Who Wants to Be a Millionaire?
The man to see; you're 22. You've got this high-tech idea so good it's viral. All you need is the cash to get started. Time to call Steve Walker
Washington Post, June 11, 2000
by Dante Chinni (reprinted with the approval of the author)
Glenwood Office Park is your standard-issue 1980s professional building - two stories of brown brick and aluminum - about 90 minutes north of downtown Washington in a semi-rural patch of land known as Glenwood, Md. For people with an idea and a hope of being rich, it is a place where dreams are made - or broken. Today in a small second-floor conference room two guys are trying very hard to explain why they deserve a million dollars. They look serious in their best let's-do-business charcoal-gray suits, and their words are state-of-the-art technobuzz, but their pitch is used-car-lot hard sell - manic hand gestures and rapid-fire sentences.
"We are empowering the user," one says, grinning as he moves around the table making the case for his telephone-to-Internet concept. "What we're doing is creating shareable communities. This idea is contagious, it's viral. If I could quote from Wired magazine's December issue, `Everyone is still scratching their heads over what will emerge as the killer app' in this area. Well, we believe we have it."On the other side of the table four people sit listening. They don't look like power brokers - there are no ties, no suit jackets, a couple of pairs of sweats - but they hold all the cards. They have invited these two guys here, to explain in about 20 minutes why they should be bankrolled. So far the committee is all ears.
One of the supplicants is sweating a bit now, but he's hitting the right notes. If one has an "app" (a software application) that is "contagious" and "viral" (that grows on its own with little need for advertising), then it holds the promise of becoming a "killer" - a dominant force in the market and the standard by which all others are judged.
He even creates a new buzzword. "We could have electronic coupons. We'll call them e-pons!"
But it turns out there is one small problem with this killer app: The two would-be entrepreneurs are still employed elsewhere; their employers don't even know they're here this afternoon. And this raises a red flag. Do they own their idea, or do their employers?
Committee members start to wonder. This concern will end up being a deal-killer in what is, in relative terms, an otherwise solid presentation. The two guys don't know that yet, so they walk out still hopeful.
A dozen people come through the doors of Glenwood Office Park this day with similar dreams. From 9 to 5 it's one presentation after the next, a cross between "The Gong Show" and "Who Wants to Be a Millionaire." One guy lays out a proposal for tying the Internet to car radios, but it's clear he isn't really sure what his product is. Another tells the group that he has no "revenue model" for his idea to use the Internet to scout out credit card bargains, and no real product. Still, he feels confident enough to ask for $2.2 million. (That's better than the guy, once, whose main pitch was, "There's a gold rush going on and I want a piece. I want to be rich."
Finally, there's a 22-year-old Georgetown grad who's created one software business already and now has a plan to cull the Internet for info and ads tailored to individual users that will automatically pop up onto a user's computer screen.
That's intriguing, the committee members conclude, something worth considering. Then the pitch day ends. Time to sit down with the proposals and figure out which, if any, to bankroll. In other words, time to go see Steve.
Steve is Steve Walker, the money man behind the four people at the table and the firm they represent, Steve Walker and Associates. SWA is the first stop for people who think they've hit upon an idea that will change the world - or at least fill their pocketbooks.
Gray-haired, rumpled, 56 years old, Walker is a venture capitalist, a VC in the lingo of the new new economy, and people like him are changing Washington. Suddenly cell-phone conversations aren't just about legislative hearings and amendments, they're about IPOs and Internet strategies and raw capitalism. The federal government may still be the biggest single employer in the quintessential company town, but more often than not it's folks like AOL that are hiring.
Walker understands these changes all too well. Venture capitalist is, in fact, his third career. He started on the other side of the table, working at the Pentagon on ARPANET, the Internet's precursor - he's one of the reasons you type @ when you send e-mail. But Walker dumped his federal salary and poured his $30,000 pension into a business idea when no one else would fund it, and several years later emerged a millionaire. A $350-million millionaire to be exact.
