It's the party anecdote of this millennium: the man who knows a man who made millions with a startup. Where managers once sat in meetings, dreaming of writing a best seller and retiring to the country, today's pipe dream involves stock options in a dot com, an initial public offering (IPO) and a condo in the Caribbean.
According to The Sunday Times Rich List, the internet is the fastest growing source of wealth in the UK. Take Christine and Isabel Maxwell, whose company, McKinley Group, was sold to Excite in 1996 in return for shares worth £100m today. Or Mark Hunter, who failed his A-levels before setting up an ebusiness consultancy in 1994, and floated the company for £30m at the age of 36.
The internet millionaire is not purely a US phenomenon. In the UK, 50 Internet companies are expected to go public this year. And as European networks and mobile technologies mature, European ecommerce could leapfrog the US, says Rosemary O'Mahony, director of Andersen Consulting's European internet practice. "Europe is in a position to take world leadership in electronic commerce," she says.
People joining dot coms expect to be given stock option. According to Morgan Stanley Dean Witter, the number of European internet users will reach 100 million by 2003, with penetration rates of 30 per cent - roughly equivalent to US rates today.
Internet fever
Membership of First Tuesday, a UK organisation that links venture capitalists with internet entrepreneurs, shows how internet fever has gripped the UK. The organisation grew from 1000 to 30,000 members in five months, says Julie Meyer, vice president of global marketing. "There is a kind of frenzy," she says. "People think if they don't get into the internet space, they will become obsolete."
But along with this desire to join an internet company comes the expectation of making a quick buck. According to Mark Hughes, managing director of Internet consulting firm Broadvision: "People spend half the interview making sure the package is right."
This isn't necessarily bad news, believes Toby Rowland, chief operating officer and founder of ClickMango.com, an online health retailer. "A lot of people are here because they want to work for two or three years and then make a big capital gain," he says. "But they have a lot of commitment and enthusiasm that we can use."
Catching up with Uncle Sam, however, means experiencing his problems. In Silicon Valley, dot com employees joke that IPO stands for Instant Porsche Owner.
When the going gets tough
Such instant financial gratification won't necessarily promote hard work and loyalty, however. Dot com employees are among the most fickle in the business, and 150 per cent staff turnover is not unusual. Employees who join dot coms for financial reasons are the first to leave when problems hit, leaving fragile companies in their wake. "The risk with using stock to motivate people is that when they are financially secure, people feel no pain," says Hughes. "If business gets tough, people who are financially secure have no motivation to turn up on Monday morning."
On the other side of the coin, blue chip companies are finding it increasingly difficult to compete against stock options from startups. These compensation practices will affect the general corporate culture, says Edward Spiedel, a director in PricewaterhouseCoopers' (PWC) global human resources solutions practice. "Non-dot com companies are creating ecommerce subsidiaries, but they will have a difficult time attracting top talent."
At Cambashi, a Cambridge-based technology consultancy, the internet millionaire is a common fixture, says IT manager Ralph Seeley. "Most of our staff know, on first-name terms, at least one person who has become a millionaire in a startup," he says. "It is unsettling because it threatens to loosen ties based solely on loyalty."
Business schools traditionally offered rich pickings for large enterprises looking to recruit, but the internet has changed all that. At one recent recruitment event in London, a large consulting firm failed to recruit a single MBA for its fast-track scheme.
McKinsey and Co responded by starting a programme that allows junior consultants to work with small client companies on the IPO track. The trainees have all the excitement of working with a startup while at the same time receiving world-class training from senior partners.
Managers make the leap
MBAs aren't the only people rushing to join internet startups: the list of high-profile departures from blue chip organisations is growing by the week. KPMG's chief operating officer Roger Siboni and Andersen Consulting's long-time chief executive George Shaheen have both joined startups. In the UK, Safeway's Mike Winch is the latest in a long line of IT directors to leave corporate life behind. "Today's middle managers don't want to spend 40 years wandering up the corporate ladder," says Stephen Clements, another director of PWC's global human resource solutions division.
Startups are keen to acquire disillusioned corporate workers. "More than 75 per cent of our staff come from blue chip organisations," says Dam Josefsberg, chief executive and founder of the football portal Eurofootball.com. Josefsberg, a former Coca-Cola executive, says these employees offer valuable experience. "They have organisational expertise, knowledge of marketing and can think strategically," he says. "This is very important to a dot com when you need to build the company very fast."
At ClickMango.com, employees come almost entirely from large bricks and mortar companies. "Our staff come from United Media, Carphone Warehouse and other such companies," says Rowland, himself a former Disney account manager. "We need to offer stock to these people because we expect so much from them."
These employees also have a vital role in securing venture capital, says Rowland: "Venture capitalists like these people because they have more business awareness, which improves the viability of the company in their eyes."
These employees are willing to sacrifice short-term job security and remuneration for the IPO dream, according to Joshua Sparks, head of IT recruitment at Robert Walters. "Over the past year, it has been common for candidates to offer themselves to the market at two very different levels," he says. "There is one salary level for the dot com and another very different level for everyone else." Lower salaries are accepted in exchange for stock options and the chance of hitting pay-dirt.
Taking stock
"Using stock to attract, retain and compensate senior level managers, employees and directors is not a typical for startup companies that cannot compete with blue chip salaries," says PWC's Spiedel. "But internet companies are using this tactic more aggressively than most."
Stock is also used liberally to compensate employees. A PWC survey of 112 internet companies measured the potential dilution attributable to employee equity programmes, known as 'overhang'. The average overhang in internet companies was 23 per cent of shares outstanding. "Anything more than 20 per cent is extremely high," explains Spiedel. Just how much these shares will turn out to be worth is a moot point.
