Hard Lessons From The First Nuclear Winter of the Internet
It has now almost receded from memory– the starving time of the internet. Although we were probably never as close to extinction as it felt, the times were grim. These are the lessons that can help startups survive the next hard times. Scar tissue is often the best teacher.
This is a recollection of my adventures and misadventures in the early days of the Internet and the lessons that I learned. In retrospect, these sound like the stories that our ancestors told about immigration or surviving the Great Depression. But they really happened. And, today, as we see Google and Netflix shock investors with weak quarters and venture capitalists calling a timeout on investments, there are eerie echoes of the hard times of twenty years ago.
Plunging into chaos
In the late 1990s I was running Computerworld, a vertically integrated media business within International Data Group. I had a website within my unit but it felt as if we were dabbling. I made the decision to leave the relative security of a corporate job for the risks and rewards of DevX, a venture-backed, web media startup. Although the ride was harrowing, I have often joked that I hit the CEO Trifecta during the first nuclear winter of the internet: we survived; we became profitable; and I walked out the door under my own power.
During the late 90’s the internet was booming. Netscape had an IPO in 1995 and its stock soared reaching an enterprise valuation of more than $2B. That started a gold rush for the internet. Venture capital flowed freely and startups goosed their valuations with deals that were creative at best and fraudulent at worst. One common practice was known as round-tripping. One companies sell something to another company who sells something else with the same value back. Both companies booked the revenue but no money really changed hands. I remember sitting on airplanes in late 1999 and listening to indiscrete VCs wondering whether their portfolio stock would crater before their lockups ended.
In April of 2000, everything started to unravel for the first phase of the internet. The NASDAQ crashed. VC funding was put on hold. For a little more than a year, there was a phony war. Things were on hold but no one was sure where we were going next. Then things turned ugly.
9/11 was like tossing a drowning man a boat anchor
From twenty years distance, it is hard to remember how traumatic the attacks of 9/11 and the subsequent wars were to America. On the ground it felt as if our thread-thin lifeline was snapping. Startups scrambled for shelter. Or dried up and blew away. Red hot ventures that had looked down their noses at traditional main street businesses suddenly were begging for a soft landing–but comfort was hard to come by. The message that most startups received was “you’re on your own, best of luck”. The doubters who said that the internet was a fad and a fraud were spraining their arms patting each other on the back.
Lesson 1: In hard times, it’s about the people
It’s a cliche to say “We only want A players!, Only the very best people”. It never happens. Not at Google or Facebook or Microsoft. And certainly not in a startup. In fact, the most important question is what does “A Player” even mean for this company, at this moment in this market?
When the smelly brown stuff hits the rapidly rotating ventilator the core quality is not intelligence or technical chops or college pedigree, it is attitude. Bad teams filled with prima donnas fall apart under adversity– see my beloved 2022 Lakers. All Star finger-pointers.
In the toughest of times, the best people are the ones who pull together, find ways to laugh, pick each other up, and solve problems. One of my all-time favorite movie lines is from Heartbreak Ridge. “Adapt, Improvise, Overcome”. That is the key to riding out the starving times.
There were months when half of the days were unpaid furlough days. There were days when Enron turned off the electric power to Silicon Valley. But we persisted. And, in the end, being there for the happy ending often requires the grim determination to get through the ugly middle.
There is a long list of people to whom I will always be grateful. We had great investors from Hummer Winblad, specifically Ann Winblad and Mark Gorenberg. We could have never survived without the wisdom, good humor and. optimism of my friend and business partner Jim Cook. Other invaluable folks were Trisha Merriam, Lori Motko, Mac McCarthy, Rosalind Tan, Katie Sturdivant and Greg Stern. My assistant and office manager, Tina Templin played an outsized role in keeping us together. More than just my respect and gratitude, they will always have my affection.
2023 Action: Cultivate the people who are positive problem solvers. Ditch the prima donnas.
Lesson 2: Do the hard stuff quickly
There was a day in late 2000 when Jim turned to me and said, “We need to run the business as if the last money that we raised will be the only money we ever raise.” From that moment on, we had a steely focus on getting to cash flow breakeven whatever it took. Even as others were encouraging us to grow and invest.
There is a natural tendency in business to kick the hard decisions down the road. It’s easier in the short term to hope that things will get better, the sales team will hit their forecast, the clients will all pay their bills. But, as I often say, hope is not a strategy.