Since then, Walker has been investing in the promising ideas of others, with an unusually high rate of success. He's an early early funder, who plucks a glimmer of an idea out of the pile before most others would even consider it. Walker loves the idea of finding something new, particularly a new technology, that will affect how we go about our lives. "That's what this is really about," he says. "It's about changing the way things are." Bigger VCs will come in with more money later; at the beginning, when you're desperate, it's Walker who'll give you a hearing, offer you advice, validate your concept (assuming you make it past his pitch committee). Which is why those he invests in tend to view him as something of a demigod: Steve thinks I'm going to make it! Steve liked my proposal!
Almost every article you read about Washington's high-tech boom, nearly every success story about some kid who struck it rich on the Internet, begins with someone like Walker. VCs fund ideas and people when they can't get the money they need from the bank. And there are more money movers in Washington now than ever before. As the area's technology sector has exploded, there has been a rush to find money that will help make the latest "Web-enabled" gizmo a reality. Since 1995 the number of venture capital deals in the Washington area has risen steadily, from 60 in 1995 to 189 in 1999. And the amount of venture money has climbed from $368 million in 1995 to $1.6 billion last year - the first time the total invested exceeded $1 billion. In the first quarter of 2000, Washington area venture capitalists invested slightly more than $1 billion in various businesses, a dramatic increase from the same period in 1999 when they invested $250 million.
In relative terms, this is still small potatoes - Silicon Valley saw about $7.9 billion invested in the first quarter of 2000 - but for the Washington area, long a backwater in the venture capital game, it's boom time. More entrepreneurs are seeking money, which is leading to more money being invested, which is in turn leading more people to seek money. In fact, this process has become so accelerated, it's now difficult to determine who is chasing whom.
Last fall, at the Mid-Atlantic Venture Association Fair, AOL's Ted Leonsis told the crowd, "We no longer ask to see business plans. It takes too long and we might miss the opportunity. One entrepreneur told me, `I feel like I've got peanuts and the circus is in town.' "
Not everyone, of course, is pleased with the new environment. William Kimberly, who has been in the Washington VC market for about 15 years, says the changes have created some less-than-thoughtful investments. "We used to always have people knocking on the door, but we didn't want to work with them. They didn't have a good idea or what I call applicable experience," Kimberly says. "It's so much more intense now."
Walker himself agrees. "This idea of being an entrepreneur is catching on with a lot of people - some of whom it shouldn't be catching on with. Anybody with any credentials at all can get money now." Even the recent turbulence in the stock market, particularly toward new technology companies, is unlikely to change the eagerness of VCs to find and fund hot ideas. While he and others are making a greater effort to figure out whether a proposal really is worth the money risk, in the end, Walker says, "no one wants to miss a good opportunity now."
With his large silver-framed glasses, hunched-over walk and well-worn tweed jacket (no tie, of course), Walker looks and acts more like an amiable grandfather than a cutting-edge money man. He likes it that the young Internet wannabes see him as a spiritual supporter rather than a typical VC shark.
His philosophy as a VC is heavily influenced by his own experience - scuffling to find money when he left the federal government to start Trusted Information Systems, which created computer fire walls to protect company files.
"Every time I went to see a venture capitalist, they made me bow down. So, when we started this company, we said we're not going to be venture capitalists. We're going to work with people. We want to help them through the process of starting a business."
Of course, working with people still involves dollar signs, a lot of them. But in Walker's estimation it also involves more elementary things: advice on hiring, how to do payroll, how - basically - to start a company. "We're doing early-stage investing," he says. "Of course, now everyone says they're doing early-stage investing, so we say we're doing early early-stage investing."
Every day Walker and four or five of his top staff people, including his son Matt, go over all the pitches. A few are well considered, some are half-baked and some are, in all honesty, incomprehensible. Every once in a while, though, perhaps 5 percent of the time, Walker and company find an idea that is fundable and they offer its creators money, usually less than $1 million, sometimes well under that. In exchange Walker takes a portion of the company's worth - usually between 15 and 20 percent - which he can cash in on if the company hits the big time.
Exactly what makes a company worth funding is a delicate mix of things. Profit projections are important and a sound business plan helps. But when you get right down to it, Walker says, it's really how the guy - and most of them are guys - comes across when he's asking for half a million dollars. About half of the business plans he gets end up leading to an interview with the SWA group, at which point the business plans and profit projections take a back seat.
"A lot of times at this stage the person is all you've got," Walker says. "And in the end I think it's more important than all the business plans. These are human endeavors. Humans make them go. Eventually you're going to run into trouble, and the question is how will you handle it."
