“The song I’m going to play is called ‘You Can’t Put Your Arms Around a Memory,’ and it’s dedicated to Web publishing,” announced Tom Watson, the founder of the Silicon Alley newsletter @NY, as he stood on the stage of Webster Hall. About 150 people had gathered on a Saturday evening earlier this month for the first Silicon Alley Talent Show. Most of the crowd had spent the past several years toiling away in assorted Silicon Alley start-ups, building their Internet dreams and hoping the masses would come, but Watson didn’t have a very inspiring message. “It doesn’t pay to try, all the smart boys know why,” Watson sang into the mike as he strummed his guitar. “You can’t put your arms around a memory.”
All the “content” carnage piling up – much of it in New York City’s so-called Silicon Alley, which runs roughly down lower Broadway – has recently become too obvious to ignore. Earlier this year, Microsoft’s Sidewalk New York and the America Online-funded Digital Cities both laid off staff. In March, the network service provider Icon CMT announced it was pulling the plug on its New York-based Word.com, one of the Web’s oldest online magazines. Three weeks ago, Lara Stein, the woman Bill Gates had sent to New York in 1996 to fund projects for the Microsoft Network, went to work for a company that does online promos for First Union Bank.
And if those recent events weren’t a clear enough sign of which way the wind was blowing, along came the Silicon Alley Talent Show, in which the Alley’s best and brightest performed (actual song and dance, not product demos) to raise money for “independent” Web projects – i.e., the types of Websites that had literally become charity cases.
“Silicon Alley was founded on this idea that new media would blow old media out of the water,” says Watson. Three years ago, the idea was that content – created by New York’s unparalleled collection of designers, writers, and assorted creative types – was going to rule the new-media industry. California would create the “printing presses,” so to speak, of the Web – the physical side of the Internet, the computers and networks that serve as its infrastructure – but New York would be its “publisher.”
“But now,” says Watson, “it’s not about publishing; it’s more about direct marketing.”
In other words, old-media-slaying Alleyites, finding few sponsors willing to ride out several years of unprofitability, are scrambling to find alternative revenue streams, while the healthiest pure-content sites, like Nerve.com (the self-described “literate smut” site), have gone offline to secure old-media deals (watch for a paper-and-ink Nerve book, coming soon to a bookstore near you). “It’s still interesting,” says Watson. “It’s just not as exciting.”
In the meantime, Alley start-ups of every stripe are suffering through their growing pains. Capital infusions are desperately needed, and the cash isn’t easy to find. “This is a problem of evolution, and it’s only going to get worse,” says Anna Copeland Wheatley, editor of the finance-oriented Alley Cat News, which recently sponsored a conference for Silicon Alley companies looking for venture capital – in San Francisco. “That birthing canal is not cozy.”
Still, within the past year, a handful of companies and individuals have emerged as key Alley players. With the right partnering arrangements, business models, brands, or niches, these genotypes are now on strong enough footing that they should continue to fare well in the increasingly perilous landscape.
THE ENTERTAINER
At a time when many a cash-strapped content site is desperate to be bought out, SonicNet is happily nestled in the corporate bosom of cable giant TCI, its fourth owner in as many years, while traffic on its newly redesigned site has doubled in the past month. How has it managed to fare so well? SonicNet president Nicholas Butterworth sums it up: “By being a music site, being in New York, not fucking up too badly, staying really focused on the users, and not getting ahead of ourselves.”
Let’s start with the first point: Music does make for an intrinsically good fit on the Web. “There’s so much you can do with it, and there’s so much that people want to know about it,” says Butterworth, “and we have the ability to deliver the music itself.” Not only in audio and video form right now, but over cable modems and digital interactive TV-set-top boxes in the future. “TCI gives us access to the next-generation high-bandwidth platform,” he notes.
SonicNet has attracted a large following of music groupies (the site logged 3 million page views in March) who check in several times a week (content is updated continually) for news on their favorite bands. It helps, too, that SonicNet targets a demographic that’s highly attractive to advertisers: teenagers, college students, and other young adults who are frequent Web surfers and are poised to buy product.
“In the global perspective, you’d call SonicNet niche media,” says Butterworth. “It’s just a really sweet niche.” In the future, Butterworth says, SonicNet, under the umbrella of TCI Music, will expand its revenue mix (beyond advertising) to include subscription fees and pay-per-requests at the higher-bandwidth platforms.
SonicNet got into the online music space way ahead of Rollingstone.com and MTV Online, which is one of the reasons it’s now in the position to effectively compete with such heavyweights. “They’ve got the programming expertise, the deep pockets, and the cross-media promotion,” says Mark Mooradian, a senior analyst at Jupiter Communications. “That’s what will make or break all these guys.”
