Duke University Alumni Magazine

E-Ventures in the Start-Up Economy

The Internet start-up has become a standard of the post-graduation narrative-as common as medical school and law school have been.

tepping into The Green Room on Broad Street brings a momentary flicker of what's-wrong-here. Blinded by the glow of neon signs and silver shuffleboard pucks, one can hardly guess for which of the pre-Internet years this joint is the perfect deadpan act. Fluorescent lights and pool tables stretch through its vast expanse, and the stereo system pumps out Matchbox 20 and Weezer bootlegs from the pre-Netscape-IPO 1990s. The Duke students and professors who frequent the place are definitely not of the cell phone set.

Up and away: Just a few months after David Huang, Brad Minsley, John Quintiliani, and Matt Weiss conceived Startemup, they were already linking capital to clients
Photo: Jim Wallace

At The Green Room, not so much as a credit-card reader is linked to a network, and the only thing more technologically advanced than the non-cordless telephone is the video-game poker machine resting atop the bar. The bartender points to his manual cash register, the kind with circular plastic buttons printed with five-cent increments and another that reads "SALE," and says, "Someday I'm gonna take out a full-page ad in The Independent with a picture of this bad boy. The bottom's gonna say, 'The Green Room: We'll never have a freaking website.'"

The irony of the situation lies not three billiard tables away. Twenty-two-year-old Fred Oakes-University of Texas dropout, co-founder of an Internet start-up that does wireless applications for medical centers, and millionaire-is attending to urgent company business on his Palm VII wireless. He and his colleagues have been in town all summer, spending their nights programming dozens of handheld computers for prototypical use in the Duke Medical Center emergency room. Right now he's winning at pool and enjoying a Red Stripe.

Across time and town, a summer party is in full swing at a house just behind East Campus. It's a Duke party with all the trimmings -a keg of Killian's in the kitchen corner, smokers on the porch, even a

paint-by-number living room pleading for guests to leave their mark in yellow, brown, or blue on its semi-decrepit walls. Conversations span topics sublime and ridiculous-John's upcoming jaunt to Tanzania, whether they're really going to shut down Napster, any of the graduated seniors' reasons for still being in Durham, how many Duke people so-and-so saw in Georgetown last weekend, where did those cute Carolina girls come from, and the denouement of the Clinton era.

A sequence of MP3s, strung together at random from a playlist of 600 digital music files, provides the musical backdrop to it all, blaring at full force and perfect quality from Shamim's PC. As would be true for many populous Duke parties, the combined net worth of everyone's parents is most likely in the tens of millions. But there's a demographic difference from past parties: The total net worth of Internet-based start-up companies whose founders or CEOs are present also exceeds ten million dollars.

This year more than ever before, the Internet start-up has become a standard of the post-graduation narrative-as common as medical school and law school were to students and graduates of the Terry Sanford era, or as consulting and investment banking have been to the Duke of Nan Keohane. It's a narrative with endless variations, but with a resounding, overarching sameness.

There's the confluence of talent and initiative, the outspoken entrepreneur who serendipitously befriends the reticent techie. The "business concept" is birthed over a long car ride or a drink at a local dive. A few sleepless nights later, there is the "backgrounder." Then the business plan. Advisory boards are assembled, graphics are designed, websites are posted. Talk of "seed rounds," "initial rollout costs," and "angel investors" begins to rule the day. Partnership upon business partnership is negotiated and announced. The first crucial check is transferred into a brand-new account, sending dreams and egos to stratospheric heights.

Tiny companies, whose assets might entail a computer terminal, some office space, and letterhead, start to envision themselves as "the Andersen Consulting of online security," or "the Web's first dorm-room incubator." The global nature of the very network on which they are based, and the sheer speed that's required if they're to keep afloat, gives these companies wings to fly. Before long they are enticing venture capitalists and garnering media coverage beyond their wildest dreams.

igh-tech start-ups and universities have lived in curious symbiosis since before most people had ever seen the letters "html" strung together. Hewlett and Packard met as undergraduates at Stanford. So, too, the folks behind Sun and Cisco, and Jerry Yang and his Yahoo! co-founder. The kind of interactions that bring business concepts from obscurity to IPO seem ideally suited to campus environments. Compared to places like Stanford, Berkeley, Carnegie-Mellon, or M.I.T., Duke might seem pretty far behind the curve. But in the months since the millennium bug has faded into misplaced media hysteria, the start-up bug has bitten at Duke.