If you think that makes the early early stage a lot like a crapshoot, or an educated guessing game, you have a point. But if it's all luck, then Walker is on an incredible run. In the past two years, Steve Walker and Associates has funded 30 startup companies and not one has gone belly-up. Several are now worth many, many millions.
Which goes to show that sometimes, when a proposal lurking in the pile strikes you right, the risk doesn't seem so risky after all.Lurking in the pile today is the Internet info and ad-tracking scheme by the 22-year-old Georgetown graduate, Michael Applebaum, and his business partner, Jeffrey Garvett, also 22. It is the only one that Steve Walker's committee liked after its day-long gong show, the only one the committee considers worthy of taking to Steve. The others all felt either unoriginal or unworkable.
SWA Vice President Alan Burk points to one group that promoted its "new idea" - an Internet magazine distributor - and, with a mock excitement, mimics the pitch: "We have a great idea and no one else is doing this." Except, maybe, a dozen other companies that have had their sites up and operating for two or three years. "Put clueless next to their name," says another vice president, Gina Dubbe, her voice dripping with sarcasm.
But Applebaum hits them differently. A fast-talking, stocky, business management/computer science graduate, he and his quieter Georgetown classmate, Garvett, impressed everyone with their presentation. They seemed energetic, realistic about how much things would cost and how long it would take to get up and running, plus the two already created a small software company in their college dorm.
Applebaum told them that his and Garvett's idea, NoCostWare, was to give away popular types of software programs, such as spreadsheets, tailored to work with the Internet to download information and advertisements specific to customers' needs.For instance, if a customer likes the rock group U2, NoCostWare would work with news and retail sites on the Web and a special demographic survey filled out by the customer to have advertisements and updates about the band pop up onscreen. Say Bono is protesting something or the band launches a world tour or releases a new album, the customer would be among the first to know and, NoCostWare thinks, probably among the first to buy.
"It's going to be an online friend," Applebaum told the pitch committee. "It'll be like getting a stock alert, but on anything you're interested in."
"They were the most energetic little management team," Dubbe says to nods around the table. "They even put Christmas cards in our boxes before they left."
"I'm not sure what they would do," Burk says, "but I'm willing to go out of my way to help these guys."
Applebaum and Garvett want SWA to give them $500,000 to get them through the first eight months. The idea's interesting, the money's not too far out of the ballpark. The committee decides to bring NoCostware back for another meeting.
"Other people have been asking for my business plan," Applebaum says one evening, with typical bravado, "but I've been holding off. I want Steve."
Applebaum is sitting on an overstuffed couch surrounded by oversize leather armchairs at Revolution Coffee Lounge, a Herndon bar-cafe-restaurant in the silicon hub of the Dulles corridor. It reeks of twentysomething chic - cinderblock walls and exposed heating duct work matched with bright colors and comfortable furniture.
Applebaum is surrounded by a group of youthful Internet players and players-to-be who self-mockingly - but also with a certain pride - call themselves the Brat Pack. On hand is Applebaum's friend and mentor Evan Burfield, all of 23 years and CEO of NetDecide. As is Greg Pass, 24, who in less than 24 hours will officially be rich. Tomorrow AOL will purchase ToFish, an Internet graphics search engine created by Pass and college buddy Frank Wood to find look-alike images on the Web. "We planned on being acquired. That was our exit strategy," says Pass, as he nurses a beer with a swallowed-the-canary grin on his face. "Things worked out pretty well."
These are not computer geeks who live to tinker with their keyboards and hard drives, and they're nothing like the pale-skinned pocket-protector moles of the computer industry's early work-out-of-the-garage days. They know the technology intimately and are keenly aware of where the cutting edge is, and where it might be moving to, but they are focused as much on something else - striking it big, striking it rich, becoming players in e-business. "It would be interesting to do a psychoanalysis on this room," one of the Brat Packers says. "The megalomania would be off the charts."
Applebaum is here because his friend Burfield invited him. Like nearly everyone else in the group tonight, Burfield got his start through funding from Steve Walker, and he has been encouraging Applebaum in his dealings with SWA.
