Internet Catalyst

Star Tribune
January 10, 2000
by Roger Yu; Staff Writer
Section: Business, Page: 1D

Adam Beberg has big, hairy plans to use an armada of personal computers to do scientific and commercial research, and even to search for E.T.

Today, however, he is off to an inauspicious start.

The 26-year old Minneapolis resident and self-admitted programmer/hacker is running 20 minutes late for an afternoon appointment with Gary Smaby, one of Minnesota's most-noted Internet start-up investors. Beberg is just one of three men with big ideas that Smaby will entertain and spar with over the course of the day, as he decides whether he will help finance their nascent business venture.

Smaby is an example of the latest generation of investors, a category he calls "venture catalyst." Like angel investors, venture catalysts invest early and in modest sums, typically less than $1 million. But like venture capitalists, they are heavily involved in the early stage of a company's development, to fine-tune and guide it through the initial bumps, including marketing, board formation and recruiting.

"If you have a business plan, you're actually further along than we'd like," Smaby said. "Writing the check is the easiest part. We come in at an earlier stage, and the hardest part is that companies fall through. We need a higher rate of return because we take higher risks."

Beberg's basic idea - to create a supercomputer that can handle massive research projects by using the Internet to link legions of PCs while they are not being used by their owners - have won him underground fame in hacker circles.

He comes to Smaby via Forest Baskett, a Silicon Valley venture capitalist who was impressed with the young man's proposal and referred it to Smaby, a friend. So far, Smaby and Beberg have only communicated by e-mail. "Anyone who can go toe to toe with Forest, I want to meet," Smaby said with a chortle, adding: "If he shows up." Smiling sheepishly, Beberg finally walks in the door, muttering something about downtown parking difficulties.

If Bill Gates had a little brother, he might look like Beberg, a bespectacled, lanky and self-admitted "geek" who still lives with his parents and once made a living as a day trader.

The name of his main Internet site - http://cosm.mithral.com - vaguely derives from the fantasy novel "Lord of the Rings."

It's also clear that Beberg, looking uncomfortable in a shirt and tie, isn't accustomed to the old economy's sartorial protocols. Not to worry: Smaby doesn't usually don ties either when greeting entrepreneurs. Today he's in a black sweater.

Smaby's involvement with a company typically lasts about 27 months, followed by what he calls "an exit strategy." Currently he's working with Iculture.net (online content for the "cultural creatives"), Fanball.com (fantasy football), Yatra Corp. (travel management), Mega Mags Inc. (online magazine store), NorthStar Photonics Inc. (optical and imaging components) and Lumina Marketing. He also was an early investor in Techies.com, a career-development site for technology professionals.

Attracted by the challenge

Many Internet investors, including Smaby, have large personal fortunes, and are drawn to the business not so much for the money but for subtler rewards: to match wits with dreamers such as Beberg and help them grow into an important part of the economy.

"Money has never been a priority in what I do, but it's a nice byproduct of what I do," he said. "I really like the challenge of starting with just an idea and have it evolve into a company that can be an economic engine. I find it exhilarating to be involved in a high-energy company and high-energy people. I'm less attracted when day-to-day management challenges take over. In the beginning, the focus is on team building and vision."

Smaby has his own team - he calls them "a loose confederation of like-minded investors" - that includes several locally significant figures: John Rollwagen, former chairman of Computer Network Technology Inc.; Vance Opperman, owner of Key Investments; Erwin Kelen of Kelen Ventures; and I.P. (Kip) Knelman, former head of money-management firm Investment Advisers Inc.

Less than two years ago Smaby formed a subsidiary, Square One Ventures, to pursue his interest in Internet start-ups. Because of his reputation he has been sought out by dot-com dreamers, largely through word of mouth and referrals.

Smaby typically meets with about 10 percent of the people who submit concepts, and even fewer get money: Of the 250 or so concepts he reviewed last year, only six got a check from him. A typical first-round investment ranges between $50,000 to $250,000.

"We'll meet at least half a dozen times before a dollar is exchanged," he said. "Initially, you spend a lot of time looking at their background to see if they have the passion, to see if they can ride the peaks and valleys."

Of course, it also helps an entrepreneur to have some connections. "The [Beberg] meeting wouldn't have all likely happened without that Post-it note [from Baskett]," Smaby said.

And it was Smaby's cousin, Paul Smaby, who passed along the business concept of Steve Banks, founder of Division21.com, a St. Paul start-up being developed at Banks Brothers Construction.

Similarly, Smaby's last meeting that day - with Don Leeper, founder of St. Paul-based Bookmobile.com - was a referral from Mike O'Connor, a co-founder of Internet service provider GoFast.net.

Construction management

Smaby began the day with Division21, a business-to-business e-commerce site that will distribute software to let construction managers chart progress and share the latest information and photos of buildings.

Unlike Beberg, who has yet to write a decent business plan, the Division21 plan already has been farmed out to professionals and the company has signed on "beta" clients, including Best Buy and Golf Galaxy.

