Digital dreams that turn to nightmares

Hugh Carroll dreamed of a bright Internet future, but found himself a nightmare. Last year, Mr Carroll, 29, left a stable job in Silicon Valley for a promising sales position paying $40,000 plus commission at a San Francisco Internet startup called Thought Inc.

Hugh Carroll dreamed of a bright Internet future, but found himself a nightmare. Last year, Mr Carroll, 29, left a stable job in Silicon Valley for a promising sales position paying $40,000 plus commission at a San Francisco Internet startup called Thought Inc.

But the server software proved hard to sell and the company ran into cash-flow problems. Mr Carroll's pay cheques stopped, and he was promised a lump-sum with back pay when revenues started coming in. But the revenues never came in, and Mr Carroll's pay never arrived. Now he and several colleagues have filed a complaint with California labour officials seeking $50,000 in back pay.

"It was a disillusioning experience that left me cynical," says Mr Carroll, who has now gone back to university. "Joining a startup is a calculated gamble - not getting your pay cheque is another matter."

The plight of Mr Carroll illustrates the potential upsets for today's startup dreams. While the media lauds US high-tech success stories like eBay and Amazon.com, little attention is paid to the much larger number of upstarts that fade away, shut their doors or blow up, often leaving employees and creditors in the lurch. With UK Internet start-ups now also ballooning, the US experience offers a cautionary tale.

Startups-turned-blowups will make up the lion's share of the approximately 20,000 business plans circulating around Sand Hill Road, the opulent address of Silicon Valley's most powerful venture capitalists. Most of them end up in dustbins, never earning a penny for investors. And those that do secure funding often do not make it. Official statistics are not available, but venture capitalists estimate that for every successfully-funded startup there are about 100 that fail. Many of the dot.com plans are from fresh-faced young entrepreneurs who sacrifice successful careers in other industries, only to find frustration and failure.

Chia-Lin Simmons, 26, turned down a well-paying job from the Walt Disney company to "become part of the online revolution". Nine months and two layoffs later, she was "ready to screw this Internet s***, and my parents were saying, 'I told you so'."

Ms Simmons' not-so-magical-mystery tour of the Web started at iGuide in December 1995. She was hired as an associate producer at the online directory, and fired in a mass layoff two months later, after MCI WorldCom decided to back out of this joint venture with News Corp.

Ms Simmons was quickly taken on at Wired, the publisher which was preparing for a stock offering. But when the San Francisco-based company's IPO went belly-up, Ms Simmons was laid off in September 1996. "I was so impressed with places like Wired; they had a chef making three meals a day there," says Ms Simmons. "Perhaps, I should have been more concerned about job stability." Wired Ventures was parceled up and sold to other media firms.

Then there is the tragic case of 44-year-old Vladimir Pokhilko, who gained universal acclaim from popularising the seminal videogame Tetris. Mr Pokhilko's final venture, a wannabe e-commerce firm, failed to wow the investment community and money was tight. Mr Pokhilko went abroad last year trying to land $10m in new capital. But financial problems deepened and the angst-ridden Russian scientist worried he would fail.

Several months later, early on 22 September, 1998, a despondent Mr Pokhilko finally snapped. In his quiet Palo Alto, California home, he savagely bludgeoned his wife and their 12-year-old son with a hammer and stabbed both to death. Then he slashed his throat with a hunting knife. Later that week, one of the potential investors phoned from Japan, unaware of the deaths. Gilman Louie, a business associate of Mr Pokhilko's, said the caller "was ready to receive instructions for the wiring of cash to go into funds".

The astronomical jump in dot.com businesses has fuelled a goldrush mentality among would-be Internet entrepreneurs who have been encouraged by record funding for high tech ventures. Venture funding for Internet companies soared to $3.8bn in the second quarter of 1999, triple that of 1996, says Kirk Walden, director of investment surveys for Pricewaterhouse Coopers LLP in Austin, Texas.

The easy money fosters the belief outside Silicon Valley that every Internet startup is a jackpot. Not true, investors say. An estimated 700 Net companies are created each quarter, heightening the competition for venture capital dollars. Some firms routinely rewrite their business plans in their search for cash.

"Some businesses deserve to die," a former executive at a failed online content company admits. "There are a lot of bad ideas out there. Employers owe it to their workers and investors to shut things down and not eke out a month-to-month existence. That's too painful."

In many ways, high-tech busts provide a convenient historic parallel to the 19th-century prospectors who ended up in squalor during California's Gold Rush. Although comparisons between successful online entrepreneurs and gold diggers abound, many are reluctant to extend the analogy to those who don't strike it rich. (Indeed, John Sutter, the first to discover gold in California in 1848, died in poverty.)

"Starting a company isn't the problem; getting others to buy into it and making it a reality is," says Donna Bonifield, 39, who left Broderbund Software in 1994 to co-found Genuus, a digital video company in a do-or-die quest for $15m in funding. "It's like panning for digital gold." Ms Bonifield and her partner, Matt Siegel, 29, are polishing the third version of their business plan before they audition for investors.

Until then, they are funding their tiny company with the stock they earned at Broderbund, where they headed up the successful Living Books division. "At one time Broderbund was exciting, but it became big and lethargic," she says. "We wanted to create something great and make money in the process. Only it's a lot harder than we thought."

And more competitive. After demonstrating its product to an established software company in a bid for an investment, Ms Bonifield and Mr Siegel were stunned to discover elements of their technology crop up in that big software company's next product line. "I guess we got a crash course in capitalism," Ms Bonifield sighs. Genuus, (the name is a hybrid of "genuine genius"), is still seeking funding. It is now considering giving away free stock in exchange for customer subscriptions to its service.

"There is no corporate safety net at startups," says Rip Gerber, who suffered a series of blowups for five years before landing as vice-president and general manager of CommTouch Software in Santa Clara, California. "When you are on your own, there are a ton of shysters and fly-by-night operations."

Yet big dreamers continue to give up everything for a shot at striking high-tech gold, knowing the barriers to funding have never been lower. Jay Hoag, founding general partner of Technology Crossover Ventures in Palo Alto, California, says an Internet company requires less than $1m in revenues to go public. Five years ago, a software firm needed at least $6m in quarterly sales and five straight money-making quarters to turn the trick.

"If you're profitable today, in fact, you run the risk of scaring away investors because it shows you aren't reinvesting in your company like an Amazon.com," he says.

Ms Simmons - the twice-laid-off producer at iGuide and Wired--plowed ahead with tours of duty at CNET and Beyond.com. Last month she joined Clip2.com, a Bay Area startup that allows consumers to share information online. "I love the idea of people bringing their dogs to work and employees having food prepared by an in-house chef," says Ms Simmons, wistfully. "A startup can be an exhilarating experience."