For Applebaum and Garvett, Walker offers something invaluable - experience and willingness to help two guys get their act together. Their idea needs work, definition and focus. The truth is, NoCostWare is still a bit rough around the edges. Applebaum and Garvett, working on two computers in their shared Georgetown apartment, aren't completely sure how their idea will work in reality or how they'll market it. But they're focusing on a promising market segment: Personalizing information is one of the Web's big growth areas. The Internet's fast-moving pool of facts, figures and rumor can sometimes be daunting, even for the well-acquainted.
For a potential investor like Walker, NoCostware is interesting because it promises consumers something they might want and, more important, has a realistic revenue model. What dot-com retailer wouldn't pay for a list of specific likes and dislikes from customers and the ability to get new sales information to them quickly and directly?
From Steve Walker's point of view, NoCostWare is coming at him the right way: Its creators want expertise and they're not asking for too much money - hundreds of thousands instead of millions. A lot of fledgling entrepreneurs come in asking for $5 million even though they have no idea what they'd do with it. The more money Walker gives to a company, the larger the percentage of the enterprise he takes, which sounds like it would be good for him, but it isn't. "You can't take too much," he says. "You've got to leave enough for the founders to be motivated on their own."
And that motivation is critical. Walker, as a very early funder, is just the first stop in the venture capital game. Once a company gets money, its mission is to advance far enough to get more money. Companies usually go through several rounds of funding, each bigger than the last, and in the process can begin to look like nothing more than money sponges. But the hope is that after a company has been through enough rounds, it will be acquired by a larger company like AOL or go public - the real Holy Grail.
If NoCostWare can get Walker and his money and reputation for backing good ideas at the front of this process, it tells the rest of the world that the company has promise. "That's why a lot of people want us," Walker says. "If we're interested, other people are going to be interested."
Walker's success in handing out money has been so great that he burned through SWA's $5 million nest egg in only 10 months, though he had thought it would last two or three years. So he created a second fund, Walker II, which, with his reputed eye for good ideas, immediately attracted 42 investors and now has $45 million to invest, often to companies that are ready for a second - or third - round of funding.
So much money! So much power! Walker himself seems surprised by it. At Revolution Coffee Lounge, though, it just inspires awe. "If you're doing a story on him," says Elisa Harnquist, the 31-year-old founder of RetailMetro, which Walker funded, "you have to have a picture of him wearing halo and wings. "Michael Applebaum clearly agrees.
Steve Walker recalls a family trip to Montana when he was 7 years old. As the car rolled through the vast open landscapes, his attention was drawn to the power poles that ticked by, and something struck him. It was a crystallizing moment, he says. "I really don't know why, I just knew I wanted to be involved with that, with those poles, and that was engineering."
Once you get past all the talk of VCs and money, Walker is at heart an engineer, by disposition as much as training. For as long as he can remember, he has been interested in how things work. By 17, he had left the Midwest and was enrolled at Northeastern University in Boston as an electrical engineering major. One of the programs available was a summer internship in Washington at the National Security Agency. This was in the early 1960s, and the NSA was extremely cloak and dagger, but for Walker the job was all about technology. "They had all these top-of-the-line oscilloscopes, much more than we had at Northeastern. They were building supercomputers and testing integrated circuits [early computer chips]. I mean, these were things that didn't even exist yet. It was very exciting."
And so, after graduation, he ended up with the NSA. Where he stayed until 1973, when his desire to play with high-tech toys led him to a small research team at the Defense Department called DARPA, the Defense Advanced Research Projects Agency. DARPA was created after the Soviets got into space first by launching Sputnik and Washington scrambled to close the Cold War technology gap. The U.S. government essentially went out and tapped some of the nation's best minds and granted them a huge amount of freedom to invent and create. One of the new ideas they came up with was something called ARPANET, the precursor to the Internet.
Walker was placed in charge of ARPANET. He oversaw its expansion and, as part of a smaller group there, helped create many of its protocols, including the @ in e-mail addresses. When he left DARPA to work elsewhere in Defense, he fought to keep money flowing to ARPANET at a time when DoD was considering pulling out. "I'm not going to say that the Internet wouldn't have happened without that," he says. "But it would have been a lot different, because this move [to keep military money flowing] sent all the DoD brainpower and dollars into the development of the Internet."
