthusiastically participating in online communities; they're sharing links on del.icio.us, obsessing about music on MySpace, tagging photos on Flickr. Third, thanks to Google - and the competing frenzy of innovation by Yahoo!, Microsoft, and Amazon - useful Web search has become the norm. Finally, with Google's AdSense and Yahoo! Search Marketing Solutions leading the way, Internet advertising has become a $10ébillion-a-year marketing medium.
No surprise, then, that a new boom is on: Startups are sprouting everywhere, venture capital firms are collecting tons of cash, and major companies are gobbling up smaller outfits. In the first three quarters of 2005, VC firms raised $17.3 billion - more than they raised in any full year since 2002. Google, eBay, and Yahoo! are on an acquisition spree.
At first glance, though, the Fantastic Four don't seem to be working to Morgan's advantage. Thanks to the open source movement, cheap hardware, and offshore software development, it takes a lot less money to start a company in 2006 than it did in 1996. And that means a much smaller role for venture capital. Flickr became a well-known Internet brand within a year of its launch in 2004 - without a penny of VC money. Its founders, Stewart Butterfield and Caterina Fake, were rewarded when Yahoo! bought their company for a figure reported to be somewhere between $20émillion and $35émillion. That's not a trivial sum, but it's certainly not the kind of IPO windfall they might have commanded five or six years ago.
That's where Morgan's project to dig up companies lost in the bust comes in. He firmly believes that, while most VCs and investors are focusing on the new boom, tomorrow's Internet titans will begin as VC-backed startups that dare to dream big, not as bands of angel-funded programmers happy to sell out for peanuts. "I'm not buying the thesis that there's something fundamentally different in the IPO market," Morgan says. "If in the next 24 months there still haven't been any IPOs, then you've got to look for an explanation."
Morgan's project started with Mayfield's $5émillion bet on Pluck - a company that Morgan predicts will generate $100émillion in sales and eventually go public. Since then, he's been filtering every business plan he runs across through the prism of the last boom. And last summer, he decided to go straight to the source - conduct a systematic examination of boom-time companies.
Ankur Luthra, 24, spent much of the summer hunkered at a desk in one of Mayfield's smaller offices. Most of the time, he was barely visible behind several yard-high stacks of old magazines and newsletters. A 2003 Rhodes scholar on break from Harvard Business School, Luthra was performing the forensic analysis required to extract the good ideas trapped in the pile of dotcom corpses.
Morgan had already done a fair amount of scouting himself, but he asked Luthra to tackle the job more rigorously. The first order of business: Locate the mother lode of bubble-era business plans. Sounded easy enough, but it turned out that Mayfield's entire heap of late-1990s pitch documents had been shredded. So Morgan and Luthra were forced to turn to plan B: use the bibles of the era - tech-touting magazines and newsletters - as their raw material.
They collected back issues of Red Herring, The Industry Standard, and, yes, Wired, from 1995 through 2001, and then Luthra began to pore over the magazines. He stuck Post-it notes on stories about dotbombs in the making and typed company names and business plan summaries into a spreadsheet. He ended up with scores of companies that, as a group, might be hard to take seriously. Many of the names on Luthra's list, in retrospect, seem to foretell the companies' fates: Pseudo.com, Skeleton Closet, SpendCash.com.
Once a week, Luthra and Morgan sat down at a conference table, spread out the growing list of prospects, and identified those that should have been winners - if only they hadn't been felled by one of the Four Horsemen. After Luthra and Morgan had sifted through the mountain of buzzwords and hyperbolic proclamations, some long-discredited concepts emerged looking genuinely feasible: "monetizing eyeballs" in the resurgence of search-driven advertising, "push" reborn as RSS aggregation, and consumer ecommerce. So far, Luthra's archaeological dig hasn't led to any investments, but Morgan is confident it will, perhaps as early as this spring.
Meanwhile, Morgan's resurrection mission has already led Mayfield to invest in a handful of companies. He started with Pluck, the RSS aggregation startup that reminded him of PointCast. The next dotcom revival he stumbled on came from within Mayfield itself. One of the firm's entrepreneurs in residence, Yori Nelken, knocked on Morgan's door in March 2005 and announced that he'd figured out what his next startup should focus on: scheduling. Teams of people working together - across the office or across the globe - need an easy way to keep track of one another's comings and goings.
