Maryland Cheers Its Diverse Dot-Coms
Upbeat: Internet companies are undergoing a shakeout, but Maryland dot-coms' resources include many government and university research labs
Baltimore Sun, January 16, 2001
by Michael Stroh
Last spring, Neil Sweren blew five months and $25,000 crafting a business plan for Fizbot.com, an online start-up he and his wife hoped would be their ticket to retirement by age 40.
And why not? In cyberspace, millionaires were being minted nearly every day. Sweren figured his idea for a Web site catering to the for-sale-by-owner housing market was a sure bet. His lawyers heartily agreed.
"All of the advice we got was that we were going to be able to raise big bucks," says Sweren, a 33-year-old mortgage broker in Owings Mills.
Today, Sweren's dot-com dream of fast riches has gone down the tubes along with the stock market that fueled it. Now, rather than relying on a fat check from venture capitalists, Sweren is building Fizbot.com the old-fashioned way: slowly, one customer at a time.
"The market is forcing us to go back to basic business - you don't waste a penny," he says.
Welcome to the tech industry circa 2001, a time when the heady days of cyberspace are a virtual memory and the lavish bashes once thrown by start-ups to celebrate stock offerings are being replaced by "pink slip" parties for dot-commers who have just been canned.
This month Advertising.com let go a quarter of its 287 employees from its Tide Point headquarters in Locust Point. Once a flagship of Baltimore's emerging e-commerce industry, the company is reeling in the wake of a slump in online ad buying. Cidera Inc., a wireless industry start-up in Laurel, laid off a third of its 265 employees this month.
They're the lucky ones. All told, more than 210 Internet companies flamed out completely in 2000 - 60 percent of those in the fourth quarter, according to a new survey by Webmergers.com. In the process, the companies deep-sixed more than $1.5 billion in investment funds.
Yet, while e-commerce companies may be floundering, many analysts and business leaders in Maryland remain upbeat about the state's tech industry in 2001.
One reason, of course, is that despite all the hype over Baltimore's "Digital Harbor" and other breeding grounds for Internet start-ups in Maryland, the state never saw the explosion of e-commerce firms that occurred elsewhere in the past few years.
As a result, "we have a lower cliff to fall off of," says Drew Krimsky, president of ACI Group, a fast-growing information technology recruiting firm in Fells Point.
And Maryland has also slowly been nurturing a diverse array of technology companies, which may help cushion the blow if the economy goes south.
For example, several of the state's 250 biotechnology firms that dot the Interstate 270 corridor in Montgomery County are flush with cash and leading the charge to turn the newly decoded human genome into 21st-century wonder drugs. The industry already employs 16,000 or so statewide, a number that is expected to swell this year.
Another bright spot in the state is telecommunications, especially hot areas such as wireless and optical networking. For example, Ciena Corp. in Linthicum, which makes optical networking gear, was among the state's best performers in 2000, with its shares ending the year up 173 percent to $78.63.
And there's more. Hunt Valley has quietly become home to a thriving video game industry.
"As the bloom on the dot-coms fade, we're seeing a return to fundamentals, to companies that have real products," observed Phillip Singerman, director of the Maryland Technology Development Corp. (TEDCO).
But that's not to say Maryland is about to become Silicon Valley East. In 2001 there are still plenty of hurdles facing the state's emerging tech industry.
Perhaps because of its government roots, Maryland has a reputation for lacking the kind of "entrepreneurial spirit" found in Silicon Valley and Northern Virginia, Singerman noted.
As a result, many government officials and entrepreneurs alike overlook a singular advantage the state has: all its government and university labs.
Instead of basements and garages, it's places such as Johns Hopkins, the National Institutes of Health and the Aberdeen Proving Grounds where many of the most valuable commercial ideas in the state are likely to be born in the new millennium, Singerman said. "That's our unique strength."
Hopkins, he noted, receives more than $1.2 billion in research funds annually, putting it on a par with all the university R&D in Boston or Northern California. The state, he said, receives nearly $6.3 billion in federal research money, twice as much as California.
But not enough of these ideas leave the labs, Singerman said. And too few researchers dare abandon cozy research jobs and comfortable pensions for start-up riches.
The challenge in 2001 will be nurturing budding entrepreneurs, especially at a time when venture capitalists have suddenly turned stingy.
"The question on my mind is: What level of capital will be available for companies? There are some big forces at work here," Singerman said.
Time was, even the most harebrained idea scribbled on the back of table napkin could send venture capitalists scrambling for their checkbooks. (No fewer than three companies were once competing to sell dog chow on the Internet, for example.)
"It's like five guys opening a hat store on Charles Street and suddenly thinking they're going to dominate the world in hats. It's just crazy," said Sean Carton.
Carton, who runs the Baltimore design firm Carton Donofrio Interactive, is writing a book for publisher McGraw-Hill about lessons businesses can learn from the faltering Internet industry. The tentative title: "Dot Bomb."
The idea for the book came last spring after being involved in an $8 million deal with start-up Women.com in San Francisco. Three weeks after the meeting ended, the firm's CEO phoned to ask Carton if he knew a good place to unload used office furniture.
Among many e-commerce firms, "there was never any concept of we're going to build a business," Carton said. Instead, "there was this concept of we're going to get rich."
Between 1998 and 1999, investments in Baltimore and the surrounding counties more than doubled from $217 million to $581 million, according to a study by the American Electronics Association and Nasdaq.
But it's unclear whether that trend will continue. Stung by the excesses of the past few years, some angel investors are becoming pickier.
Steve Walker and his partners at Steve Walker and Associates in Glenwood still get 25 to 30 new business plans a week. But they're not funding as many new ideas as they did six months ago.
Other venture capital firms have suddenly become conservative as well. "This is not an excellent time to begin with a pure idea," says Doug Schmidt, a partner at Grotech Capital Group in Timonium. "All of us are going to be looking for profits and proven strategies."
And it's not just better strategies that entrepreneurs need, it's good people. The days of 20-something techies setting themselves up as CEO, their roommate as CFO and their girlfriend as VP of marketing are also disappearing fast.
"We're starting to look for solid management teams that can carry an idea further," Walker said.
But the shakeout has an upside. "We're seeing far fewer nuttier ideas," Walker observed. "This is a dramatic change."
But while the first crop of dot-coms may have flopped, it doesn't mean e-commerce is over - far from it.
It's clear that the Internet is increasingly becoming the bedrock of business strategy at mainstream corporations. And that Maryland will continue to attract new high-tech ventures.
"Does an economic pullback hurt that development? I don't lose sleep at night thinking this is going to stifle growth," Walker said.
