E-Business Start-Ups: Separating The Men From The Boys

Like the tale of Jerry Yang and David Filo, who, between engineering classes at Stanford, diddled with the computer database that became Yahoo! Or the stories about the entrepreneurial zeal of Steve Jobs and Bill Gates, who, through hard times, rejection and years of anonymity, built our country's biggest computer and software companies.

We've all heard the tales. They are as much a part of the story of the new economy as the founding fathers are of the story of our nation's beginnings. But then comes the mundane,yet essential,building and growth phase. And with it, the people brought in especially to handle that task. In the case of a young United States, it took Congress and other political leaders to help men, such as Washington and Jefferson, implement their visions. In the case of a successful start-up, it's the MBAs, those industry veterans roped in at a certain stage of a company's life to help its transition from upstart to an efficient, established Wall Street player.

Many analysts liken that leap to the pivotal moment when an airplane attempts to break the sound barrier. Is the craft sound enough to survive the shuddering stress of the jump? Is the crew up to the task? If not, the craft will shatter under the pressure. In business, that pressure can sometimes come from the clash of two cultures,the start-up culture vs. the traditional business culture (see "Five Tips To Help Start-Ups Become Grown-Ups).

Some companies have made that sound-barrier leap, from penniless start-up to multimillion dollar business. Learn what worked for them and what didn't,and why.

Baby's All Grown Up

For some, the start-up is the thing. The only thing.

Ross Gerber, software designer and co-founder of e-business application company Vignette, is a celebrity in the world of computers and software. The industry recognized his contributions with the 1999 Ernst & Young Entrepreneur of the Year Award. His background is impeccable, the stuff of start-up legends. When he and partner Neil Webber founded Vignette in 1995, it was with the same entrepreneurial verve that he had approached everything else.

After its phenomenal initial public offering in 1999, Vignette made that successful leap through the sound barrier, and, at the same time, Gerber began to lose interest in the game. Eventually, he left to work at another start-up.

It may seem shocking that he was able to walk away from the captaining of Vignette: It was his baby, after all. But what happened to Gerber happens to many entrepreneurs.

"Going corporate is not really always a part of the entrepreneurial personality. They get bored with the mundane details," says Greg Vogel, an Internet analyst with Bank of America Securities.

"They like to build things; that's what they are good at," Vogel adds. "When the 'thing' or the company has been built, sometimes they just walk away."

So, is that the end of a company when its founding father walks away? Not for Vignette, which went on to successfully grow and adapt to its newfound status as an established business, with high revenue and a fat employee roster.

"The growth was really fast, and we had to make some significant cultural changes in order to manage it," says Vignette's senior vice president of products Bill Daniel. "We grew from 100 people to more than 2,000 employees in less than two years, and that takes adapting to."

And adapt they did. First, they brought in a new CEO with a more traditional background,a move that Vogel says is commonplace. The new man was Greg Peters, who had had 16 years of industry experience and was former CEO of software company Logic Works.

Then the folks at Vignette sat down and figured out what company values they wanted to retain from their early days, and what they wanted to add.

"We realized that an important part of our early days was 'customer-centricity',paying attention to the customer, making him the focal point of our attention. We didn't want to lose that as a big business," Daniel says.

Vignette is thriving. What could have been a disaster with the departure of Gerber, was turned into a triumph.

Other companies have not fared as well. Minicomputer pioneer Digital Equipment was a major player since the beginning of the boom time in the new economy. But Digital's founder, Ken Olsen, an indisputable visionary in certain ways, violated a cardinal rule in the industry,he stayed on too long.

"Ken Olsen was brilliant in many ways. But he wasn't able to move on to the next wave," says Peter Kampas, a former adjunct professor in the Cornell University Graduate School of Business and former employee of Digital Equipment who got out before the company was bought by Compaq.

Kampas, who is now an analyst with Framingham, Mass.-based Hurwitz Group, says there is a dynamic tension that exists in every company, and the two axes of that tension are creativity and control.

A start-up is all about creativity, Kampas says,the creation of a company and a product, the incubation and birth of ideas. But when a company hits a certain stage in its lifespan, often right before or after it goes public, that's when control has to kick in. And that's the stage when many MBAs and traditional industry types come on board.

"At that stage, the company begins to emphasize process," Kampas says.

But one of the pitfalls for a company at that point is that it may become addicted to process and to controlling that process.

"A lot of dot-com companies don't survive for that reason," Kampas says.