Looking at the stock market, the initial signs are promising. In the first half of 1999, venture capital firms pumped an unprecedented $5.7bn into internet companies, according to PWC. This year, Andersen Consulting will invest a further £1.2bn in internet startups.
The problem is that making a million depends entirely on the performance of the stock. Venture capitalists can afford a 90 per cent failure rate, as long as the other 10 per cent turn into lastminute.com or equivalent. But for ecommerce professionals, the choices are tougher - make the wrong decision and risk losing the corner office, with a handful of worthless shares your only compensation. As the market matures, stock options are getting smaller, says First Tuesday's Meyer. A year ago, the chief executive might reasonably have expected five per cent of the company. Today, he or she is likely to settle for 0.25 per cent, she says.
The stocks are only worth as much as they sell for when the employee is free to sell them, points out Hughes at Broadvision. "You may be a paper millionaire, but if you need to stay for three years, you would be naive to count on that money."
Risky business
The risks in the internet economy are greater because the rules of business don't apply. Businesses used to go public after seven years and four consecutive quarters of profitability. Today's internet startups typically go public within three years, while profits are still a speck on the horizon. Joining these companies requires the iron stomachs of entrepreneurs and venture capitalists. "The market today expects people to go public on a one year trajectory - or there is something wrong," says Meyer.
One company that illustrates the typical risks perfectly is ShopSmart, which launched in February 1999 and raised a six-figure sum in second-round venture capital in less than 10 days. Eighty per cent of this money was spent on advertising, including a £7m deal with Channel 5. Only 20 per cent was spent on staffing, infrastructure and development.
The company will probably go public this year, but is unlikely to make a profit before 2003, according to Daniel Gestetner, ShopSmart's 28-year-old chief executive. The company's executives boast former employees from the likes of Revlon, BSkyB and Tesco.
Of the 150 companies making their debut on the Nasdaq stock market in 1999, fewer than 20 are trading above their opening price today. So, even though each of ShopSmart's executives has received five per cent of the company as stock, the chances of cashing in are slim.
"Less than one in 10 startups last five years before they die or are sold," says Hughes. As employees wise up to the negligible value of stock options, some salaries in the internet space will increase - but this will be the exception rather than the rule.
In the money?
A 1999 study by research firm Spencer Stuart found that while the top 10 per cent of internet chief executives in 1998 received an average of $191m in stock and salary, the bottom 10 per cent received only $87,000 - less than many in-house IT staff.
Remuneration packages may be more appealing at bricks and mortar companies, believes Spark. "These companies are reacting to the threat with better salaries, generous performance-related benefits and improved working conditions," he says. In addition, bricks and mortar ventures offer better security because their survival doesn't rely on success in the new economy.
Some large companies are also beginning to offer stock to ecommerce ventures. SAP lost more than 200 managers, including its chief executive, president and UK general manager, before implementing an employee equity scheme in November 1999. Two of the UK's biggest IT companies, ICL and CMG, have set up programmes to bring recent graduates up to speed in ebusiness techniques.
But offering stock to employees in large companies may not be enough to stop the exodus, warns Rowland. "What we give people, in addition to stock, is the opportunity to work with a blank piece of paper instead of a 50-year-old company that does things in the same way all the time." This can be just as important as stock, says Meyer. "People don't only want money," she explains. "They want to get away from bureaucracy - it's a pioneer spirit."
When Disney heard Rowland was leaving to set up ClickMango.com, it made him a "very attractive offer", he says. But the lure of the startup was greater than financial reward. "It was the pull of doing something different and seeing if my idea was good," he says.
While some employees are with ClickMango.com for financial reasons, others simply want to escape the corporate culture, says Rowland. "We have people who hate the inertia of big business, who dislike being stuck in a role they feel has no meaning."
Big boys fight back
Big companies are learning from their smaller competitors and implementing separate employment terms for ecommerce staff. This is the case at RS Components and the Irish airline Aer Lingus, where the dress code for ecommerce staff is relaxed, and working and salary conditions are flexible.
At The Body Shop, which prides itself on a progressive working environment, some staff have left to join internet startups. More interesting is the effect on the company's business partners, says Patrick Ballin, management information systems manager. "The intranet development company we work with has attracted some very experienced staff by offering stock options," he says.
For companies that keep ecommerce in-house, it is important to separate ebusiness from the rest of the organisation, says Clements. "The best option is to cut the division away to avoid resentment," he says.
This unit should also operate differently, according to Meyer. "You have to let people work where and when they want to," she says. "People want to have principles and teamwork, but not forced objectives and ways of achieving them."
While these moves can improve staff retention, it is important to remain realistic about the chances of keeping ecommerce staff. "No matter how great the culture and the salary, people who are working their nuts off for £40,000 will jump at a big enough carrot," says Clements.
PWC believes the shift of staff from bricks and mortar companies cannot be completely halted. "Eventually, companies will have no option but to outsource this sort of work," Clements adds.
The outsourcer is actually the closest the Internet economy comes to being a sure thing. These companies offer the stability of working with large enterprises, together with £50,000 starting salaries and the stock options of the startup.
For instance, Jason New, 25, works with internet specialist Broadvision, building ecommerce services for clients such as Vodafone. This reaps New a £55,000 salary and £1m in stock options, which he is able to sell for £20,000 per month.
"My plan is to retire at 40 by investing the money sensibly," says New. "I bought a house this year and want to pay off the mortgage by April."
At Broadvision, consultant salaries have doubled in the past 18 months, says Hughes. "We hold our breath when we go into negotiations now, wondering what people are going to ask for," he says.
See also:
All Ecommerce
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