Startup Survivor

Its a tough time for technology startups in Seattle.

Many have already endured more than one round of layoffs. Others have scaled back their business plans. Venture capitalists are tightening the grip on their wallets. Even Microsoft has announced a hiring freeze.

Terry Drayton has seen this all before. The 48-year-old Calgary, Alberta, native is best known for co-founding in 1997 one of the companies that came to epitomize the dot-com bubble: HomeGrocer.com, the personal-delivery grocery service famed for riding the dot-com wave until the sector collapsed in March 2000. Drayton is bracing for an even worse recession this time.
This is the fourth down cycle I can remember, says Drayton, a compact man with a strong Canadian accent who says frickin just about every other word. When the economy is booming, people think it will never frickin end. When it goes bust, people say they never frickin saw it coming.

Like many back in the late 1990s and early 2000s, Drayton is one of those people who never saw the end of the tech bubble coming. One week in 2000, you could raise as much money as you wanted, he says. A week later, there was no way to raise any money at all.

After the dot-com bust, Drayton moved on. In June 2000, he resigned from HomeGrocer as part of the Webvan merger. In early 2001, he co-founded two startupsThe Ramp Group and The Arena Group, both based in Bellevue. Ramp is a computer programming and application development consulting firm with about 100 employees, and Arena, now with 12 employees, is an online registration and management software company that is really six companies in one.

The Arena portfolio inludes Count Me In, a business that produces software to help individuals manage sports leagues of all types. It also has charge of Powered by Eastbay, which offers software to manage sports organizations. A third firm, Turnstile Systems, makes software that assists event managers with registering people and running events. Another similar Arena company is All Registrations.com, which provides online registration software for any need. Alumni Software lets individuals manage alumni organizations, and Youth Sports World creates and supports internet communities dedicated to youth sports.

Drayton knows how to keep a startup alive during a recession. But those lessons werent easily learned, and he has the scars to prove it. To this day, the fall of HomeGrocer.com stands as a bitter reminder of what happens when a company is unprepared for an economy on the brink of a sudden and violent downturn. We were a creature of the times, he adds, with our strategy built around growth.

Anyone who lived in Seattle 10 years ago probably remembers the distinctive peach logo that was emblazoned on HomeGrocer.coms delivery trucks. Next to Amazon.com, HomeGrocer was probably the best-known e-commerce brand in the Pacific Northwest.

Even before HomeGrocer, Drayton had a hand in the consumer products business. From 1986 to 1989, he ran a bottled-water business, Spring Valley Water. In 1992, he acquired another bottled-water company, Canadian Springs, from Nestle Corp., for $28 million (Canadian). Three years later, he sold Canadian Springs to Evian for about $50 million (Canadian). Just one year afterward, in 1996, Evian acquired Spring Valley Water.

Drayton remained at Evian for about a year before moving to Vancouver, B.C., after his wifes father became ill. There, HomeGrocer was born. Drayton and a colleague, Mike Donald, were members of the Entrepreneurs Organization. He was a grocery guy and ran a huge food brokerage in Canada, says Drayton of Donald. And wed both been thinking about the online grocery business.

Through Donald, Drayton met the third HomeGrocer co-founder, Ken Deering, who helped develop the business plan for HomeGrocer.

The concept behind HomeGrocer was simple: Customers would order groceries from the choices on the slick HomeGrocer.com website and then wait for the food to be delivered, usually the next day, by one of the delivery trucks in the firms vast fleet. The website won plenty of awards and customers raved about the service. We did 50 percent organic produce, and that was 10 years ago, Drayton still marvels.

Like many e-commerce startups in the late 1990s, HomeGrocer raised hundreds of millions of dollars from venture firms in Seattle and Silicon Valley, including Madrona Group, Kleiner Perkins Caufield & Byers and Hummer Winblad Venture Partners. Other investors included Netscape CEO Jim Barksdale and John Malone of Liberty Media. Even homemaking doyenne Martha Stewart chipped in.