Banks has an eclectic past. The Berkeley, Calif. native once rode a motorbike through Africa and India, taught English in Japan and pursued a career in writing. Banks, 43, still has two antique motorcycles in his office, even though the cramped space hardly has room for 4 cubicles.

"I was dangerously good at writing, but not good enough to make a living off it," Banks told Smaby.

The repartee perks Smaby, who majored in East Asian studies and arts and actually prefers entrepreneurs who have a liberal arts background. "They're more malleable to changes in the business environment,"` he said. Banks' motorbike trip, he says, "tells me that he's a risk taker."

During initial meetings, Smaby, whose understated pleasantness belies his analysts' propensity for skepticism, typically operates in his gentle Socratic method, encouraging entrepreneurs to do the talking. Although Smaby asks elementary questions about revenue, competition and management, his primary purpose is to get the entrepreneur to describe the vision.

Division21, if successful, would capture a piece of the $177 billion commercial construction industry in the United States, Banks said. The company's plans call for it to develop an Internet site that would help construction managers communicate better with subcontractors. It will let project managers upload the sites' pictures and track progress. Also in the pipeline are voice recognition, fax and e-mail applications. Initially it would make money through software licensing and advertising; later it would offer procurement and data warehousing.

Smaby wonders if the construction business-to-business arena isn't already crowded. Another obstacle, Smaby tells Banks, is enticing construction managers to use the application.

"A lot of companies have gone bankrupt trying to make doctors use computers," he said.

Banks is quick to defend the industry. "Construction managers are just as smart as doctors," he said. "It's a misunderstood group."

So how does all of this turn into revenue? Division21, like many dot-com start-ups, is still a bit fuzzy on that front. "The problem is translating construction to collaboration," said Ivan Arenson, Division21's marketing coordinator. "We're still establishing the revenue model."

Smaby usually keeps introductory meetings, like the one with Division21, to an hour or so, though he will prolong them if they are going well and the entrepreneurs capture his interest. Banks manages to keep Smaby for more than two hours. As they prepare to end, Smaby pops a set of standard wrap-up questions, meant to gauge entrepreneurs' flexibility: Are you willing to relocate? Are you willing to stand aside and work in a large company?

"Ego is not my problem," Banks responds earnestly. "I'll do what it takes."

According to custom, the men refrain from discussing what really brought them together: money.

The meeting was a success. Smaby called Banks the following day with more questions. "Gary's questions were probing and original," Banks said. "He wasn't just going through the motions, but taking in the information."

Digital book printing

As the late afternoon wears on, Smaby is visited by Bookmobile.com's founder, Don Leeper. It is their second meeting. Here, the men will spend less time with introductions and more time narrowing differences.

Leeper founded Bookmobile.com last year with a plan to eliminate book shipping from printer to retailer through a digital printing process. Having books on database would ensure overnight order fulfillment, something of particular importance to online retailers.

He would like to build on his expertise in university and trade books to capture 30 percent of the digital printing market by 2004. By then, he predicts, 10 percent of all books will be printed digitally, with sales of $1.6 billion to $3 billion.

Of the day's three pitches, Smaby considers Bookmobile to be at "a riper stage" for investment. but after their last meeting three months ago, Smaby wanted a clearer idea of what BookMobile.com will be doing differently from Leeper's Stanton Publication Services, a book-production company that the entrepreneur also owns.

Leeper has returned with more data and a business plan that's 61 pages shorter. He's also scaled back plans for his first printing plant.

Smaby - joined by John Lindstrom, who screens investment opportunities for Carl Pohlad and others - fills the meeting with specific questions, covering cash flow, entry of larger publishers, contracts, acquisition chances and the shrinking role of distributors.

For Leeper, who once considered selling his business, the experience of chasing seed money has been a renewal of sorts.

"It's real fun," he said. "Everybody tells you it's going to take longer than you think and it does. You can be an expert in an area, but know nothing about how the capital market operates. Five years ago, the valuation [of my business] was problematic because there was no huge upside. But if you're nimble and see the opportunity in the Internet, I think it's a great time."

Far-reaching vision

While Banks and Leeper want to use the Web to transform existing businesses, Adam Beberg's vision is much more far reaching. And, until now, his professional experience has been limited to running a Web development firm.

But Beberg is passionate about programming, something he took up at age 8. Recently, he has been trying to develop software that will assemble huge amounts of computing power to handle huge data-crunching projects.

One such project, SETI@Home, taps into such a network to look for signs of extraterrestrial life using a large radioscope in Puerto Rico.

But Beberg's ambition's are decidedly more practical. He would sell use of his software for projects that have more tangible benefits than SETI. As Beberg hints at possible uses - the Human Genome Project, protein folding - the old business maxim - high risk, high reward - rings true.

"It's almost like his science project," Smaby said after their meeting.

But it was clear that Smaby, if not ready to shell out cash, was at least impressed by Beberg's moxie.

"I'm intrigued with the individual enough to stay in orbit. It'll have a longer gestation period than most," Smaby said.

That's good enough for Beberg, who has been rejected by several other venture capitalists. "I love the technology and ideas," he said. "Geeks generally don't like [the business] end. But you have to do it. First thing I would do is fire myself as a CEO."


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