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Missing the Cut
Tuesday, May 1, 2001

Dot-coms have come and gone. Even Yahoo! is struggling, and the brief days when 25-year-old kids were out making millions on the public markets and driving new Porsches in the warm California sun, or frantically writing code in San Francisco lofts and Palo Alto garages with dreams of the Nasdaq, seem like they’ve been gone for years.
But amid all the jokes about ambitious business plans that somehow forgot to account for revenues and profits, and the investors (everyone from venture capitalists to day traders) who jumped on the bandwagon, not too much has been said to explain what some entrepreneurs were thinking when they launched dot-coms — especially those who founded companies, got well funded and didn’t find a way to pull through. Many have dismissed the dot-com explosion as a “get rich quick scheme.” Was it? Or are all of those dot-comers a sadly misunderstood bunch.

Amar Goel can say that he was there. Goel founded golf e-tailer Chipshot.com in August of 1995 while still an undergraduate at Harvard. He built it up and ran it in his spare time during summer jobs at Robertson Stephens and Netscape. When Goel graduated, the company got seed capital. He and his co-founders paid themselves $1,100 a month.

“While my friends were getting well-paying jobs,” Goel explains, “I was back in my garage.” Goel confesses that some would-be entrepreneurs “did see it as a get rich quick scheme,” but insists that others, like him, “were trying to build real businesses.” Money was obviously a motivating factor, but Chipshot was, astoundingly, the fifth company that Goel founded — most of the earlier ones, he admits lightheartedly, were somewhat “stupid.”

His story reads like a classic dot-com dream — minus the billion-dollar IPO. Chipshot filed for bankruptcy in late 2000 and was bought out. But Goel argues that Chipshot wasn’t a half-baked idea that got funded just because its founders were the first to come up with the idea of selling custom golf equipment online and wanted an easy paycheck. “I’m sorry to disappoint you,” Goel explains, “but it wasn’t ‘okay, let’s fund this company.’ We didn’t just waltz in there.” Venture investors, he insists, were serious about what they were doing when they invested in his company. Chipshot received $3 million in funding from top tier firm Sequoia Capital in 1998, and Goel and his team were well on their way. The company would eventually raise a total of $50 million from Sequoia, as well as Oracle, Comdisco Ventures, Glynn Ventures, Capital, and Sumitomo.

Goel suggests that his investors at the time believed that his company could become a hugely profitable business. Chipshot would never reach a billion in sales, but because of the uncharacteristically high margins that the company was hoping to harness on its merchandise, at $200 million in sales it would do extremely well.

And yet, the Internet was, and still is, a new medium. People trying to turn the Net into a vast shopping mall made some serious mistakes in good faith. Or were the VCs, investment bankers, and entrepreneurs just greedy — trying to package nonexistent businesses with shrewd marketing dollars just in time to pull the wool over the eyes of excitable public market investors?

It was a new market to be sure. Goel says of those early days, “A lot of people thought eBay wasn’t a good business model.” Goel points out just a few of Chipshot’s errors: The company didn’t realize that, as a consumer goods company, they needed a VP of merchandizing, and didn’t get one until late in the game. The company did limited online advertising on golf.com and saw excellent customer acquisition costs, but then proceeded to spend $50,000 of its marketing budget at golf.com, only to realize that golf.com had limitations as an advertising channel. Suddenly the company’s customer acquisition costs had skyrocketed to $200. Goel explains: “We didn’t really spend a ton of money at golf.com, far and way we in terms of marketing the most money went to TV, and then radio, but you could definitely say that our portal deals were not good expenditures of money.”

But the biggest mistake was a difficult one to get around. At the height of the dot-com market, entrepreneurs were encouraged to build their companies aggressively, to depend on the capital markets. So Goel and his team burned a large amount of cash in a rapid growth mode. Many consumers will no doubt remember Chipshot’s humorous TV ad campaign. Then, suddenly, as the bottom fell out of the markets, the word of the day became “profitability.” Goel admits that Chipshot simply couldn’t adapt fast enough to the new rules.

Says Goel, “At first the capital markets were saying ‘If you’re not going to build aggressively, we’re not interested.’ Then the capital markets said ‘you’re not profitable right now.’” There was a contradiction in terms.

So, once again, were VCs pushing for an easy exit before the stock market realized what was wrong? Goel answers that question with an emphatic no. “I never had discussions with anyone about ‘how quickly can we push this company to be public,’” he says. Goel simply sees the fact that many companies went public and then failed, as the trial and error that happens when something new (the Internet) comes along. “People can complain that venture capitalists or entrepreneurs hoisted Pets.com on them,” he suggests, “but they still got to buy Yahoo and see a 20X return on their money (even after it has fallen 95 percent from its high). Everyone was engaged in speculation and the possibilities of the Internet. No one group is to blame.” And yet the push to build aggressively, without any customers, need not necessarily be viewed as the offshoot of inexperience in the face of the newness of the Internet. At the time the concept of the perfect Internet company had been created. That “perfect” company included all of the right management profiles, the right investors, and the right marketing buzz. All entrepreneurs had to do was build such a company in record time and everybody involved would be richer for it. Beautifully wrapped packages were being presented to Wall Street investors, who would realize only in April 2000 that those packages had nothing of substance in them.

The push to build aggressively was certainly part of this “instant company” strategy. Going with Goel’s assertion that Chipshot, as a high margin business, could have been profitable on just over $200 million in sales and break even at $100 million, it’s interesting to wonder what would have happened if the company had been built more organically. Maybe a few less hotshot business development or marketing people would have been hired at high salaries, or cash would have been spent differently.

But Goel is convinced that what happened at Chipshot in those euphoric days (when dot-com happy executives from companies like Riffage, or Blue Dog took their own practice swings in the sun on the Stanford golf course) was in no sense a scam, or a joke. It was just a sincere effort to build business and value at a time when everyone — investors, bankers, analysts, and entrepreneurs — had collectively lost their grip on what building a company means.

Goel, who is now consulting for McKinsey, views Chipshot as a “learning experience.” But he has genuine regrets. “I feel bad that we had investors who invested money and we weren’t able to deliver,” he says. “We had employees who worked very hard, and they won’t see Chipshot.com become the biggest company in golf or a return on their options.” But Goel hasn’t lost faith in entrepreneurship. He assures that he will one day go back to building companies.

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