The Harsh Realities of ‘Dot-Com’ Dreams

As the prices of Internet stocks soared last summer, they quit good-paying jobs or shelved careers. They hunkered down in spare bedrooms or small offices to write business plans or develop software. And drawing on their savings, they launched their own “dot-coms.”

Why not? Sky Dayton worked in a coffeehouse before starting EarthLink. And Buy.com founder Scott Blum once parked cars at a Ritz-Carlton.

An Internet start-up didn’t seem like much of a gamble--then.

“Never in the history of man has there been an opportunity where a layman can build a mega-company,” diesel mechanic Rudy Salazar enthused in January, as Internet euphoria in Los Angeles peaked. “I happen to be in the right moment of human history.”

Well.

Odds have turned against dot-coms. Disenchanted investors are dumping Internet stocks in droves. Venture firms that used to bankroll guys with ideas now want entrepreneurs with Fortune 500 pedigrees.

The pressure comes not only from investors. Corporate heavyweights from the real world are racing onto the World Wide Web, limiting opportunities for start-ups. The B2B market, wide open six months ago, is crowded with such giants as Ford, International Paper and Dow Chemical.

No one can predict how start-ups will fare in the months ahead. Venture capitalists, who’ve fueled the explosive growth of dot-coms, continue to dole out funds but are more selective.

“It has never been easy to raise money,” said Roy Nwaisser, a USC graduate who co-founded a dot-com last summer. “And it is harder now.”

As the giddiness fades, new-media entrepreneurs find themselves near a crossroads. Here is how founders of three embryonic start-ups--among 370 entrepreneurs who attended a venture forum in Irvine in January--assess the challenges facing them.

The Engineer

It is crunch time for Randy Chung.

Before leaving Conexant Systems last August to launch an Internet start-up, the veteran hardware engineer socked away enough money to support his wife and 15-year-old son for a year.

Chung has three months left to make a go of EdgeStream.

So far, Chung has built a prototype system for transmitting TV-quality video over the World Wide Web. Engineer friends and family members sold on his idea have invested $500,000 in EdgeStream.

Chung hasn’t yet shaken loose any venture money though. VCs are unsure of the technology and Chung’s management skills, the entrepreneur admits.

“Some are positive, but not 100% positive,” he said.

The stakes are high for Chung. When he quit Conexant, he walked away from options worth between $400,000 and $600,000, he said. He earned $100,000 annually as a department manager.

But EdgeStream offers him a shot at wealth not afforded employees of a large corporation. In Chung’s mind when he started EdgeStream was his experience at Western Digital, where in the early 1980s he helped invent a specialized chip that IBM used in its personal computers.

“It was a very successful product,” said Chung, 48. “I was rewarded reasonably well as an employee. Not as an owner.”

Chung isn’t a gambler. The equity from family and friends is enough to keep EdgeStream going for six months.

But Chung has assured jittery investors that he won’t tap it until he is certain his company has a fighting chance.

Along with his partner, Bill Mayhew--a marketing consultant Chung met at an Internet networking event in October--Chung is testing demand for EdgeStream’s technology. And with help from freelance engineers, he is building a second, better-developed prototype.

Chung figures that in two to three months he’ll know whether there are customers for EdgeStream’s technology.

“With the market tumble, we’re being cautious,” said Chung, who quickly added, “I’m pretty sure we’ll be successful.”

Raising the pressure on Chung is a personal worry: The looming cost of college tuition for his son, a sophomore with straight A’s at Aliso Viejo High School.

“What if I used up a bunch of money and couldn’t send him to the college he deserved to go to?” said Chung. “That is my one major concern.”

The Mechanic

Well before dot-com mania hit him last summer, Rudy Salazar was in search of the next big thing.

After hopping from trucking firm to trucking firm, the trade school graduate had bumped his annual salary up to $48,000. Four years ago, he quit his job with a trucking company to start his own fleet-maintenance business, Corporate Lube.

Salazar envisioned Corporate Lube as the Jiffy Lube of the trucking industry. He drove his lube truck to clients’ lots, where he maintained fleets for such companies as furniture retailer Homestead House. By the end of 1999, Salazar said, Corporate Lube had 40 customers and had turned profitable.

But Salazar already had his sights on the Internet.

In a spare bedroom of the Fullerton home he shares with his mother, Salazar is working on a business plan for FleetMechanic.com.

He said the company, which hasn’t yet launched, will track maintenance schedules, driver reports and other virtual paperwork for companies with fleets of 15 trucks or fewer.

“It’s gonna be huge,” said Salazar, 36.

After working on the idea for months, Salazar incorporated FleetMechanic in February. He paid a consultant $1,200 for a market analysis. A second consultant is helping him tweak his presentation so he’s prepared for potential investors. He joined three dot-com networking groups to make the right contacts.

As yet, he has no financial backers.

Salazar believes his company has a chance despite investor worries about Internet companies. But with FleetMechanic consuming 80% of his time, Salazar has scaled back on Corporate Lube. That hurts his income.

“In no more than two months, I’ll have a check written” from a venture capitalist, he said. “Or I’ll be throwing in the towel.”

The Grad

With advanced degrees in computer science and communications, Roy Nwaisser possesses the academic credentials to make a splash on the Internet. But since co-founding Netraction with a former USC classmate last year, Nwaisser has learned he needs something else: contacts.

For the last 10 months or so, Nwaisser has been working Los Angeles’ digital community to make connections that will lead him to potential clients and financiers. He’s made some headway.

An acquaintance from a networking group pointed him to an attorney and an accountant who have agreed to defer cash payments and accept some compensation in warrants in privately held Netraction. At a networking breakfast, Nwaisser met a headhunter familiar with new media who is advising him at no charge.

His antenna is up when he’s not working. A chance meeting with a friend of a friend at a Hollywood nightclub earlier this year led to an audience with a local advertising agency. Netraction is developing a method of delivering online ads to Web users. Discussions with the ad agency haven’t led to a deal yet.

Besides Nwaisser, 28, and his partner, Hermann Eichholzer, 32, four other people work at Netraction on and off. No one gets paid. If Netraction succeeds, they’ll financially benefit.

“It’s a risk-reward thing,” Nwaisser said.

Los Angeles-based Netraction has no outside financing. Nwaisser, also a project manager at IBM, puts $1,000 a month into the company. His partner contributes an equal amount.

Given investor skepticism about dot-coms, Nwaisser is less focused on raising equity than on attracting clients. That’s a change from a year ago, when he and his partner dreamed of an initial public offering.

“In the early days, our heads were filled with dollar signs,” he said.

Nwaisser is forging ahead with Netraction. “If you believe in something, it’s to the grave,” he said.

He isn’t ready to give up his day job, though.