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an evening with the stars of e-commerce

part 3: Bill Melton: one big incentive program

I'm going to offer you one idea and then I'm going to do my second job, which is to introduce Bill Gorog. I'm going to spend a few more minutes introducing Bill, because, in many ways, he represents to me the entrepreneurial spirit. So, Bill, with your permission, and even without your permission, I'm going to use you as a symbol of a few lessons to be drawn here.

The idea I offer you for e-commerce is that we need to think of life on the Internet as one big incentive program. Why do I say that? Most of you who are in retailing, or in business of any kind, know that you spend 15%-75% of the retail sales dollar on sales and marketing. That sales and marketing budget, currently and historically—particularly historically, in the world that existed two or three years ago—was used for broadcast advertising. It would go out through newspapers, mail solicitations or other kinds of broadcast media. You hoped, if you were very lucky, to get a 1%, 2%, maybe a 3% response. If you got 3%, you were euphoric and rolling in the dollars.

With the Internet, we now have an alternative to broadcast advertising and broadcast sales. You are able to focus the attention on the consumer, on a single consumer-by-consumer basis. You are able to offer money, incentives and liquidity to an individual consumer who is willing to come and look at your product. You, as a merchant, are able to create money. You are able to create spendable dollars and say, "Mr. Consumer, I will give these to you individually, one-on-one, if you will come and look at my product."

Now, this isn't going to be a smooth process. We have a few companies which have tried this, and they have created some little money of one kind of another and given it to the consumers and they found that the market is very smart. They have started counterfeiting it real fast. Blockbuster has done this recently, and now they are putting in some new and improved control systems to take care of some of the hot cards that have been created. But when you consider taking this 15%-75% budget (depending on the market that you are in) and focusing it back on the consumer, it turns the marketing and advertising world on its head. So, life in this new economic world will be a life of incentives.

That's all I'm going to say about e-commerce. Let me tell you a few short stories in the introduction of Bill Gorog. Actually, I met Bill through Jack McDonnell. Jack used to be a salesman and, when you hear him speak tonight, you'll know that he can speak very well. Jack came into my office one day after a trip to Hong Kong. At that time, he purported to be selling things in Hong Kong. I guess he was because he was being paid very well by a company you used to know as Time Share. Time Share was one of the first companies to sell email and those kinds of things on a public network. That company is no longer with us today, but Jack is.

He came into my office when I lived in Honolulu. At that time, I only had myself and one other employee working for me. Jack, being the visionary he is, said, "Hey, a buddy of mine has got something; let me introduce you to him. Can you come to Washington, DC to talk to him?" At that point in 1981, I didn't have very many buddies. I was broke and had all those problems, so I flew into Washington and who does Jack introduce me to but Bill Gorog. Now, Bill, at that time, was working at the White House helping them design international trade policies. Coming from Honolulu, I assumed that anybody working at the White House was very, very smart, but that was before I moved to Washington.

Bill had already done some amazing things. He had designed what you now know as LEXIS-NEXIS to run on IBM 360s. From there, Bill went on to the hotel business. He had learned a lot by running LEXIS-NEXIS, so he created a hotel business. From there he had gone on to the White House. That was when I found him and he said, "Oh, yes, I have a little side corporation here and I will be your agent for selling VeriFone units anyplace outside the United States." That fell on its face, so he said, "Okay, that didn't work, how about east of the Mississippi?" I said, "Okay."

After doing an extremely good job for me, as we were getting ready to go public with VeriFone, he folded his part of the organization into the rest. We went public together and lived very happily through that transaction. Subsequently, he started another company called U.S. Order—I'm missing a few, because you'd be here all night if I told you about all of his companies. U.S. Order was eventually sold to Visa, or a large part of it was. If that wasn't enough, now he goes with another company, called InteliData.