THE ANGEL
‘The companies here are starving. They need capital, every one of them, and I can get them capital,” Robert Lessin said on April 2, the day after he quit his job as vice-chairman of Salomon Smith Barney to commit himself fully to Silicon Alley as its leading independent investing “angel.” Camped out in his lawyer’s office, Lessin seemed to be in slight shock. “My life was Wall Street until yesterday,” he said. Still, despite the rather dramatic career change he has just made, Lessin wasn’t converted to the Internet overnight. In the beginning of 1997, he made his first investment in a Silicon Alley start-up. “I didn’t know anything about it,” he says. “Some friends at Smith Barney recommended the deal.” Since then, Lessin has invested in about 35 companies in Silicon Alley, including CultureFinder and Medscape, with sums ranging from $100,000 to $1 million of his own money. “I don’t invest in anything that’s not Internet-related,” he says. “It’s too profound a trend to be ignored.”
If every Wall Street millionaire thought that way, Silicon Alley would now stretch from one end of Manhattan to the other. But the city’s wealthiest private investors seem to be relatively gun-shy, at least when it comes to early-stage funding. “It’s going to take some time to make that constituency feel comfortable,” says Lessin. To speed up the process a bit, he has decided to use his connections to the banking world to become an Über-consultant and -investor to young companies. “It’s amazing how little capital relative to the resources goes into this area. The West is a creator of technology, and the East is a user of that technology, and the world is shifting from the former to the latter,” says Lessin. “On the West Coast, there’s too much money chasing deals. But if you want to be a contrarian, New York is the best market in the world.”
THE CAPITALISTS
Thanks to online brokerage services like E*Trade, anyone with a little extra cash, a computer, and a modem can now buy and sell stocks with no (human) middleman, bringing the guys behind the sales desks at PaineWebber one step closer to midlife crises. But becoming an early-stage investor, or even being able to snap up some of the hot new IPO at its opening price, hasn’t quite reached the mass market – yet.
Since last September, Wit Capital has been a co-sponsor of ten IPOs with such Wall Street giants as Lehman Brothers and Alex Brown – ”though we haven’t cracked Morgan Stanley,” says Andy Klein, Wit Capital’s founder. For each offering, Wit posted a prospectus on its site, sent e-mail notifications to known individual investors, and took orders to buy on a first-come-first-served basis. Wit also plans to offer something it’s calling Public Venture Capital, which would consist of registered stock that would be restricted from trading for a certain amount of time. The third prong of Wit’s strategy: its Digital Stock Market, which, should it work, could be one of the strongest leveling forces in personal finance since the deregulation of broker’s fees in the seventies. Currently if you trade stock as an individual, you end up losing money on the differences in buying and selling prices (the “spread”) set by the market-makers. Large institutional traders get to match trades directly through a computerized system, thereby narrowing the spread. In the Digital Stock Market, slated to roll out this summer, buyers and sellers can meet directly online and negotiate down the spread themselves. “There’s no doubt that stocks will trade this way for small investors in the future,” says Klein. “Look at how much attention people have paid to commissions in the past year or so. The next big wave in retail consciousness is going to be the spread.”
The former chief technologist of the NYSE designed Wit’s electronic-trading system; top management includes former employees from Salomon Brothers and Merrill Lynch. And the big surprise on Wit’s list of investors? The infamous ex-head of Salomon Brothers, John Gutfreund. “The thinking is, ‘We’re all capitalists, the Internet is now a reality – why not be on the cutting edge?’ “ Klein says of all the camaraderie.
THE AGENCY
There are Website-builders that are much cooler than Agency.com, ones that have sleek black metal office furniture and throw open-bar parties and wouldn’t dare play lite FM when they put callers on hold. But as Agency.com founders Chan Suh and Kyle Shannon know, both having started their Web life in content, cool doesn’t pay the bills. (Suh ran the Vibe Website, and Shannon founded one of the first online magazines, Urban Desires.) Not that there aren’t other Alley Website-builders – so-called agencies – that are making a lot of money. But with its 250 employees, $15 million in revenues, and growth of 145 percent over the past year, Agency.com is perhaps better positioned than any competitor to steamroll its way to the top. (Brand Dialogue currently leads the list at $25 million in ‘97 revenues, but the company’s growth rate is a comparatively modest 25 percent.) “They’ve got a lot of momentum, and they’re really professional,” says Bernhard Warner, who covers the industry for Adweek. “Everyone’s got gripes with even the best guys, and Agency.com has the fewest arrows pointed at it.”
Agency.com was founded in 1995. Its first big job: designing a site for the Sports Illustrated swimsuit issue. Now it builds entire online strategies for blue-chip clients including American Express, GTE, British Airways, and MetLife. “We didn’t need all the baggage that other agencies were trying to sell us,” says Richard Painchaud, MetLife’s VP of Interactive Commerce.