In January, seniors David Huang, Matt Weiss, Brad Minsley, and John Quintiliani began plastering campus with flyers offering "dough for your dot-com." It took a few weeks, a few major media appearances, and more than a few photos of these doyens of the new economy on the front page of every business publication in the area for people to realize what had hit. Startemup (with "up" raised half a line above "startem") was the embodiment of the moment. Self-consciously labeled "a start-up starting start-ups," they had more momentum than anyone knew what to make of.

The four entrepreneurs, buddies since their freshman year, came up with the concept while driving from D.C. back to Durham over the 1999 fall break. Not three months later, their site (www.startemup.com) was running, their all-star advisory board was enlisted, and their pithy slogans were emblazoned on brightly colored, beautifully designed red-and-orange banners. "Pre-med? Pre-law? Pre-start-up!" "Take your idea from the dorm room to the boardroom!" Everyone from Durham's Herald-Sun to The Wall Street Journal took notice.

"This idea was spurred out of our own collective frustration over not being able to find a good source on the Internet that spoke to college entrepreneurs, to provide them with the language that they respond to, the basic information that they need to take their idea for an Internet company and make it be successful," says Huang.

"The timing of the idea really spoke to what was going on with the campuses at the time," notes Weiss, the quick-talking public face of the venture. "The idea of an Internet incubator hatching these companies wouldn't have been as widely embraced even last year. So it was the hotness of the incubator market at the same time that college entrepreneurship was soaring, when students were, for all intents and purposes, putting together their own 'e-majors,' combining graduate-level engineering courses, computer science courses, economics, marketing-gearing up for an exit from Duke into the new economy."

"We noticed this trend among our peers at Duke," he adds. "We noticed that students were falling out of the traditional route of investment banking and management consulting. You're seeing a different breed of students that are coming into college these days. They have a clear-cut plan of attack. Their parents may want them to be pre-med, pre-law, but they're destined to be pre-start-up."

The idea was first to solicit "intellectual capital," in the form of business proposals from college campuses, using idiom and rhetoric suited to these techno-savvy locales. Then they would select from the crop a few winners, and "incubate" them-that is, provide them with everything necessary to turn their business plans into successful start-up businesses. "Everything" means office space, legal support, overhead, equipment, business-plan development, and a slew of high-profile contacts and introductions, to name a few elements.

The "incubator model," in which infant companies receive corporate life support in exchange for a 20- or 30-percent equity stake, is a rather recent outgrowth of more traditional venture-capital operations. Startemup sees itself as the Web's first university-specific incubator. Beginning from an office two miles from Duke's West Campus, the team hopes to establish a national presence, with satellite offices planned for the university-rich environments of Atlanta, Washington, D.C., and Boston.

This past summer, though, they focused on Duke sophomore Ryan Kazanciyan's Hide- away.net, an online security consulting emporium and the one company that the team has already brought "in-house." As they look to the year ahead, they see entrepreneurship conferences in cities across the country, co-branded with accounting giant Arthur Andersen-and carefully timed to coincide with the peak of that firm's on-campus recruiting season. There is talk of hiring a CEO, an older, more experienced businessperson who will lend that extra air of credibility when they put their proposal on the tables of the big-time venture capitalists in the coming months. And their publicity campaign-arguably the most successful facet of the business to date-shows no signs of letting up.

When asked why their business idea is so compelling, the foursome can spin hours upon hours of smoothly flowing paragraphs, paeans to Gen-Y productivity, sonnets to this brave new world. Dizzy with ambition, they craft such manic sentences as, "More than anything, it's the technical expertise that students coming into school these days possess over students like ourselves, who are just graduating, that keeps us going. I mean, we've [chosen to incubate] a freshman who was running a security site that was profitable his junior year in high school. He's looking to grow his business, doing security auditing here in the area remotely, and then branching out to other venues. That's pretty remarkable: We came into school, opened up an e-mail account, and thought it was the biggest thing in the world. He's come in and already had a profitable small business on the side."

There was a time-a few "Web years" ago, barely a turn of the page on real-time calendars-when Matt, David, Brad, and John didn't set up at a trade fair, host an information session, or give an interview without meticulously coordinated outfits: all four in black pants, belts, and shoes, Weiss and Huang (of Miami and Dallas) in Manhattan-chic gray shirts, Minsley and Quintiliani (the North Carolina natives and economics majors) in blue. They've matured since then, acquired some capital-financial, cultural, and otherwise. As weeks pass, they dress more and more like the archetypal Triangle area start-up entrepreneur-khakis, polo shirt, and a cell phone or some sort of wireless device on the belt.

he seventeenth-century British philosopher Thomas Hobbes had a notion of speech as invented, of meaning as contrived, of discourse as one big game with little connection to actual, material reality. The image seems apt as we're bombarded with information-age axioms like the online retailer worth millions on paper but hemorrhaging money each day.