Drayton considers his time at HomeGrocer as one of the high points of his entrepreneurial career. I loved that business, he says, somewhat wistfully. One of the things that was really fun was being in the consumer products business. I liked the contact with the customer and the driving [of the vans]. It was frickin awesome.

But the good times didnt last. HomeGrocer went public in March 2000, literally one day before the public markets began a free fall that would not stop for more than three years. By the time its chief rival, Webvan, picked up HomeGrocer for $1.2 billion in an all-stock in June 2000, HomeGrocer stock was already below its IPO price of $12.

When the end came in July 2001, it wasnt pretty. Webvan filed for Chapter 11 bankruptcy and fired its 2,000 employees, 200 of whom were based in Seattle. The Webvan/HomeGrocer service, which counted 50,000 customers in the Puget Sound area, was gone

When he compares the fall of HomeGrocer and the current economic turmoil, Drayton sees many similaritiesbut he thinks the downturn in 2008 will be far worse than the one in the early part of the decade.

The shit has really hit the fan, he muses. Even I dont understand the degree to which some of this stuff has happened. The difference between now and then is the fact that Im 48 years old this time around and Im not losing my head.

That may be so, but other people at Draytons two technology startups have already lost their jobs. In October, Drayton cut eight people at Ramp and one-third of the staff at Arena. It was hard to do for DraytonI was in tears, he saysbut cuts had to be made.

One thing I learned from the HomeGrocer experience is that there is a tremendous danger in carrying staff for a long period of time on the hope that youll have more business down the road, he says. Doing nothing creates its own self-fulfilling prophecy.
Drayton is convinced that if Webvan had cut staff and scaled back its plans to expand into several new markets earlier in the technology downturn of 2001, the company might have survived.

[Webvan] still had tons of money on the balance sheet when they acquired us, he says. I think it would have been better to stop all the construction we had going on. Back then, no one knew how long the [capital] markets were going to be closed.
The same is true now. Drayton is currently trying to raise $10 million in venture capital for Arena. Things are not going well, to say the least.

It sucks beyond all comprehension, Drayton says of the venture environment. All the venture capitalists are moving very slowly to fund new deals. And this Entellium mess is making everyone move even more slowly. The timing for us raising money couldnt be worse.

The Entellium mess refers to the recent surprise meltdown of customer relationship software startup Entellium of Seattle, which had raised more than $50 million in the last four and a half years from a number of venture capitalists, led by Bellevue-based Ignition Partners.

Late last fall, however, FBI agents arrested Entellium CEO Paul Johnston and CFO Parrish Jones on charges of fraud. The two executives have been accused in federal court of inflating revenue figures to attract millions in venture-capital investment. The charges followed on the heels of rampant news reports of unbridled greed and mismanagement on Wall Street brought on by the subprime mortgage crisis.

Given the state of the capital markets and a slowing economy, Drayton says that startups need to focus on two things if they want to make it through the doldrums: cutting costs and conserving cash.

Weve had to pull back, Drayton says of his plans to expand Arena. We had all sorts of ideas for marketing [Arena] more, doing trade shows, but were pulling back on that now. Another project at Arena requires some additional functionality on the software and channel side, but were pulling back on that, too.

Ramps Deering says all startups should minimize their cost structure up front. Everything should be about cost containment. Only build features [into software] that generate revenue.

Startups should also tack on another six weeks to their estimates for closing on venture capital as a result of the economic slowdown and the Entellium situation, Deering adds.

The third week of September [2008], there was a shift, he explains. This was the word that came down from venture capitalists: Show me slower burn rates and that you dont need a Series B.

Despite the current problems in the capital markets, Drayton is sanguine about his two startups chances, especially Arena, which, as a software company, has much lower overhead costs than consumer-oriented startups like HomeGrocer.

I never want to do an infrastructure play again after HomeGrocer, Drayton says. Its frickin hard and it takes so much more money. Shipping electrons is so much frickin easier.

Only time will tell whether these larger, more established
companies will find success. But there are at least two things in their
favor: This current crop of delivery firms have plenty of money and the
management know-how to handle expansion.