Walker left the Pentagon in 1983. He jokes now that it was because he didn't like the long commute to work - it takes an hour and 20 minute to drive to the Pentagon from Walker's 19th-century farmhouse overlooking his Glenwood offices. But in truth, he says, the decision was more elemental. "At 38 I would talk to these guys at the Pentagon who were 48 and they'd always be saying, `Only seven more years and I can retire.' And I thought I never, never, never want that to be me."
Along with running SWA and sitting on various company boards, Walker is a member of two of Washington's best-known venture capital clubs: Capital Investors, an exclusive group that includes AOL's Steve Case, MicroStrategy's Michael Saylor, Virginia gubernatorial hopeful Mark Warner and other heavy hitters; and the bigger Dinner Club, whose members, many of them doctors and lawyers, have each paid $80,000 for the chance to fund some bright kid who understands this Internet thing and seems to have a good idea.
Walker himself is always on the lookout for the next new idea. Sometimes it's something surprisingly small and extremely low-tech. "It is a collapsible lacrosse goal," he says excitedly one evening after dinner, pointing to the unusual sight of goal frame and net stretched out in his company's lunchroom. "I know this guy who is a big lacrosse player and he wanted to be able to bring his own net with him to games. So we found a company in Canada that could make this hinge and we built this prototype." He starts disassembling the frame to show how it works. "The thing is, the hinge is the key. And now we can apply it to any goal - hockey goals, soccer goals. This could revolutionize the goal industry."
Most people, of course, never even think about the "goal industry." This is the difference between most people and Steve Walker. It's not only that he likes to understand how things work. It's that once he sees how it works, he wants to figure how that thing could change everything - and, of course, how he could make money on it.
In that way, of course, he's not so different from Mike Applebaum, who also thinks about changing the world. Though that's not the first thing on Applebaum's mind. First he'd like to get rich.
As with Walker, one of the defining moments of Applebaum's life occurred when he was only 7. That year, 1984, he was given an Apple IIc as a gift and started writing game programs in simple computer language. One of the first things he created was a trivia program that would ask questions like "Who is number 33 on the Celtics?" (Larry Bird), and soon he was hooked. "I didn't really know what I wanted to do in terms of a career, but I knew it was going to involve computers."
In high school he created a small Internet service provider with a big name, Geonet On-line Information Services, that provided a couple hundred people in his neighborhood in a leafy Boston suburb with e-mail service. "Even then, I was working when I got home from school. It was a hobby really, something I enjoyed. My parents used to punish me by taking away my modem," he says. "I still have my first modem with me. I held on to it." He laughs when he says this, like he's talking about some valuable ancient dinosaur fossil.
At Georgetown he met Garvett, a fellow computer science student, and together they launched their own software company, Illumix, which created "advanced Internet research applications for businesses and consumers." They did the programming in their dorm rooms, and if you called their "technical support" line, you got one or the other, who, between studying and planning the launch of their next effort, would answer your questions.
The two now share a two-bedroom apartment, where their lives more or less consist of working on NoCostWare. The place is in a nice building off M Street and is very neat, but it is notable for its lack of furnishings: two beds, two desks, two computers, a kitchen table with three chairs, a leather sofa and that's it. The walls are mostly bare except for three whiteboards, each of which is filled with scribbled words that are indecipherable except for "me" and "you" and a bunch of arrows.
"I roll out of bed by 10 a.m. and start programming, and a lot of times that's after staying up to 3 a.m. doing programming," Garvett says. They support themselves largely by money they make off Illumix and some family help.
It's Applebaum who is the public face of NoCostWare. Like many of the people who pitch Walker for money, he speaks in a self-assured business fast-talk that is a cross between the patter of an aluminum-siding salesman and an MBA. Hyperbole slips easily off his tongue; his world is full of people who are "geniuses" and ideas and companies that are going to be "huge."
But with Applebaum, there is something believable about the pitch. Maybe it's the way he wears his emotions on his sleeve, happy about his prospects one moment, scowling at doubters the next. Maybe it's his energy, as he bounces on his feet, wildly gesturing with his hands as he speaks. Or maybe it's his experience - this is his third company, after all.