But it is ultimately another Hobbesian notion that gets to the heart of this new moment that might be called "network capitalism." In Hobbes' schema, men are physical equals, and can prevent their untimely demise only by shifting among alliances with other men. The state, or "common-wealth," grounded in the sovereign's absolute authority over human life, is the ultimate alliance, and in Hobbes' mind, the only real deliverance from the "war of all against all." Shy of this external check, men prolong lives that are destined to be "nasty, brutish, and short" by aligning themselves with those more powerful than they are, or by accruing a reputation for uncanny greatness or strength. Floating in a world of transient epochs and bobbing fortunes, alliances and partnerships are what separate the losers from the winners.

Perhaps there's not a huge difference between the start-up world and the State of Nature. After all, if we've learned anything in the last five years about the Internet or the modes of thought that come with it, it's the futility of attempts for absolute control over anything, the impossibility of a "dot-commonwealth."

And so, for a company like Startemup, there are two things that really matter: first, the nexus of high-profile people they can convince to orbit their idea like electrons; second, the amount of press that they can garner. It's a dharma of the start-up world-the million-dollar seed-capital checks may transfer instantly into this account or that. But what keeps companies alive is the "credibility capital" they store in bonds with similar or not-so-similar ventures and players around the country, whether investors, advisers, competitors, or collaborators. The name of the game is to "partner" with others for all but that which lies at the heart of one's "core concept." If the concept has value, gains can be realized by focusing on it-or so the thinking goes.

Sometimes the value of this core concept is in nothing but the entrepreneur's position. John McCann, a professor who specializes in entrepreneurship at Duke's Fuqua School of Business, says, "These guys really don't know anything, and that's a good thing. They're filling a niche that they're ideally suited for, that no one else can fill. They may not 'know anything' themselves, but they know who knows, and they know how to help people with ideas get access to that. They're really just providing a service in exchange for a fee, though it looks a lot more complicated than that."

Venture capitalist Jonathan Guerster B.S.E. '86, a partner with Charles River Ventures of Cambridge, Massachusetts, raises other questions. "When I look at incubators, I'm always asking the question 'what's their edge?'" he says. "As an established VC firm, our edge is that we know exactly the kind of companies we're looking to invest in, companies that fit into our overall goals and strategies. With these guys, their edge might be that they're better than older folks at ferreting out the qualified opportunities among their peers. There might be some validity to that; younger kids may be the best innovators. But they need to balance that with finding their companies the kind of management edge they need -because with inexperienced entrepreneurs like the ones they're working with, it's not going to come from within.

"When we invest in a firm, we're looking to maximize its profitability as quickly as possible from the get-go. Even the term 'incubator' connotes a certain kind of confusion about where companies are headed." Start-ups, it seems, create value in the context of a very specific niche, which they must convince the world that no one else can fill. When barriers to entry are low, as is the case for many dot-coms, the work of the start-up sometimes lies more in convincing the world that the niche is unique than in simply filling it.

Especially for the young start-up, part of convincing means showing that youth doesn't equal inexperience. Potentially crippling perceptions that a new company lacks seasoning are best fought by establishing an advisory board stacked with heavy-hitters. In the university context, that often entails drawing faculty members into relationships that go well beyond old-fashioned constructs like "office hours." At Duke, for example, Startemup has signed computer science professor Alan Biermann onto its advisory board. Kmama.com, founded in May by a cohort of graduating literature majors, connects Japanese, Chinese, and Taiwanese students with native English speakers for online instruction. Already they've recruited professor of Japanese history Simon Partner to their board.

In some instances, this sort of faculty-student interaction brings with it an equity stake for the professor. Some raise questions about the ethics of this sort of partnering, while others see it as an inevitable and desirable progression in the complex and constantly evolving relationship between universities and technologies. An August cover story in the magazine Red Herring, "Smart Young Capitalists and Their Mentors," touts the relationship between Freeman Hrabowski, president of the University of Maryland-Baltimore County, and nineteen-year-old entrepreneur Andy Lufburrow: "Hrabowski lured Andy Lufburrow to his school by showing an interest in his business success as well as his academics. Mr. Hrabowski works at keeping Mr. Lufburrow focused on his academics and lets his associates at the university's incubator help with business development for Mr. Lufburrow's Web design company, Digimo. 'I work with him on developing as a student and a human being,' says Mr. Hrabowski. 'He's given up the last part of his childhood to start a company.'"