To Morgan, this sounded an awful lot like a company Mayfield funded in 1998 - a startup called TimeDance that was shuttered in 2000. It was also reminiscent of Zaplet, which had promised to make collaboration simple with an email-based service. Funded by Kleiner Perkins Caufield & Byers, among others, Zaplet raised about $100 million before fading from view in 2002.
Morgan sent Nelken to talk with a founder of TimeDance, Mark Drummond. In a series of meetings, the two entrepreneurs hammered away at what had gone wrong with TimeDance - and what had changed in the intervening years. They isolated two major problems. First, TimeDance's offering hadn't been able to tightly integrate with calendar applications like Microsoft Outlook, forcing users to toggle awkwardly between their desktop scheduler and the TimeDance Web site. Second, and more devastating, TimeDance was ahead of its time: Users expected Web-based services to be free, and it wasn't.
Morgan was already convinced that the big problem - consumers' refusal to pay for online services - no longer existed. Yahoo!, RealNetworks, and The Wall Street Journal have shown that companies can make a tidy profit on subscription services. The other issue, seamlessly integrating an online calendaring service with desktop apps, was just a matter of programming. To Morgan the conclusion was obvious: It was time to resurrect this idea. Last May, Mayfield gave Nelken $1.2émillion in seed funding for a new company dubbed TimeBridge - with Drummond as a board member. In December, Norwest Venture Partners and Mayfield ponied up another $4.8émillion. TimeBridge is slated to launch in March.
In April 2005, Morgan ran across another entrepreneur with an idea for a new venture that sounded strangely familiar. This one popped up during a board meeting at Pluck. One of the startup's cofounders, Andrew Busey, unveiled a side project called Shadows that he'd been tinkering with for a few months. It was a product that would create a duplicate version of any Web site where users could post comments, share tips and information, and add relevant data.
Morgan flashed back to one of the first companies he worked with after arriving at Mayfield: a startup called Third Voice. It made a browser plug-in that allowed users to affix virtual Post-it notes to Web pages. When it launched in 1999, Third Voice caused an uproar among Web site designers, who objected to the litter of hecklers' notes left on their sites. After failing to raise adequate advertising revenue, Third Voice closed its doors in April 2001.
Busey's idea sounded like a better version of Third Voice. Today, there are more users willing to lend a hand in building rich pages. (Just look at the success of Wikipedia.) And Shadows had something else that Third Voice lacked: a revenue model. It plans to take advantage of Google's AdSense, a roughly $1.5ébillion advertising system that distributes text ads to Web pages. Sites that host ads get a cut of the revenue. Morgan liked the idea and, along with Pluck's board, gave Busey the green light to use funds from the company's investment nest egg to launch the project.
In a booth at Buck's restaurant in Woodside, the VC haunt considered ground zero of the dotcom boom, Morgan's got his back to the wall. This gives him an unobstructed view of everyone entering and leaving the restaurant. A half-dozen times during breakfast, one of Morgan's large hands goes up as someone he knows - a client from his days at Wilson Sonsini Goodrich & Rosati or an entrepreneur whose business plan he's perused - comes through the door. Most of them stop by to say hi, inquire about the wife and kids, find out how business has been, ask if he's been traveling much.
All the signs of a new boom are present and accounted for here. But despite the seemingly frantic pace of Morgan's days - reviewing dozens of business plans, recruiting management teams for his startups, and working the BlackBerry in between - the business of venture capital turns out to be incredibly slow-moving. This year, Morgan will examine 50 to 100 business plans and sign term sheets on one to three.
And this is perhaps the final lesson Morgan has extracted from his dig into the dotcom graveyard: All the talk of business moving at supersonic Internet speed, was, of course, just blather. It still takes four to six years for an industry-changing startup to become profitable. But the promise of big, new companies emerging from the networked world is very real - and it has barely begun to be fulfilled.
VCs, in other words, might be as important now as they have ever been. Angel investors and quickie acquisitions aren't enough. "Investing $5 million in a company that gets bought out for $25émillion isn't going to get me into the VC Hall of Fame," Morgan says. "That's not why I got into this business." Tech IPOs will come back, he says, and when they do, he'll have a stable of startups ready. "I'm talking about building major companies," he says, "something enduring."
Contributing editor Josh McHugh (josh@wiredmag.com) wrote about the LeapFrog pen in issue 13.11.
credit Mando Gonzales
Morgan is convinced that thereés gold in the dotcom past.
credit Mando Gonzales
Ankur Luthra scoured old tech magazines in search of viable -business ideas.