"It's a lot of work, but it's so exciting," he says, sitting at a sushi restaurant, a few days after his SWA gong show appearance - and feeling pretty hopeful. "Sometimes when I pick up the phone and call Evan [Burfield of NetDecide], it's 4 in the morning, and he's at work and I'm at work and it's awesome. I mean, I have the best mentors."
Burfield offers all the sage advice a man of his advanced age - remember, he's 23 - can. But in Internet terms, this may not be inconsequential. Burfield's company is off and running, with real offices in Fairfax City and a handful of employees. "Evan is at least on base. I am just walking into the stadium. And that's why I'm so excited," Applebaum says.
"I have always known I wanted to run a business. I always knew this would happen eventually, but I'm very hungry to go further, you know. This is just the beginning. NoCostWare is going to be huge. It will happen. It will happen."
He may be right. Things are looking good. There have been four meetings now between the two sides over about 10 weeks. The first was just with Burk, who said he liked the idea, but needed to talk it over with the rest of the group. "I have never been so excited in my life," Applebaum recalls. "I mean, this was my fantasy." The second meeting was for the gong show appearance. Then he met with Burk again. Applebaum didn't even see Steve Walker until his fourth visit.
Thinking back on that encounter just a day after it happened, he goes into a sort of e-reverie. "It was great. I really enjoyed meeting Steve. It lasted about an hour and at the end he said, `Michael, that was a great presentation.' " Applebaum has a huge smile on his face, as if Walker's statement was about the largest compliment he has ever been paid. "It means a lot because he's an engineer, so he understands. I want this so badly. They are so good." Applebaum is feeling more confident that he's going to get some money.
In fact, Walker came away feeling that Applebaum and Garvett have possibilities. "Those guys are really exciting," Walker says. "You just know they're going to do something."
And, of course, this is one big way that the new Washington is a lot like the old Washington. Whether it's politics or killer apps, in the end the game is still all about selling yourself. It's just a different group of people who are making the decisions about who wins and who loses.
The fifth and final meeting between Applebaum and SWA lasts maybe 30 minutes at Glenwood as Alan Burk pages through Applebaum's well-considered budget for the first year of NoCostWare. Steve Walker isn't even at this meeting.
Typically, with this VC endeavor well in hand, Walker has already turned his attention elsewhere. He has seen the future and it's . . . helicopters. Last year he bought a Bell JetRanger II and he now is certain that helicopter travel is going to "change the region." So Walker is off helicoptering today, attending meetings at the VC-focused Morino Institute in Reston.
It doesn't matter; Walker gave Burk the go-ahead for NoCostWare after the last meeting. And so Burk is asking a few final loose-end questions.
"Do you plan on hiring these guys in here and giving them full benefits and all that good stuff?" he asks."I don't know. I wanted to bounce that off you," Applebaum deferentially replies.
"You want to give them stock options?"
"We want to give them something. We don't know exactly what."
"Mmm hmm, okay, we can talk about that."
The two agree that Applebaum will get some money - Burk doesn't say how much yet, but it's clear it'll be less than Applebaum and Garvett asked for - and a weekly free consulting session with SWA to better develop the NoCostWare idea. "This is even early stage for us," Burk says. "But we really like these guys. We always want to have a NoCostWare in our portfolio. We think they can do big things."
Five days later Applebaum gets an e-mail from Burk putting it all in writing. SWA will give NoCostWare $100,000 to pay for a three-month effort to develop a prototype. SWA will also provide the free consulting. NoCostWare, meanwhile, will get a new name: VitalContact. The Walker folks thought this sounded jazzier, and Applebaum and Garvett went along. Both sides agreed there will be more funding once the prototype is in place.
Applebaum at first is a little disappointed. The money is less than he was hoping for. But you don't play the VC game without a good sense of risks and rewards, and pretty soon Applebaum is seeing the bright side. There are so many people out there looking for the right idea, so many people looking for the big payoff. But Steve chose him and Garvett! That night he and Garvett go out for a celebratory dinner at Houston's in Georgetown. A few hours later they're back at their computers figuring out how to make VitalContact work. Tomorrow they'll start hiring people and look for some real offices. And Mike Applebaum can just smell it. Someday soon he's going to be rich.
Dante Chinni last wrote for the Magazine about the University of the District of Columbia.
