Five years ago, Jonathan Nelson wouldn’t have given himself the time of day.
Back then, Nelson wanted to start a firm to design sites for companies on the nascent World Wide Web. He went to a venture capitalist, bearing no expertise, business plan or barriers to the entry of potential competitors. “You kind of don’t have a company,” the sought-after backer told Nelson.
Nelson went ahead anyway, keeping Organic Online independent. It adopted new technologies early and began building what has mushroomed into an enviable client list, including Barnes & Noble, Nike and Starbucks. More recently, it helped push clients away from simple informational Web sites into highly interactive e-commerce sites.
Now Organic is turning into a venture capital firm of sorts itself. Forsaking millions of dollars in cash fees, Organic instead has taken stakes or potential stakes in five companies, including specialized virtual retailers and comic book pioneer Stan Lee’s new effort at a global community of interactive superhero fans.
“I’m interested in going public as a company that understands e-commerce globally,” said Nelson, 31. “I’m much more interested in being CMG than I am in being an ad agency for the Web,” he added, referring to the publicly traded Internet investor with holdings in Lycos and GeoCities.
In part, Organic is just following the money. Internet companies’ public stock offerings have made millionaires out of countless people in the last two years, and a wide range of service providers, from lawyers to executive recruiters to janitors, want a piece of the action.
“What Organic is doing is a very clear example of how the desire for equity is intensifying in a significant way,” said Jim Breyer, managing partner at Palo Alto venture capital firm Accel Partners, with $800 million under management. “Most of the professional firms are very pleased to take equity in lieu of cash.”
Organic’s transformation from start-up to incubator to investor also shows how in the age of e-commerce, those who make the Web work best have the ability to become players in related spheres of business, if not mini-conglomerates.
“It’s a good strategy,” said William Rice, president of the Web Marketing Assn. “There are only a handful of companies that have made a name for themselves, that know how to make a site for e-commerce. If one of these sites really gets established, the potential payback is huge.”
Silicon Valley law firms have been taking stock or options for years, and it doesn’t stop there. Among the more surprising investors in Vita Systems, IMiner and Velogic is a company called Trinet, which provides outside administrative and human resources functions for those and other tech start-ups.
“At the initial stage of a start-up, it can be cash-sensitive,” said Craig McGannon, a Trinet vice president. Taking equity means that “clients perceive us as a strategic partner, and it gives us an additional incentive to see them succeed.”
Millions Invested in Start-Ups
Organic has invested between $5 million and $10 million in start-ups so far, and Nelson estimates that the portfolio’s value is now four or five times that much. Last year, the holdings provided 13% of Organic’s revenue, and the figure is headed up. “Overall, a quarter to a third of our revenue in the next year or two will be represented by these types of transactions,” Nelson said.
Organic’s credentials as a high-end designer are established: It won a recent best-of-show award from the Web Marketing Assn. for a site selling the Philips Multimedia Home Theater, and AdWeek ranked Organic as the top interactive agency for 1998.
“They do just incredible creative work and interactive work,” acknowledged Geoff Kerr, a senior partner at larger competitor USWeb/CKS, which has worked for nearly half of the 100 largest U.S. companies.
Expertise in Web design doesn’t necessarily translate into entrepreneurial know-how. But Organic learned from its own experience and from the ideas that have passed through its offices in a loft south of Market Street.
Apache, which is now the most popular Web server software in the world, began a few years ago as a project that included two Organic engineers and others outside of the company working to improve existing technology.
“We were trading patches [technological fixes] like baseball cards,” said Brian Behlendorf, who left Organic last year and is one of the leaders directing development of open-source software. Organic was one of the first heavy users of the Apache system, since adopted by companies from Apple to IBM.
Other Organic spinoffs include the Accrue system for tracking Web ads and BigBook, an online directory that by Nelson’s own admission “wound up collapsing and creating a large crater in the ground.”
“I’m kind of a serial entrepreneur,” Nelson said. “We just find ourselves in the middle of some really interesting things.”
After Apache and Accrue, Nelson and others at Organic began thinking more about getting in on the action of new businesses. That sentiment accelerated alongside the Web’s shift toward e-commerce, where the design function is vital enough to justify such a move.
First out of the box was Organic’s investment last year in Fragrance Counter, a perfume seller that Organic took from America Online to the Web. Revenue has tripled, and the site recorded 2.3 million visitors in its most recent quarter.
Organic also has a piece of E-Town, an electronics virtual store that in July will link consumers to reviews and to products at other retailers. Organic put up $500,000 of the $3.5 million raised by the company so far, said E-Town President Lewis Brown. Without the equity deal, “I don’t think we could have afforded a top-rung agency like Organic,” Brown said.
The company also owns pieces of the Worldly Investor stock site and Next Planet Over, a comic book distributor.
One of the most recent Organic bets is Stan Lee Media, which in June will debut the first major characters in 25 years by the creator of Marvel comics superstars Spider-Man and the Incredible Hulk. (For now, https://www.stanleemedia.com opens with the words: “Hello, capitalists!”)
After Lee disentangled himself from Marvel during the company’s bankruptcy reorganization, he and business partner Peter Paul started casting about for new ventures.
They were impressed by Organic’s proposal for a site that included merchandising, a virtual clubhouse for teens and streaming video and audio. They settled on a $1-million program, paid partly in stock. (Stan Lee Media will merge with a publicly traded shell in two months, Paul said.)
“It’s the greatest partnership in the world. They’re doing all the work, and it allows me to concentrate on the stories,” said Lee, 76, of Beverly Hills. “It’s just so much fun to have another medium to work in. I can’t wait to get into the office every day.”
Staff Needs Evolve as Company Changes
Nelson is still hiring at Organic, which had a staff of 60 two years ago and now numbers about 350. The type of employee is evolving, with more and more MBAs coming on board. While many of them agree that coaching a start-up is more fun than trying to make more money for a Fortune 500 company, the shift in Organic’s approach initially caused consternation for at least one company director.
That director is from Omnicom, the giant New York ad firm, which invested in 1997 for nearly 20% of Organic and the board seat. But Omnicom said it isn’t nervous about Organic anymore.
“What Organic is doing is a logical progression,” said Omnicom consultant Felice Kincannon. “They are taking advantage of the evolution of the marketplace. They are equally qualified as a venture capitalist.”
Omnicom also has minority stakes in Agency.com and three other Web companies. The five have combined revenue of $250 million a year, Omnicom said. Of the Omnicom-backed companies, Think New Ideas is trading at about twice its 1996 offering price, and Razorfish has filed to sell shares as well.
Organic has “high odds” of going public six months or more from now, Nelson said.
Even Silicon Valley’s traditional capitalists agree that Organic is probably a good equity partner for a start-up.
“We don’t consider it competition,” said Breyer, of the Accel venture firm. “If a technical, consulting or legal relationship is one that should last for several years, it’s a positive to give them shares. And for an e-commerce site, where the product is the Web site, Organic has more skin in the game by taking equity.”
The only caveat, warn some venture capitalists, is that a young company might know too little about what it’s worth.
“That’s one area where if a company is already venture-backed, or there are some really expert people around the table, they can provide some very valuable advice,” said general partner Mark Dubovoy of Information Technology Ventures, which has more than $75 million invested. “There are few things worse in the world than mispricing your equity early in the game.”
Then again, one of those worse things is never to get off the ground at all.