The point is that whether it's LEXIS-NEXIS or hotel systems, whether it's the White House or VeriFone (which he had never heard of before), or whether it's a new company, today, Bill incessantly, continually goes back to that entrepreneurial spirit of learning something new. I say learning something new, because you would think he would do what he's done before, so he could learn from his experience. But if you're an entrepreneur, you have a disease. You can't go back and do again what you have already done. Cursed as we are, you always want to do something new to keep that excitement going.

next: part 4: Bill Gorog: logic doesn't prevail >

an evening with the stars of e-commerce

part 5: John Backus: the fastest way to a $10 million company

Thanks, Bill. I tried to get into the meeting down the hall, the Stars of the NASDAQ Stock Market, but they wouldn't let me in for some reason. Maybe next year we'll be able to make it into that meeting. I have been with InteliData since we got it started back in 1990, and it's been a roller coaster ride in a lot of ways. I'm not the great storyteller like a lot of these others are, so, instead, I'll go through a half dozen or so lessons that I've learned in the hopes that you can repeat some of them, but more importantly, not repeat some of them that I had to learn the hard way.

The first one is, it's okay to change your vision. What do I mean by that? A lot of entrepreneurs start a company with a great idea, but a lot of times—in fact, most of the time—the idea has to change because the market changes. If you stay dogmatic about the idea that you start with, while sometimes that's great, you miss the fact that the market is changing. You can really be in for a big surprise. We made that mistake early on at U.S. Order. We started out with the concept of a home transaction terminal that would offer grocery shopping on a smart telephone. Now, somehow that concept transmogrified into banking on the Web. We were a little late to embrace the Web because we were pretty set in our ways and dogmatic about the smart phone being the next wave of the future. As Gary is often fond of saying about smart phones and interactive telephones, "It may be the wave of the future, and it is, but it always will be." We stayed with that product a little bit too long.

The second lesson I'd like to talk about is focus, and I can't underscore the importance of focus enough. We tried to do too much early on. We had a hardware product and platform, and we had a software product and platform. Instead of looking at them as one product, we thought we had two separate businesses. When Jack McDonnell joined our board recently, he looked at the company and said, "This is the smallest conglomerate that I have ever seen." Well, we have taken Jack's advice and we are starting to deconglomerate. Someone once told me, that the fastest way to become a $10 million is to start out with a $20 million company." We are on the way to becoming, hopefully, a very successful $10 million company in the electronic commerce space.

The third lesson applies to the stock market. It also applies to companies and everything within a company: invest in your winners and kill off your losers. Every company is going to take some risks, which means you are going to have some winning products and you are going to have some losing products. You are going to have some winning business ideas and business units, and you are going to have some losers. What you have to do is take quick action to get rid of the dogs so you can keep the winners out there. One mistake that I have seen made before, that I have made before personally and that I hope you don't make, is taking your best people and trying to turn around the worst business. Big mistake. Take your best people and put them on the best business, because if you take your best people and put them on your worst business, what does that mean? It means you have people, who aren't your best people, working on your best products. That's a problem. The corollary to that is, as Warren Buffet once said, "Oftentimes, if you take a good manager and put him in a bad business, more often than not, you end up with a bad manager instead of a good business."

The fourth point is to stand by strong partners when you're small. Every one of us wants to start a company some day. It's an exciting experience and it's a lot of fun, but one of the biggest problems you have is getting visibility. How do you get credibility? It's important to look like you are a lot bigger than you are, and on the Web it's easy to do that, but when you start selling business-to-business, it's a little bit harder. Businesses expect a certain level of scale or credibility or profitability or something like that. It's very important to find a good partner. We are actually trying to thread the needle right now by working with Microsoft in the NT area and IBM in the mainframe area. So far, we have been successful and, if we keep it quiet and don't talk about it at events like this, I think we'll continue to be successful for some time to come. The corollary to that rule is, don't let weak partners tarnish you. Once you start becoming successful, you'll also find there are some partners who may not be the best ones down the road. Just like some of your best products, you might have to cut bait here as well.