People managing business through challenging times talk about “catching a falling knife” which means trying to cut costs fast enough to stay in line with dropping revenues. The painful lesson is to cut faster and deeper than you think you need to. However “realistic” you think that you are, you are still too optimistic. It is usually not enough to cut the fat. You may need to cut muscle and bone. And it will hurt. And you will wonder how you can function. And there’s where your mantra needs to be “Adapt. Improvise. Overcome”
We actually got DevX mildly profitable during the grimmest of times. And Jim and I stole an idea from the corner barbershop. We got fresh dollar bills, signed them and laminated them. Everyone got a “share” of our first dollars of profit. It wasn’t much and they couldn’t spend it, but it was a powerful symbol that we were refusing to die.
Our strategy was simple. Outlast the starving time. Be standing when things began to ease. I used to say that on my tombstone it would say “Damn, he was hard to kill.” Not Churchillian but it was enough.
2023 Action: Focus on creating enterprise value and know how to get to cashflow breakeven quickly.
Lesson 3: Be important to your core customers
During the better times, DevX was supported by advertising targeted to software developers–often from other startups trying to burnish their brands. There was lots of activity but little engagement. This was the “eyeballs” phase of the internet.
As things began to fall apart, I said “The first thing that will go in a collapse will be brand advertising. The second will be crappy dot.coms like us. We need to get to get to the money”.
We survived because we figured out how to become authentic business partners to the biggest tech companies–the ones who could outlast two or three years of bad times.
We met with executives at the client companies (not their ad agencies) and talked about what business goals we needed to deliver for them to hit their personal MBOs and collect their bonuses and stock options. Most were hesitant at first to deal on such a personal, nitty gritty level but staring at the cold cruel world encouraged openness and creativity.
Our readers were software developers. We did a good job of helping them make and execute smart decisions. We figured out how to bridge brands to these decision-makers in ways that were honestly helpful to both sides.
There is a delicate balance in signing up for real business goals. It needs to be significant enough that your client is your true partner who needs you to succeed but not so big that success is unachievable.
And it worked. Struggling, starving little DevX became a true business partner to Intel, IBM, Qualcomm, BEA, and Microsoft. We signed them to longer term deals that delivered tangible results.
2023 Action: Tell yourself the truth. Are you important for your core customers? If not, figure out how to become important.
Lesson 4: Use OPM–other people’s money
There was no venture capital to be had. But we needed cash. How to make these two distant circles on the Venn diagram overlap? The answer was to convince Intel and Microsoft to sign annual contracts and to pay us in advance. We gave them a 20% discount over rack rate but the money was not only cheap, it was lifesaving. Startups often assume that venture capital is the only way to fund their business. In reality, they need to think harder and more creatively about non-dilutive ways to fund survival and growth.
2023 Action: Actively explore non-traditional ways to put non-dilutive cash into the business
Rule 5: Find fun without spending a lot of money
It has become accepted wisdom that employees will only be loyal if you shower them with perks. Gourmet lunch rooms. Spas. Dogwalking. Drycleaning. Neck massages in their Aeron chairs. Foosball tables are just penny ante table stakes. During the starving teams we couldn’t even pay people every day. We needed to inject fun without funds. Our solution was to draw on the notion from old movies “Hey kids, let’s paint the barn and put on a show”
We had potlucks where everyone brought dishes representing their ethnic heritage. Mac McCarthy guided us through wine tasting–and he brought the wine. We had a guess the baby picture contests, the grand prize was lunch with me at a Thai buffet.
There is a great Napoleon quote that says “No man will sell you his life, but he will gladly give it to you for a scrap of ribbon”. People become unhappy when they feel that they are not being paid fairly. But more money doesn’t make people happy or loyal. People need a sense of purpose and comradeship.
2023 Action: Let people know that you care and that you appreciate them. Human connection is more important than cash.
Lesson 6: Take the win even if it’s not pretty
In early 2003 we sold DevX to Meckler Media. It was bittersweet. We had gone through the toughest market in memory. The core team was closer than ever. And we handed the baby that we had fought for to someone who wanted it but didn’t really love it the way that we did. Disappointing? Sure but it WAS a win. We needed to take the money and say thanks.
2023 Action: Don’t be greedy. Don’t stay at the party too long. There comes a time to sell your business and put the money into your checking account. Don’t miss it.
Lesson 7: Always bet on the future
It wouldn’t be honest to say that there were not days when I wondered what I had gotten my self into–why had I given up a great job with a great company to risk everything. Although there were many tough and harrowing moments, it was all worth it. We survived. The internet came back. The world actually did change. The future always wins.