Moving to the Internet rhythm
By Phat X. Chiem
The Midwest's flourishing dot-com community is on a pace to break all its records as a rush of Chicago-area companies line up to raise money through initial public offerings. Analysts predict Illinois firms this year will exceed the 1997 benchmark of $2.2 billion raised through IPOs, with most of the activity coming from on-line ventures.
One person who has watched these developments with some delight is Howard Tullman, a Chicago-based entrepreneur who created some of the region's earliest Internet ventures. In 1996, he founded Tunes.com, an on-line music network that was sold in December to digital music distributor Emusic.com for $130 million in stock.
As a Silicon Prairie pioneer, Tullman helped build one of the first on-line jobs databases in 1991 through a company he headed called Information Kinetics Inc. The service evolved into CareerPath.com, now used by major newspapers such as The New York Times, The Washington Post and the Chicago Tribune.
Tullman operates his own venture fund and is on the board of directors at Elk Grove-based on-line auctioneer uBid Inc. and BeautyJungle.com, an on-line distributor of beauty and personal care products majority owned by red-hot Divine Interventures.
Over a bowl of Rice Krispies with fresh berries and orange juice at the Ciello restaurant overlooking North Michigan Avenue, Tullman spoke about prospects for the Midwest's Internet community, the increasingly competitive environment for on-line ventures and why many won't survive.
An edited transcript follows:
Q: Do you think the era is over where two college buddies working out of a garage can come up with a great Internet idea and make millions on an IPO?
A: Just a great idea won't do it anymore. You need great management, a good strategy and lots of capital. But it depends on what the end game is. If it's a sustainable business, then it doesn't matter that you don't become the next Yahoo! It's perfectly acceptable to take the company a certain extent and allow someone with more resources to buy you out and expand the idea.
Q: How do you know when to step aside?
A: It's not necessarily about stepping side. It's knowing when to give up the idea of going about it alone. Because all the money and stock can't help you get certain things done. You need leverage.
Q: What are your thoughts on Divine Interventures?
A: The incubators are really interesting. I have really mixed feelings about how that's going to work. (Divine Interventures chief Andrew "Flip" Filipowski) and some of these other people think you can incubate from scratch. The CMGI model took existing groups of entrepreneurs who were turned on about their businesses and helped them work together. It's a lot different than anointing people as Mr. Real Estate and Mr. Technology and saying, "Now everybody grow." The guy who's hired usually doesn't have the same kind of crazy passion to get one of these things started. You might get some lemons.
Q: You think the startups need more support?
A: My view is that the most successful people in this space are going to be people who can bring value-added experience to the entrepreneurs because they've done that sort of work before. I would prefer to work with 2 or 3 business and be actively involved.
Q: What do you look for in an Internet business plan? Is first-mover status a must?
A:First of all, first mover status isn't going to matter. What's going to matter is fast follower. Unless you find a peculiar space, like Ebay, that's going to offer revolutionary change, it's very hard convince me that a first-mover status is going to have a predictable advantage. Remember that Yahoo! was the fourth search engine, not the first. No one remembers that. It's not about being first but about assembling the best package and staying for the long term.
Q: What other things do you consider?
A: The biggest challenge on the Internet, without question, is how do you get people exposed to your idea or message. Everything else takes a back seat to that. It's a question of trying to break through the clutter. Every business plan that I see these days essentially has a horizontal set of numbers and one spike. That spike is marketing and promotions and it can be as high as you want it to be.
Q: Give me an example of proposal that you've turned down.
A: Someone came to me saying they wanted to build a memorabilia site. I used my test: Does the guy own more memorabilia than anyone else? How long is it going to take AOL, if this turns out to be a good idea, to have 20 million people sell their memorabilia? How long is your margin going to last? Is there any reason to think this is a special or a sustainable business.
Q: How does that test apply to BeautyJungle.com?
A: The BeautyJungle model of being more business to business than business to consumer is definitely an improvement over these pure beauty sites. I also think the strategy of offering prestige brands and generics is important. But it's going to be a horrendously expensive battle and it remains to be seen who comes out on top. We're a strong player but it's going to be a very hard year or two.
Q: What's the most important commodity on the Internet?
A: The scarcest resource is time. Because if you can do something for me quickly and efficiently, I don't care what I pay for it. I'm not willing to save 10 cents on groceries by going to Priceline.com. On the other hand, if you're service like Kozmo.com that says I can run to the video store and pick up your cleaning and deliver it to your house, I'm there.
Q: What's makes a great Internet idea?
A: It's one that takes advantage of the inherent capabilities of the Internet. The first generation of people who built websites and simply replicated their catalogs didn't get it. The people who are consistently beating (old-line) industries are the people who understand that you have to identify a problem, show how you're going to fix it and show people what their life will look like after who've fixed it.
Q: How do you think Chicago will fare against communities like Silicon Valley and New York's Silicon Alley?
A: I'm optimistic for three reasons. We have a tremendous amount of major universities here. We have better economics because the dot-coms here aren't competing against California or New York salaries. And I think we have a pretty fertile group here. We might no invent the newest chip, but in terms of content sites, we're not lacking what will make up 90 percent of success on the web. Only a portion of the Internet has to do with technology. It has a lot more to do with content and pedestrian things like execution, distribution partnerships, syndication and consolidation.