Just Managing: Pennies From Heaven

SAN FRANCISCO (05/31/2000) - When I think of what it takes to make it in the Internet economy, an old Steve Martin joke comes to mind. Martin has the secret to making a million dollars: " 'First,' he tells his audience, 'take a million dollars ... ' " Campbell Ellsworth would get this joke. As a gifted architect, he's a guy with true brick-and-mortar skills. (For the record, he designed the home office I'm typing from right now.) Two years ago, Ellsworth got the Internet bug and got it bad. He and his business partner, Peter Stames, were frustrated with the complex process of contract work and spotted an opportunity to help the scattered players in the construction industry get things done more efficiently.

Ellsworth and Stames created Redhut, "an online set of business tools and e-commerce solutions for contractors and architects in the residential-construction field." The two envisioned Redhut as an online resource to coordinate and simplify the contracting process. The service would provide independent contractors (90 percent of whom use home computers, according to Ellsworth) with a home-page marketing site through which they could access tools, such as interactive critical-path scheduling for running their businesses.

Moreover, key players could meet and collaborate through this extranet. By making documents, proposals, communication threads, spec changes and the like centrally located and accessible, all the players could avoid many of the small hassles that plague jobs. The site also would give homeowners a one-stop shop for all the materials and goods they need for a given project, thanks to partnerships that Ellsworth and Stames set up with local distributors for bulk discounts.

The two created a business plan for Redhut, a demo of the product and then went calling for money. And that's where their story gets interesting. The Redhut founders ran into what Ellsworth calls the "urban legend" of easy money for Internet startups. "Everyone seems to be saying that any two geeks with an idea can walk [up] to a venture capitalist and get funded. And we are finding that that is not the case," he says. The two contacted a venture capitalist through a mutual connection. The moneyman loved their idea but said Ellsworth and Stames weren't asking for enough money. Why not ask for $6 million instead of $3 million? Ellsworth and Stames took their plan back, redid the numbers and returned full of hope. The VC turned them down.

Ellsworth and Stames tried other VCs, but they also passed because the two men weren't seeking enough money. So Stames and Ellsworth targeted smaller investments from high net-worth "angels." Again, they were met with interest but no investment. According to Campbell, many folks wanted to pony up as long as they weren't the "lead investor." They were interested but wanted to wait until someone else invested before them. At that point, armed with the collected experience and wisdom the two had gathered to date, Redhut sought out business incubators as a source of support. This time, Stames and Ellsworth were turned down for, among other reasons, being too far ahead of the game.

"We never seemed to be asking for the right money at the right time from the right people," says Stames.

At each stage of the process, the two received input and advice from the other parties, but that feedback always seemed to position Redhut as attractive for last week's funding model. As a result, their plan evolved from a business-to-consumer model into today's more current flavor, business-to-business. Redhut's troubles securing financing are all too common.

In the book Angel Investing, experts Robert Robinson and Mark Van Osnabrugge decry what they call the vast untapped potential of the business-angel market.

There's plenty of money available to finance early stage companies today, the authors say, but there's no efficient method for matching investors to investments. Angels tend to fly under the radar of traditional, formal search methods - and the dirty little secret is that relationship capital, meaning what a person knows, is a huge factor in successfully securing investment capital. Such a dynamic exists regardless of whether VC money is on the ebb or flow. This market flaw has created opportunities for smart Internet entrepreneurs.

For example, Garage.com, the highly touted venture from a few high-profile Silicon Valley guys, works as a marketplace to help companies generate leads from qualified investors and to screen good investment opportunities for its investors. According to Geoff Baum, VP of Garage, the company adds value at the phase in which far too many companies in today's economy falter, when they are pulling together the talent and capital required to get a venture going.

Yet Garage can reach only a small percentage of the potential companies being built today, which is why many would-be business owners have shared the same experience as the Redhut founders.

Ellsworth and Stames are a poignant reminder that even in the booming New Economy, many smart and passionate people are not being showered with investment money. "It's a good thing that we have a skill to fall back on when things don't turn out the way we planned," says Ellsworth. He and Stames have returned, for the time being, to design and construction work. The two estimate that their investment in both direct and opportunity costs for the past year and a half has come close to $200,000. But they remain determined to build a successful Internet company. Ellsworth says, "We have industry experience, a good business plan, a good mockup that describes what we are doing, a small-but-tight team that we have been working with that is ready to go, a team of web developers, and key partners.

"Someone said to us, 'Add money and stir, you're ready to go,' " says Ellsworth, who says he is undaunted by the missing ingredient. "This whole industry is about change and timing," Ellsworth says. "You can come up with this great idea, but the question is: Are you at the right moment in the curve?

Are you two months early? Six months? Two years? My gut feeling is that we are still too early."

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