Entrepreneurial relationships at Duke have not grown so tight-knit. Still, it's interesting that the magazine with its finger on the pulse of the dot-commerce world has such a clear-cut vision of what it sees as the university's proper place in the information economy.

ith a network firmly in place, the start-up looks to publicize its imminent conquest, aggressively courting ink that will find its way to the eyes that matter-industry specialists, potential investors, competitors, and the general public. Startemup, with its dazzling portfolio of press clips, may be an extreme case study. But new Internet companies-at least those that deal more in concepts and content than in technological innovation-see their public relations as part and parcel of their value-adding projects.

This complicated process of creating value is a sort of millennial alchemy-one in which millions of dollars drop from the money trees that grow out of personal connections and preludes to fame. The task of the entrepreneur is to paste together prestige and excitement in a way that's interesting enough to convince the big boys that they should take his idea to the next level. And why not? Everyone is six degrees removed from the actual physical production of commodities, anyway.

And who are they really trying to impress? The venture capitalists, those strange new masters of the dot-com universe. When you get right down to it, the new economy speeds forth powered by VC turbines-the dollars that are up for grabs if someone can be convinced of an entrepreneur's potential. When venture capitalists assess who might be worth their time and money, they look at three things: the originality and feasibility of the business concept; the potential market for, and market saturation of, said concept; and most importantly, the track record of the proposed managers, who will bring the whole thing profitably to a sale or initial public offering. Technology, market, team-it's the trinity that transcends. Talk to anyone in the business, from entrepreneurs to graphic designers, and they'll say the same.

Jonathan Guerster is the real venture-capitalist deal. Founded in 1970, Charles River Ventures has been in the game longer than most, and focuses on delivering seed and first-round monies to companies in e-commerce/software applications and data communications. "We look for teams with fundamental insights that have some edge, and entrepreneurs who could take companies to an IPO," Guerster says. "When they come before us and we ask what drives them, 'making money' isn't a good answer. Neither is 'running a company.' We want people who are energized by and capable of fundamentally changing things."

Ambitious firms, in turn, look to CRV not only for vital dollars, but for the kind of connections and (once again) credibility that such reputable "smart money" would give them. Charles River's "CRVelocity Team" provides the fledgling companies with an incredible range of resources, ranging from introductions to their first few major customers and assistance in establishing partnerships to legal support, real-estate management, and help writing stock-option plans.

"These guys are a SWAT team, they're like brain surgeons for start-ups" Guerster says of his CRVelocity colleagues. "We have in-house experts in every conceivable start-up-related discipline, and they get the added leverage of working with all of our companies. It's some really powerful stuff."

One interesting symmetry is the preponderance of university and foundation monies in venture-capital funds. Charles River, for example, counts more than a dozen nonprofit institutions among its principalinvestors, including Northwestern, Notre Dame, Harvard, the Kresge Foundation, and the Howard Hughes Foundation. "Frankly," says Guerster, "it's more fun to make money for these people than for some pension fund."

And just as start-ups draw prestige from their underwriters, VC funds draw prestige from their constituents. A recent press release from Southeast Interactive Technology Funds, a VC firm based in the Triangle, brags: "Southeast InteractiveŠtoday announced a close of its second fund of $35 million. The Fund's partners include BancBoston Ventures, SG Capital Partners, CIT, Royal Insurance, and Duke University."

Unfortunately, and frighteningly, venture capital is not always "smart." Elizabeth Spiers '99 once worked for a networking site for alumni of elite universities, and is now with the Greenwich, Connecticut-based e-commerce expert Galt Consulting. "There's so much dumb money out there, from people who want to invest in the new economy but have no idea what they're doing," she says. "Let me put it this way: No one I know who has been looking for funding has had a problem." While Spiers celebrates her peers' entrepreneurial spirit, she wonders if some of her elders' trust-often taking the form of multi-million-dollar investments in marginally well-conceived companies-might collapse on itself.

he Internet economy is an economy of ideas-having ideas, selling ideas, and milking ideas dry until the juggernaut of cyber-industrialization (which no one understands, but everyone can profit from) leaves them in the dirt. The really good start-up entrepreneurs don't think in terms of how to make their company succeed, but how to make their next company succeed.

Jeremy Usher M.B.A. '00, business development manager of the RTP-based WindWire, can speak to that. "In any six months, there will be five or six start-ups trying to do exactly the same thing, and the question is how to assure that no one is doing what you're trying to do," he notes, reflecting on the company for which he wrote a business plan during his time at Fuqua. "It's tough to keep up with everything that goes on, looking both upstream and downstream, and still make the kind of innovations that your core concept demands."

