MPR: Painful E-Lessons for Internet Workers

Painful E-Lessons for Internet Workers
By Andrew Haeg
November 20, 2000

The dot-com boom seemed too good to be true; it was. The tech-heavy NASDAQ is down 35 percent from its high last March. Nationally, 22,000 employees of Internet companies have been laid off, and scores of dot-coms have closed their doors. In the Twin Cities, once high-flying firms Internet firms - including Net Perceptions and Techies.com - have laid off hundreds of staffers. Now these companies are trying to do something different: turn a profit.

JENNIFER BOMBACH joined Techies.com on September 1, 1998 as its 33rd employee. The Edina-based company was growing quickly; its business proposition, using the Internet to match potential employees with employers, was catching on.

Internet Stocks Tumble
	Price 3/10	Price 11/16	% Change
MINNESOTA COMPANIES
Net Perceptions	57.500	3.125	-95%
Digital River	31.375	5.875	-81%
NetRadio	5.688	0.688	-88%
NATIONAL INTERNET STOCKS
E*TRADE	26.50	11.938	-55%
About.com	92.875	23.375	-75%
Yahoo!	178.063	52.938	-70%
CMGI	136.438	13.125	-90%

Bombach soon became a manager. By the start of this year, she'd seen the company's payroll swell to more than 500. But then investors soured on electronic retailers and other Internet companies. In March, the stock market tumbled. Suddenly, Techies' prospects for expansion looked a lot less promising, as many of its clients got caught up in the shakeout. Between April and and June, management decided to fire about 120 employees.

"In a capitalist society, you always got to look at the bottom line," she says. "The rules had changed on us midstream, we had to do something different." She says the market required they turn a profit.

It wasn't always that way. In 1998 and '99, venture capital investors injected more than $870 million into Minnesota high-tech companies, just a fraction of an unprecedented influx of capital nationally. A lot of it went to startup businesses that had no clear ability to generate profits.

"Throughout a good portion of 1999, the public and private markets rewarded companies that were fundamentally investing in rapid-growth, independent of the amount of losses with the idea that in the future; these companies will turn profitable, but right now let's focus on investing in growth," says Michael Gorman, a principal at St. Paul Venture Capital in Eden Prairie, a major investor in local technology companies.

Time and again, Gorman says he heard the same promises: Entrepreneurs found a niche; said they'd spend millions to swiftly expand; and once the company established a commanding position, they assured massive profits would roll in the door.

But when technology stocks began their swan dive in March, the distant glimmer of profits faded. Still, dot-com companies tried to spend their way to success. Techies.com, for instance, lost almost $38 million last year alone. Net Perceptions has lost about $15.5 million since the beginning of the year. NetPerceptions designs software enabling e-tailers to personalize their marketing pitch, and is based in Edina.

As the market turned south, investors lost their zeal for risk; massive losses no longer seemed reasonable.

As a result, young, unprofitable tech companies could no longer get by on just an idea. They needed a strong business model and - here's the current catch phrase - a "clear path to profitability."

"Everybody became aware that the rules had changed as to what you have to do as a technology company to really succeed," says Joel Ronning, CEO of online software retailer Digital River.

Between March and mid-November, Digital River's stock dropped about 83 percent, a tough blow for a company that could reward employees with potentially lucrative stock options.

"It's a lot of fun to watch a rising stock and it's highly motivating for a team of young professionals to see their net worth doubling and tripling in a matter of days," he says. "That was a lot of fun, but operating companies have got to stay focused on profitability and not on stock price."

Digital River wasn't alone. Local Internet music broadcaster NetRadio lost more than 80 percent of its value, as did Zamba, a local Internet service provider. NetPerceptions lost 92 percent of its value. In other words, on March 1st, NetPerceptions' was worth about $1.5 billion on the stock market. By mid-November, the company was worth just over $87 million.

It was a stomach-churning ride for those who saw bright prospects disappear.

Early this year, Trista Meehan was designing Web pages for Techies.com. She says it was an exciting time; she was surrounded by young, creative people, and the company was growing quickly.

"At the employee meetings they were very gung ho, 'We're going to be expanding into all of these markets, over the year, we've got all this funding lined up.' It was very much like a pep rally at every meeting. There were constant reminders that we were going to go public soon," she says.

But Techies delayed its public offering a total of five times. Meehan soon heard rumblings her design division was in trouble. Management confirmed her fears in April when they laid off Meehan and 59 of her colleagues.

"My experience at Techies, I couldn't have gotten that anywhere. I couldn't have gotten that at business school. I couldn't have paid somebody to give me that experience."

- Jennifer Bombach

She found work at another tech company. But it may be harder for more recent dot-com refugees as their numbers rise. In October, e-commerce consulting service, Born Information Services, cut its staff by 70. That same month, NetPerceptions revamped its business strategy and fired 65 employees.

"Fundamentally, we have been positioned very well in the marketplace with great people and great technology," contends Net Perceptions CEO Steven Snyder. "What we realized is a greater focus on core markets, the core strengths of the company, was the most effective way to proceed. The key thing is driving toward profitability, and, over the long term, maximizing shareholder value."

A return to the fundamentals - profit and loss - has some breathing a sigh of relief.

Mike O'Connor is a local Internet entrepreneur. "Two years ago, I couldn't figure out what was going on, it was just madness. But now it's back to customers and profits, cash flow and all the stuff that small business people like me have grown up with over the centuries," he says.

Digital River's Joel Ronning says the shakeout in the Internet world weeded out many of his competitors. And he says he has a growing stack of offers on his desk from companies that want Digital River to buy them. He says the company bought one firm a few months ago at a tenth the price it would have paid at the height of the dot-com mania a year ago.

And NetPerceptions, despite the layoffs, currently has job openings in other, fast-growing divisions.

Those who worked at dot-coms during the days of boom and bust say they've learned some valuable lessons.

Jennifer Bombach says she regrets nothing.

"It was a land rush in a lot of ways, and an incredible opportunity who had that opportunity to be in a company like that, and solving it as you go. My experience at Techies, I couldn't have gotten that anywhere. I couldn't have gotten that at business school. I couldn't have paid somebody to give me that experience. But I got paid for it," she says.

Bombach quit her job at Techies.com in August. Now she's looking for work at other local tech companies. For now, though, she says none are hiring.

Andrew Haeg covers business issues for Minnesota Public Radio. You can reach him via e-mail at ahaeg@mpr.org.

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