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Easy Money: Garage Companies Sell Out

Take Kaplan.
Go to B-School.
Start Fortune 500 Company in Garage.

-- Ad for Kaplan Educational Centers, test preparation services.


The garage has taken on mythic qualities, rivaling the kitchen and the bedroom for subtext. It's the inventor's lab of the '80s and '90s, occupied by geniuses, and working there has become shorthand for unadorned inspiration.

The current version of the humble-beginnings script has its roots in the Bill Gateses and the Jerry Yangs. Michael Dell is the gold standard in this regard, having started Dell in 1979 in a dorm room and now enjoying a healthy company as well as a sterling reputation (unlike Big Brother incarnate Gates or Apple's (AAPL) Steve Jobs, who imploded several years back). But with each passing year, new entrepreneurs seem to acquire another coat of polish while dulling some of the raw pioneering spirit.

What used to be the bootstraps of a generation -- the long-haired, bespectacled genius cranking out source code next to the Weed Whacker -- has become as trite as the log cabin. It's no longer a visionary start, it's step one in the business plan.



Illustration by Paula Wood

"It's clearly gone from a relatively narrow community of geeks, inventors and engineers to a much more broad community of entrepreneurs and MBAs," says Bill Reichert, president of garage.com, a Web site designed to match investors to those in home-based businesses.



Of course, that doesn't necessarily prevent anybody from maxing out the credit cards and borrowing from Aunt Tilly in indie-film style. Across the U.S., teenagers still set up ISPs and Web-based businesses. But times, as they say, have changed.

Forget the long, hard struggle toiling next to the circular saw and lug wrenches, as did companies such as Excite. The six founders of that business, launched in 1992, spent 18 months in the garage, eating away at a 50-pound bag of rice. WebOrder, a company begun in 1995, develops e-commerce architecture to help companies handle online sales. It decided office space was a good idea after 18 months as well, after having to fake it once for investors flying in from Singapore. But take a look at 25-year-old Chris Klaus's antihacking security company Internet Security Systems, whose parent ISS Group (ISSX) is now acquiring Netrex Secure Solutions for stock worth $57 million. Founded in 1994, ISS moved out of Klaus's grandma's guest room after a scant six months.

Joe Kraus
The excitement started at home.
Photo: Excite@Home

One distinction of newer start-ups is that their ambitions seem more focused, less Machiavellian. Early companies wanted to take over the world, but were clueless about how to do it. Now, newbies salivate over attracting venture capital and finding an angel investor. (An angel invests a small amount of money -- less than $1 million -- and is frequently the first to help a business get off the ground.)

When Katie Peterson started WebOrder, her stated goal was "always world domination, even when I was in a corner in the bedroom." But if you're starting a company now, she says, the best bet is to "raise $50 million or forget it."

Founder Joe Kraus of Excite (now Excite@Home (ATHM) says his company's only real goal when it was started in 1992 was to "buy AOL (AOL) by 2000. We didn't have any sense of what Excite could become. We certainly hoped we'd get out of the garage."

Neophyte entrepreneurs these days have an entire system in place to facilitate commercial success. Just take a look at how freaking organized garage.com's site is (not to mention that there is even such a site, codifying the rite). garage.com schedules conferences -- they call 'em boot camps -- on starting a business and attracting financing. (Disclosure: TheStreet.com's Adam Lashinsky will speak at a garage.com conference in Boston next month.)

Separate sections on the site, which was launched in October 1998, offer advice on hiring general counsel, attracting venture capital, and accounting and consulting. They answer questions such as: "Will a venture capitalist fund an entity with widely divergent markets even if the technology is virtually identical?" and "How can I structure an exit strategy that is fair for both me and my investors?"

"Our initial expectations in terms of the number of business plans we'd get turned out to be off by a factor of 10," Reichert says. "We were overwhelmed by the number of entrepreneurs that came to us."



Ground Zero
Michael Dell returns to the old 'hood earlier this year. No word on whether the two current residents of his old dorm room have landed VC money yet.
Photo: AP

Compare that with Excite's Kraus, whose approach was less Kleiner Perkins Caufield & Byers than Beavis & Butthead. "We were supposed to go to VCs, so we did, but in terms of having a big strategy, we didn't really have a business model," he says. "That was the first question out of everybody's mouth, and the answer was, 'We don't know, we figured you could help us out with that one.' That would usually shut down most conversations."

Not anymore. Venture capital is "much more a financial services industry now," Reichert says, explaining that several years ago, the only financing people in these companies were angel investors, who sought to not only put money in but also to get their hands muddy helping the techies buff their business savvy.

These days, companies may be more organized (like having a chief financial officer or something), and they've definitely got more money. But they're still trying to keep that garage feel, even in the office. Start-up Tellme Networks, which is developing Internet-based telephone service, has its high-tech office in a former garage, according to The Wall Street Journal. "The space is one of the biggest ways you influence a culture," President and Chief Executive Mike McCue told the paper. Excite maintains that, um, edginess -- at least cosmetically -- with conference rooms fronted by pull-down garage doors.

But while many an exec, after quaffing a few microbrews at a party, would probably wistfully recall the early days, ultimately the motivation for getting out of the bedroom or garage is powerful.

"The fun parts are more in retrospect than in actuality," Kraus says. "It was dirty, and uh, awful in terms of what we had in there."

Not only does the idea of growing and earning serve as a carrot but staffing up is also a factor. It's hard to hire people, Klaus of ISS says, and "ask them to sit on the edge of the bed and type."

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