“When we first looked at the Internet in 1994, the National Science Foundation was still funding it,” says Suh. “And we thought that if commercial interests were going to take over, we wanted to go with the large companies, because we thought they would need this as much as anybody else and they would be able to spend the proper amount of investment on it.” And so while other Alley agencies focused on building impressive portfolios with dazzling, design-driven sites, Agency.com learned to speak the language of major corporate clients and focused on long-term results – not only building Websites but also driving traffic to them. Last year, Agency.com acquired majority positions in Spiral Media, specialists in database development, which brought needed tech credibility. And it also added Online Magic – the top Web shop in the UK, with high-profile clients such as The Economist – to its portfolio, given it ready entrée to the rapidly expanding European market.
THE IPO
The website developer K2 design was humming along nicely when it decided in 1996 to forgo additional private investment and become one of the first Silicon Alley companies to go public. But not long after the offering hit traders’ screens at $6 a share, K2 began to run into cash-flow problems. The stock quickly tanked (it now trades at around $2), and Wall Street grew wary of its Alley neighbors.
Until February 20, 1998, the day of DoubleClick’s IPO, also known as “the day Silicon Alley became real.” Shares of DoubleClick, an Internet advertising company, were originally priced at $17 but opened on the first day of trading at $29 (and were about $35 a share at press time). All told, DoubleClick raised about $60 million in the offering.
Though DoubleClick’s business model is itself noteworthy, its management’s mastery of the IPO process – the arcane financials and politics of going public – garners it special recognition as one of the new breed of Silicon Alley survivors. Needless to say, the offering went a long way toward rehabilitating the Alley’s rep on the Street.
“I’ve always thought that Silicon Alley was real,” says Jamie Kiggen, an analyst at Cowen & Company (one of DoubleClick’s underwriters), “because there’s a lot of energy and activity there that will result in plenty of sustainable businesses, but DoubleClick certainly increased the visibility of that part of the world.”
The company, founded by Kevin O’Connor in 1995, offers a network of more than 60 popular sites to companies that want to place targeted ads. It has also developed proprietary systems for keeping track of advertising and direct-marketing traffic. “There was a real lull where people were second-guessing the Internet,” says O’Connor. “Then, all of a sudden, it was no longer a question of whether Internet advertising would be big; it was just a question of how big.”
As for the IPO, O’Connor says, “A lot of good things converged: The market was doing well, our story was understood very well, the investors were strong believers in the Internet – in fact, much stronger than we anticipated. That was nice to see.”
THE MONEY MEN
There never were many new-media-venture-capital firms in New York – two in fact, at last count – and Silicon Alley needs them now more than ever. Unfortunately, Flatiron Partners, so named because of its supposed dedication to the home team, seems to have strayed – after some recent deals with companies in Massachusetts and California, only 50 percent of the $70 million Flatiron has spent has gone to Silicon Alley. “The focus has shifted somewhat because we expected to do more content-related things,” says Flatiron founder Jerry Colonna. “Many of the companies in Manhattan were less mature than we had anticipated.”
Prospect Street Ventures, on the other hand, cannot stray even if it wants to: Founded with the help of the New York City Investment Corporation in 1995 (Con Edison, Brooklyn Union Gas, and the Small Business Administration are the other partners), it is required by charter to invest all of its $76 million within the five boroughs. “The mayor realized this was a growing industry and would benefit from the city’s support,” says Charles Millard, the head of the Economic Development Corporation. Prospect has already dispersed about half of the fund’s sums; its most recent investments have been in 24/7 Media, an interactive advertising network, and AirMedia, a digital-information broadcaster. “We try to back excellent people in big market segments, which is not as easy as it sounds,” says Edward Sim, an associate at Prospect Street. “There are more deals out in Silicon Valley right now, but I’d say things here are getting better and maturing. Silicon Alley is very promising.”
THE RETAILERS
“Category killer” retailers – huge superstores that put everyone else out of business – don’t seem to have quite the same bruising weight in cyberspace as they do in the real world. Those New Yorkers still bitter about the loss of Books & Co. and Shakespeare & Co. will be pleased to know that Barnes & Noble – widely blamed for driving these and others into the ground – is actually an underdog on the Internet. Seattle-based Amazon.com (which currently has about ten times as much in revenues) got out of the gate two years before barnesandnoble.com, which launched only in May of last year.
But all of that could easily change. In the beginning of this year, barnesandnoble.com struck a deal with America Online in which it will pay $40 million to be the exclusive bookseller on AOL, which with its 11 million members delivers the biggest audience in cyberspace. (Just six months earlier, Amazon had agreed to pay $19 million to be the exclusive bookseller on AOL.com, its non-members-only Website.) B&N is also rolling out a major advertising campaign. “You’re going to start to see us everywhere,” says director of public relations Ben Boyd from barnesandnoble.com’s headquarters in the Port Authority building on Ninth Avenue in Chelsea, where more than 250 employees manage the site, organize author chats, and generally plot Amazon’s demise.