Usher's technical background includes an electrical engineering degree from Auburn University. When plans of starting his own company, which brought him to Fuqua after a few years in Silicon Valley, were put on momentary hold, he went to work for a company whose initial $4 million in funding came through in May. Between the time Usher started at WindWire, immediately after graduation, and early July, WindWire's staff had quintupled. Its two co-founders are already on their second start-up, their first company, Netsation, having been purchased by Nortel two years ago. Together, they are looking to capitalize on the fact that "we are now with the wireless Internet where we were five years ago with the Web." WindWire bills itself as "a pure wireless marketing start-up," delivering ads and promotions to such wireless devices as phones, personal digital assistants, and two-way pagers. If they anticipate anything, it's rapid growth.

Rapid growth means rapid change, which "quite simply, even from the operations standpoint, can be a pain in the ass-not to mention the difficulty of finding qualified people to fill all these positions," says Jim Rose '96. Rose is co-founder and CEO of MobShop, a Silicon Valley dot-com that pioneered the technology of "group-buying." He knows rapid change. His Duke years, which he spent as a comparative area studies major, ended just months after the Netscape IPO, and barely a year after the Pentium chip went mainstream.

Says Rose of his undergraduate days, "Sure, I had friends who were into Unix, into browsing a text-based Web, but obviously it was nothing like it became." His immediate post-Duke years began as a consultant with Xerox China Ltd. in Hong Kong and Beijing. Working as a marketing and communications consultant for tech giant MSI Consulting Group, he fell in with Salim Teja and Jonathan Ehrlich,two graduates of the University of Western Ontario. In October 1998, the three founded Accompany, Inc., looking to enable wired customers to "combine their orders with those of other interested buyers to realize the greatest possible savings." The site debuted in April 1999. A year later, the name changed to MobShop.

Now, four years out of college, Rose heads a company with 150 employees, a board of directors that includes Netscape titan Marc Andreessen, and a growth rate last year of 311.7 percent-the industry's second-highest, according to leading Internet statistics provider PC Data Online. He even has an assistant who says things like, "I want to set a couple of things straight: Jim's title is 'co-founder and CEO' and the name of the company is 'MobShop,' not 'MobShop.com.'"

MobShop does not retail commodities to consumers; "we let our supplier partners do that." As their company overview states, "everything we do at MobShop is centered around the idea of creating value through communities," whether those be communities of buyers, sellers, or affiliate websites. In their perfectly-crafted dot-com idiom, "it's a win-win-win opportunity."

his goes far beyond the planned obsolescence of consumer goods, Death of a Salesman style. In the start-up culture, the dialectical turbine behind the keep-up-with-the-Joneses ethos has shifted into abstraction and overdrive. We're talking now about the planned obsolescence of intellectual creations, of ideas. And companies are so tightly bound to these ideas-inscribed as they are in the whims of the moment-that the fantasy of making it no longer involves twentysomething visions of middle-aged Saturday mornings spent earnestly at the family-run corporation.

But while start-ups serve on the one hand as a mega-caricature of American ambition and desire, they also provide an "exit strategy" (to use their own term) to the rat race for those who are interested more in realizing an idea than in amassing wealth or power. The only thing that can be stated categorically about start-up entrepreneurs is that they don't mind pulling all-nighters. And while they may be the new "masters of the universe," unlike Tom Wolfe's 1980s Manhattan bond traders in Bonfire of the Vanities, they don't wear an expensive-suit uniform.

The genius of the information age is in the way it lets one choose his own leash. Here you have it-the only profession where twenty-two-year-olds with dreams of fast cars and beach houses are grouped together with those who wouldn't mind driving electric motorcycles and will probably donate a good part of their eventual fortunes to the Green Party.

In the new economy, money itself borders on empty signifier. For every sunglass-wearing entrepreneur with a BMW z3 on order for the day that first big check clears, there is one decked out in a Boy Scout T-shirt and shoulder-length hair-like the medical-software-writing Texan shooting pool at The Green Room on Broad Street who refuses to sleep on a bed, saying only a couch can remind him nightly of how impermanent a life he leads. All that unites these endlessly different types is their desire to make a brainstorm into reality, and their willingness to eat, breathe, and sleep that brainstorm for as long as it takes to turn a profit.

Tinari '01 is co-founder and CEO of America's fastest growing literary theory start-up. He is beginning his second stint as the magazine's Clay Felker Fellow.

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