Quarter 1, 2000

START ME UP

Akamai Technologies, the MIT-affiliated company that offers speedy Web content delivery, was founded in January 1999 with $8 million of venture financing. Akamai grew quickly and went public this past October. Two months later, it was worth more than $25 billion, surpassing the market value of State Street, Biogen, or Staples.

Encouraged by an exponential growth potential, a hot IPO market, and examples such as Akamai, venture capitalists are pouring money aggressively into Internet start-ups. New England attracted more than $4 billion in venture investments in 1999, $2.4 billion of which was bound for Internet-related businesses. For a firm with a good story, “attracting venture money wasn’t hard at all,” says Neal Workman, the founder and CEO of Gofish.com from Portland, Maine, a site that connects suppliers and buyers of frozen seafood around the world. As the first of its kind, Gofish.com didn’t have to chase venture money, but could ask venture to come to them. Workman rented Black Point Inn on Maine’s seashore and invited interested investors; six groups showed up, and two were ultimately chosen.

So how did Gofish.com choose? “Money is a commodity,” says Workman. “We were looking not just for money, but also for strategic partners.” They chose Bedrock Capital Partners because it had been involved with several successful Internet start-ups, including Ebay, Amazon, Lycos, and Yahoo. Diversified Business Communications, the other choice, owns Seafood Magazine and seafood trade shows and knew the industry.

“Venture capital is expensive. You pay by diluting equity and control of the company. It is worth the premium that you pay if your partners are able to reduce the risk involved in achieving a successful exit [such as an IPO],” says Jay Borden of Granite Systems, a Manchester, New Hampshire, start-up that specializes in network configuration management. Before taking money from St. Paul Venture Capital of Minnesota, Borden checked its references by talking to the CEOs of its other portfolio start-ups.

What start-ups want from their venture partners will depend upon the skill and experience of the start-up’s founders and the development stage of the firm. For Be Free, Inc., a pioneer in affiliate marketing on the Web based in Marlborough, Massachusetts, it was a strong senior management team. Tom Gerace started Be Free in 1996 at age 25 with his brother, Sam, using angel financing from friends and family. By 1998, Be Free had fifteen employees with excellent technical skills. “But we were lacking senior management, including a CEO, a CFO, and a marketing manager — the people you need to take your company public,” says Gerace. And speed was critical. Be Free wanted to go public before their competitors since, among Internet startups, the first mover has a better chance of attaining the largest market capitalization. Of the seven venture firms that offered funds, Be Free chose three, including Matrix Partners and Charles River Ventures, which signaled their interest by recruiting a CEO and a CFO even before the deal closed. The venture partners were able to find people fast because they had a connection to a pool of management talent from the start-ups they had funded before. For the second round of funding, Be Free looked for investors able to explain Be Free’s business to the market and broaden its appeal as an IPO. Among their second-round investors was Michael Dell, of Dell Computer, whose reputation was naturally helpful in attracting the investors for their IPO in November.

Despite the success of Be Free and other Internet start-ups, obtaining venture money still remains very competitive. “You have to think about both supply and demand,” says Professor Josh Lerner of Harvard Business School. More venture money is available now, but more entrepreneurs are seeking funds. “We invest in only one out of every two hundred companies we look at,” says Oliver Curme at Battery Ventures in Wellesley. While venture partners can provide help, it is the entrepreneur who must “make it happen.”

“Venture capitalists are very time-stressed people. They don’t like to spend too much time or have too much control in the firm. If they start taking control in day-to-day operation, that is a sign that the company is in serious trouble,” says Lerner. — Mizue Morita

FIRST DONATIONS

Colleges often start soliciting money from students even before they graduate. But the first donation a college or university receives from a student often doesn’t even cover the cost of its solicitation. According to Chuck Sizemore, of the consulting firm Martz and Lundy, “Schools go to great lengths to get undergraduates to make contributions, which are often under $100.” The idea is to establish a pattern of giving early on. “Later, the school can focus on moving the donation amount up,” he notes.

What about schools that have not developed a giving relationship with undergraduates and young alumni? Brandeis University in Waltham, Massachusetts, did not begin developing such relationships in a systematic way until fairly recently. To play catch-up, the university needed to elicit those important first gifts. The Development Office sent a letter to all alumni who had never given — and enclosed a dollar bill. “Please consider an investment in Brandeis,” it read. “Regard the dollar bill as seed money and perhaps you can add an additional $499 to the $1 we have sent you.”

Each appeal not only cost the school an extra dollar, it risked annoying the Brandeis alumni, known for their idealism and intellectual curiosity. But the Development Officers were calm even when some angry phone calls and letters came in. Their goal was to elicit a response, any response. Once they established a dialogue, they attempted to assess each person’s interest and communicate the school’s financial needs. In some cases, irate alumni became active donors. And that bodes well for Brandeis’s future. According to Hillel Korin, Associate Vice President of Brandeis Development and Alumni Relations, “Once an alum contributes, it’s likely he or she will continue to respond to future appeals.”— Marie Willard

IVY=MORE GREEN?

Once the college acceptance letters have been opened, the hard choices begin. Should a student attend a more prestigious school just because it may help to land a better-paying job in the future? Not necessarily. In a recent paper, Alan Krueger of Princeton University and Stacy Dale of the Mellon Foundation found that attending a slightly more selective school — as measured by average SAT scores — does not necessarily increase future income.

Krueger and Dale compared acceptances and rejections from comparable schools and found that slight differences in selectivity had no effect on future earnings. To give an example: two students apply to Wesleyan, Yale, and Harvard and both are accepted at the first two; one enrolls at Wesleyan and the other at Yale. Despite the fact that Yale has a fifty-point-higher average SAT score than Wesleyan, the study’s results indicate that the two students could expect virtually identical incomes later.

One might wonder whether this means that it doesn’t matter where a student goes to college; that a student who attends Podunk University will earn just as much as if he had gone to Berkeley. Krueger and Dale can’t tell us. Rather, their statistics indicate that students only seriously consider schools within a relatively narrow range of average SAT scores. Although outcomes may not be that different for students graduating from within a set of elite schools, there may be an economic benefit to attending an elite school over a less competitive one.

Of course, there is more to choosing a college than projections of future income. But students who are concerned with wealth should not obsess over small differences in prestige. Such small differences among schools may not be nearly as important as we think.— Peter Morrow

LABOR GAINS

Do states with lower unemployment rates have bigger increases in average annual pay?

“Tighter-than-average labor markets could be associated with rising annual pay via changes in either work hours or pay per hour,” says Boston Fed economist Katharine Bradbury. For example, New Hampshire’s 1997 unemployment rate was below the nation’s and its annual pay grew faster than the national average between 1997 and 1998. But this does not hold true for every state: Nebraska’s unemployment rate was even lower than New Hampshire’s but its annual pay growth was slower than the nation’s.

Source: U.S. Bureau of Labor Statistics.
Note: The Bureau of Labor Statistics computes average annual pay by dividing employer-reported total annual pay by the average monthly number of employees. Included in the annual payroll data are bonuses, the cash value of meals and lodging when supplied, tips and other gratuities, and, in some states, employer contributions to certain deferred compensation plans such as 401(k) plans, and stock options.