Meanwhile, New York-based N2K (www.musicboulevard.com) is in a similar No. 2 position against Philadelphia-based CD Now (CDnow.com) in the burgeoning online-music-sales market, where revenues increased by 140 percent in the past year, from $21.5 million to $52 million. Founded in 1994, N2K went public last year and has just filed for a secondary offering, having spent a good chunk of its first $60 million on marketing. It just paid $18 million to America Online to be the only retailer on AOL’s music channel, and signed exclusive agreements with SonicNet, MTV, and VH1. Despite the high costs, such partnerships seem to be paying off. The company beat analysts’ estimates for fourth-quarter revenues for 1997, the bulk of which came through AOL. When the Titanic soundtrack was promoted on AOL’s welcome screen recently, N2K sold 750 copies in all of twenty minutes.
THE RINGLEADER
Jason McCabe Calacanis never met a sound-bite opportunity he didn’t like, which is why he is the perfect pitchman for an industry that has been able to sustain itself through rough times with a hell of a lot of hype. Aside from being the editor of the Silicon Alley Reporter – a monthly that started out as a black-and-white trade paper but quickly blossomed into an 80-page, slickly packaged glossy magazine – Calacanis hosts a weekly Internet radio show; is omnipresent at Alley conferences, parties, and expos; and recently packed 1,000 Alley denizens into his own sold-out two-day conference, Silicon Alley ‘98. It was this “Salley” conference that marked Calacanis’s coming-of-age as an Alley power broker: He snagged sponsorship from Microsoft and Arthur Andersen and lined up panelists from the likes of Compaq, J. Crew, and the William Morris agency.
“He’s ubiquitous in kind of an annoying way,” says one Alley worker, “but he is our loudest cheerleader.”
In 1996, after doing freelance content development for Sony and America Online, Calacanis maxed out his credit card to start up the Reporter, which he would distribute from a cart he pulled around town. Though widely regarded as a booster sheet for the industry (compared with the more strenuous reportage of @NY), the Reporter has become something of a must-read in the Alley – thanks, in no small part, to the magazine’s party coverage. (The city’s new-media population is still small enough that even the nobodies have a pretty good chance of showing up in SAR.) “To a certain extent, the magazine has created the public perception of Silicon Alley,” says Calacanis. “We’ve made the cyber stars.”
Raise any doubts about the future of New York’s new-media industry, and Calacanis will bat them down in a second, especially when it comes to the issue of revenues (or lack thereof). “People take the success of software companies and technology companies and superimpose those expectations on media companies,” he says. “The Internet has only existed as a commercial medium since 1995, and if anything’s profitable right now, it’s a blessing.” Silicon Alley will fulfill its promise if people just give it time. “You’ve got to show the whole picture: If you judge Silicon Alley on the first three years, it will be a bunch of losers. If you judge it in 30 years, it will be the greatest success story in the history of business.”
And where will Calacanis fit into that history? “Someone once said to me, ‘You’re the mayor of Silicon Alley,’” he says. “And I said, ‘I’m not the mayor; I’m the press secretary. It’s more important than the mayor.’”
THE PRODUCT
Given that the “new” way to make money on the Web is through selling merchandise, it’s time for InterWorld, one of the few real software companies in the city, to cash in.
Retail sales online doubled in the last year, but the real growth is going on behind the screen, as retailers try to rejigger their order-fulfillment and inventory software for the Web. Late last year, InterWorld launched Commerce Exchange 2.0, a $75,000-to-$195,000 all-in-one software package (with ongoing maintenance charges) designed to increase revenue, decrease operating expenditures, and enhance customer service. Brøderbund, J&R Music and Computer World, and Scholastic are among those companies that have signed on to InterWorld’s so-called turnkey solution.
“It’s been tough, because we expected e-commerce to mature early on,” says Michael Donahue, who founded InterWorld in 1994 with two other partners. Micro Warehouse, a computer catalog retailer, was InterWorld’s first big customer in 1995. But perhaps the most significant factor in InterWorld’s favor can be summed up in two words: George Soros. The billionaire financier “has supported us on every round of financing, so he’s basically been our biggest supporter,” says Donahue. “What we were able to do is spend a lot of time in R&D. We took almost two to three years just developing the right architecture. And now we have technology which doesn’t have to be completely re-engineered.”
InterWorld has raised a staggering total of more than $50 million to date, not just from Soros but also from such other investors as GE Capital and Comdisco. With such substantial private investment from heavy-hitting players and the recent turn toward acceptance of e-commerce on the consumer side, Interworld’s upcoming IPO could be the next DoubleClick.