Fifth, cash is king. Watch it personally. I don't care what your job is in the company—if you're running the company or if you're interested in working for the company—understand the cash position and watch it. For the three or four years before we went public, I spent probably one day a week either raising money, talking to investors, or talking about where the money was going to come from and where it was going. It takes a lot of time, and I have a mantra that I developed—actually the mantra kind of developed in college around the subject of beer, but we'll ignore that for a moment. The appropriate mantra to remember with respect to cash is, "More is better, too much is just enough." You can never have too much cash in your company.

Finally, most importantly, and on a serious note, if you are going to start a company, get a great group of advisors or a great board of directors. It is very important. Whatever you think you are going to go through, you are going to find problems that you couldn't even dream you might encounter. You might think you are the only one out there facing them, but you're not. A lot of people have been down that path before and, if you have the right board of advisors or board of directors, they are going to help point out the pitfalls that you might otherwise fall into. When you look for a good board member or advisor, look for someone, first of all, who is going to commit the time to understand your business. Don't get a figurehead. Get someone who's going to spend the time to understand your business, because your business will have problems that are unique to your business and not someone else's. Also, look for someone who is going to offer to help, either with your investors or with fundraising, with working with customers or getting customers, or with getting suppliers. We're blessed in our company, and I'm blessed personally, to have, in addition to Bill Gorog who has been my mentor for the last eight years, three wonderful advisors at our board level: Pat Graham, one of the original founders of Bain & Company, who spent 30 years advising Fortune 500 companies; Bill Seidman, former head of the FDIC and another classic entrepreneur who almost single-handedly martialed the nearly trillion-dollar S&L bailout in the Reagan-Bush years; and Jack McDonnell, who will be coming up to speak later. If he decides to throw bricks at us for not making money, we'll just question his professional advice and guidance as a board member. I'm preempting something I have a feeling is going to come up later.

With that, I would like to turn this over to Mark Walsh. I met Mark at a bar once in San Diego. It was at a conference, but I think we actually met at a bar. Mark is VerticalNet's president and CEO. Before that, he was a senior VP and corporate officer at America Online. He worked at CUC, GEnie and Home Box Office. He is a classic entrepreneur who has done a lot of exciting things.


next: part 6: Mark Walsh: hard, expensive, proprietary and scary >

an evening with the stars of e-commerce

part 6: Mark Walsh: hard, expensive, proprietary and scary

Thank you. It's kind of surreal being at this table. I'm not sure if I stumbled into a family reunion or I'm on The Truman Show, which is this Internet worldwide broadcast, and for those of you watching us on the Net, it's a lot more fun here than it is where you are watching it.

My company is named VerticalNet. We run 16 sites on the Net. I'll read the 16 names rapidly and I think you'll get the idea. The sites are named Water Online, Pollution Online, Public, Power Online, Solid, Food Online, Chemical Online, Pharmaceutical Online, Hydrocarbon Online, Pulp And, Photonics Online, Test and, Medical Design, Computer OEM Online, Wireless Design, Fiber-optics Online and Property and Each of them has vendor listings and search engines for vendors, news and editorial content, chats, forums, job listings, auctions and e-commerce.

However, I come to you tonight to tell you that e-commerce is a bust. It's a fallacy. Why? Because we keep focusing on markets where any rational disintermediation would win, like flowers, airlines, stocks, books and cars.

In all the places we say we have declared victory, the customer is always ticked off and the seller is always confusing the buyer. Of course e-commerce will win then, because disintermediation is a natural imperative, as opposed to a lot of places we expect e-commerce to win where disintermediation might never occur. E-commerce today will continue to be a bust as long as it is technology-driven. E-commerce in 1998 is just like X.25 online services in 1988. They are hard, expensive, proprietary and scary.

