Start-ups storm the Net

1999: The year of the Web start-up.

Even as first-generation consumer Web businesses like Yahoo and America Online solidified their positions and amassed staggering Wall Street values, key employees deserted their posts to get in on the booming start-ups scene.

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AOL executives Mark Andreessen and Mike Homer stepped down from their positions to pursue start-up activities, as did Greg Maffei, Brad Silverberg and others at Microsoft.

The second generation of Web businesses, in fact, is fueled largely by the experience of veterans of firms like Netscape, Yahoo and Microsoft. In 1999 that second generation made its presence felt with new sites and services devoted to commerce, navigation and online versions of applications traditionally found on the computer desktop.

Those Web veterans have launched this second round of companies with unprecedented speed and cash flow. It's been a record-setting year for venture and angel investments made in Internet start-ups, at $10 billion and counting, according to PriceWaterhouseCoopers. In the third quarter alone, Internet companies received more than $5 billion in funding, accounting for more than half of all VC investments for the period.

"The second-generation Internet people have lived this before and understand the fine art of growing a company," said Quincy Smith, partner with the Barksdale Group, the venture capital firm founded by first-generation Netscape's former chief executive, Jim Barksdale. "The ability of these companies to grow has been revolutionized. You can go from two to 80 people in two quarters. What happened in the year of start-ups is that the world woke up and saw it was time to pay attention."

On the Web, an area that saw some of the most fervent activity was the business of providing productivity applications online. The trend sprang in large part from the enormous success of Hotmail, a site for Web-based free email accounts, which Microsoft acquired last year. Still, 1999 brought the launches of Web sites offering not only email but calendars, address books, file storage, spreadsheet programs and, increasingly, complete suites of applications.

The lure of Web-based applications is that users can access them from any computer with Internet access. For providers, the sites bring regular and frequent visits by users who often provide detailed demographic information valuable to advertisers.

Online calendars, for example, let advertisers target users who have penciled in a birthday or wedding anniversary with ads pertinent to those occasions.

Calendars in particular rode a wave of popularity this year. In April, AOL bought online calendar When.com. Microsoft followed suit the same month with its acquisition of Jump Networks.

This year Lycos launched its calendar with Amplitude.com, and Excite, now Excite@Home, launched a calendar service with Starfish.

The proliferation of online productivity applications has been viewed as a threat to the traditional desktop applications sold by Microsoft and others. Microsoft cited the Web applications boom in its antitrust defense to show that it faced stiff competition.

Outside the courtroom, Microsoft is preparing a response to that competition with plans to put some version of its Office suite of productivity applications on the Web. Meanwhile, one start-up, NuoMedia, is trying to beat Microsoft at its own game by offering Office-compatible applications on its Web site.

Another Web application trend in 1999 was the idea of publishing an application programming interface (API), programming shortcuts to let developers create their own Web-based programs to sit on a site that aggregates them. Sites pursuing this strategy include Desktop.com and Myinternetdesktop.com.

Names like Desktop.com indicate the degree to which the new Web sites are aiming to replace the PC desktop on the Web. A corollary from the year's start-ups was the attempt to replace the PC hard drive, offering free storage space through a Web site.

Sites offering storage on the Web include My Docs Online, FreeDrive, Freediskspace.com and Web application veteran Visto.

A related site, FusionOne, launched this year to offer users access to all their digital files from one hub on the Web.

In response to countless launches of online stores, one start-up entered the field with the goal of providing product reviews by consumers. Epinions, founded by veterans of Netscape, Yahoo and Microsoft, will go head-to-head with first-generation Web site Deja.com, which recently began collecting consumers' product reviews for a similar service. Both companies compete with a variety of e-commerce sites, from Amazon.com on down, that solicit users' reviews for general consumption.

Technology mainstays of the first-generation Web businesses, including chat, search and navigation, staged a start-up resurgence in 1999, refining those established technologies.

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Search technology provider Google.com launched this year offering search results ranked on the basis of how many sites link to sites. Backflip.com launched to offer users a way to keep track of and search through sites they've visited. Backflip joins Hotlinks.com in this arena, and both expect to be challenged by a start-up called Nectaris and its ULinkIt.com site. Based in Redwood City, Calif., Nectaris has research and development facilities in Israel and is backed by Hummer Winblad Venture Partners.

In the chat and instant messaging arena, standard-bearer AOL and second-rung players Yahoo and Microsoft face innovative challenges from companies that bring chat applications to the Web, letting visitors to a particular Web site chat with each other. Tel Aviv-based Hypernix, which makes Gooey, and New York-based NovaWiz, which makes Odigo, both launched this year.

But AOL appears to be hot in pursuit of the same idea; similar applications are under development for AOL's popular ICQ and AOL Instant Messenger services.

As Web start-ups launch by the dozens, the venture capital market fueling their growth is heating up, with increasing numbers of companies launching their own VC units. In addition, start-ups are beginning to command higher and higher valuations from venture firms, a development venture capitalists say could be a double-edged sword for start-ups.

"2000 will be the best and the worst year for start-ups," predicted Danny Rimer, partner with the Barksdale Group. "A lot of these companies in the private world, where you don't have any liquidity and can't trade the stock in for dollars, are getting valuations that only have been seen in the public space.

"When they go public, the level of expectations are going to be so high that it will be incredibly difficult to exceed them. And if you don't exceed both the official estimates and the rumor numbers, your stock is going to go down," he said.