The key to survival is to try to have a healthy balance between both. "It's like a good marriage," he says. "You don't want one personality or individual to dominate the other."

Kampas says there are ways that companies can work to avoid these pitfalls. The first thing that is required is "situational behavior",especially on the part of its founders and executives.

What that means is that executives must be able to step into many different roles, depending on what the situation demands. And their goals must encompass the short term,which can mean control, emphasis on operation, and marketing and production,and the long term, which means remaining innovative and creative, thus, viable for the long run.

Next, a company should have a reward system, or incentives, that encourage continuing creativity and innovation on the part of its employees.

Finally, a company needs to encourage and reward its "unconventional insiders." These are the company rebels, the people who are constantly challenging the status quo,the communal assumptions in a business,and coming up with their own innovative, often superior, solutions and product ideas.

"IBM in the '80s is a classic example of the mistakes you can make in this area. It fired all its unconventional insiders, and the company promptly went into a slump," Kampas says.

"IBM had a bad time until it got a new CEO, Louis Gerstner, who saw that he needed to encourage those types within IBM again. And now IBM's back on its feet," Kampas points out.

The Risks of the Renegade

But are there any companies that can afford to avoid these choices altogether,to preserve their start-up culture, eschew the MBAs and Wall Street culture and still remain viable against their competition?

Only a select few, Kampas says.

"It really has to do with the size of a company and the nature of its business. If it's product-oriented, that's very difficult. And the larger the organization, the more infrastructure you need."

But if you're a boutique company, it may be possible to avoid the "corporatization" of your company. But all growing companies that plan on getting bigger and producing more will have to eventually modify that start-up mentality, analysts agree. Nevertheless, there's more than one way to get a happy blend of the two.

"Cisco has found a good way to deal with this dilemma,it buys start-ups that will enhance its preexisting services and assimilates the companies whole without radically disturbing those companies' original cultures," Kampas says.

But most companies continue to learn the hard, old-fashioned way, such as Internet software and tools developer Allaire, which was an Annual Report Card winner in two categories this year.

The story behind Allaire and its young founders, brothers J.J. and Jeremy Allaire, is the classic start-up-in-a-garage story,almost.

"In the beginning, we were working out of a one-bedroom apartment, and we just pulled in a bunch of our friends who were all about our age, in their early twenties," says Jeremy, the company's infectiously enthusiastic CTO.

"It was all very exciting in the beginning, and precarious long hours, little or no pay, but great dedication to what we were building," he recalls.

The brothers Allaire launched their first software product,ColdFusion,to much fanfare. But nine months into the founding of the company, they realized they needed VC funding and outside help to take it to the next level.

"We saw that we needed a CEO who came from the outside, had a diversity of experience in the software industry and who had gone through the start-up experience. But we didn't want somebody who had been a CEO before, but who was now ready to be a CEO," Jeremy explains.

They found their man in David Orfao. But, before they hired him, they made sure that he understood that this was going to be a partnership,a happy marriage between the old culture and the new. Still, there were some bumps along the way.

"Some of the original group members thought that some of the new managers didn't necessarily 'get' the Internet, for example," Jeremy says. So he and his brother J.J. made sure that the next batch of outsiders were steeped in that culture, as well as having a solid business background.

"Nevertheless, pre-IPO, we did feel we had to focus on process and on the operational, and we did lose a little bit of that original start-up culture for a time," he says.

They also lost a few of the core group,a part of the natural attrition of such a company.

"After we went public, there were people who vested their stock, and consequently became financially independent," he says. "They were the folks who liked the excitement of the start-up but had no ultimate aspirations to become managers" Jeremy says. "It was best for everyone all around."

Bank of America Securities' Vogel agrees: "It's better that those people go off and do other things, rather than try to squeeze a square peg into a round hole."

In the case of Allaire, the core members who did stay on brought with them the archival memory of the company's beginnings,something new employees could respect and look up to.

And Allaire found an innovative way to combine its newfound status as megaplayer with its old start-up creativity: product teams. Inspired by Microsoft's product-team models, Allaire decided to create teams that would be in charge of the creation and development of individual new products, allowing the teams to act almost as if they were start-ups.

"It's been a great success. We've gone from having one

product to having five. And the latest,Spectra, launched only last year,now accounts for 25 percent of our total revenue," Jeremy says.

What To Watch For

Recognizing the makeup of a corporate leader who's in it for the long haul