They will never win until we acknowledge one truth about the e-commerce industry, specifically the business-to-business sector of it. Consumers and business users of online services are exactly the same people. They behave the same way. They demand the same value. They insist upon the same ubiquity, utility and meaning for the service. That is because online services are the only technology that have come from our house to our desk. All other business technologies have had the exact reverse direction. We first used a PC in our company. We first had conferencing and transfer buttons on phones at our desk. We first started using FedEx at our corporation. We first used a cell phone or a pager when our company bought it for us. We first used Document Management in the Wang department in 1982 in our steno pool. But each of those products, now, we use as consumers universally and without any thought.

But interactive services—as a way to communicate, to buy things, to join together in cyberspace as a work unit—happened in our den and now we are bringing them to our desk. Because of that amazing reversal, the consumer is actually the person we should be looking toward to drive business-to-business e-commerce.

My example is that EDI and e-commerce will work in the business environment when the CEO sits home one night, and he or she uses it to pay the mortgage, the kid's tuition, the house painter or the credit card bill. They will go to work the next day and say, "Why can't I do this at work?" Those are four different payment channels, four different types of commerce, four different types of money, and all easily done.

I, as a consumer, figure out it should happen, and that it should happen at my business. What we see in the e-business, or e-commerce side for business-to-business, is a cycle of life in cyberspace where content attracts eyeballs, context secures eyeballs—people like me in an industry that I care about. Commerce engages those visitors to try something.

But what wins? Community. Community wins in the business-to-business sector just like it won in the consumer sector. A place in cyberspace that makes you a better business person is a place you will go and a place where you will buy things. The Internet and e-commerce are not about Beany Babies, books and flowers. The Internet and e-commerce are not about EDI standards and video conferencing. What it is about is accelerating and facilitating leads that connect buyers and sellers.

Let me read to you some leads that came through some of our sites in the last 30 days. These are pieces of email from visitors around the globe to individual vendors on our sites. This one, from Lexington, Massachusettes, "I need a price quote on an exhaust jacket assembly to be used in the filling operations of 180 to 320-gallon tote bins with hydrazine. The assembly must cover the bung opening and surround the filling lance completely. It should have a collapsible accordion outer sleeve."

This from France to Chemical Online, "We're looking for a solids level probe capable of localizing the top of a solids accumulation in a liquid-filled vessel, range zero to six feet approximate. Must be able to operate under at least 100 bar and if possible up to 690 bar. Electrical output must be 4-20 mHz, or common industrial communication protocol."

This from Water Online from Canada, "I have a textile dying wastewater treatment recycling project in China. The wastewater has the following specs: COD 650 mg per liter, etc. The new expansion would be 100,000 cubic ml a day. If your company can treat this type of water, would you please send me your technical info with price tags on 20,000 to 100,000 ml a day. I look forward to receiving your early reply. Truly, JCU, China."

This is e-commerce. It is not about disintermediation, it is about reintermediation because, in most business-to-business environments, the middleman adds value. Unlike flowers, unlike stocks, unlike airline seats, unlike books, unlike records, the middleman adds value in the real world outside of these doors. I would suggest that when we study e-commerce, we keep reminding ourselves, it isn't going to happen until we make it easy for all of us to use.

With that, I will introduce the next guest. I have not met Jack before tonight, but I enjoyed sitting next to him because I think he is a core technology guy for what this is all about. He had significant stints at the Electronic Industries Association (EIA), and, as an old X.25 guy like me, spent some time at Tymnet. Those were the days, huh? Selling that 900 baud and 300 baud stuff? He spends a lot of time with the Electronic Funds Transfer Association (EFTA), and you've heard his connections to the rest of the panel. With that, it's my pleasure to introduce Jack McDonnell.

next: part 7: Jack McDonnell: you have to be a little crazy >

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, or any of their affiliates, agents, officers or directors. The transcript is provided "as is" and your use is at your own risk.  

Copyright 1998 Morino Institute. All rights reserved. Edited for length and clarity.  

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