WhataboutU: Would You Fund This Firm?
By Katrina Brooker

(FORTUNE Magazine) – Last August, in the grand tradition of the Internet, two college buddies, Mat Thomas and Samir Seth, came up with an idea for a dot-com company, and in two months they raised $700,000. It was just an idea, mind you--no site, no business plan, nothing. Still, everyone wanted a piece of it. At a meeting in Chicago, Thomas recalls, "these guys just whipped out their checkbooks right there--we still didn't even have a business plan." Another investor group offered $5 million in return for a 25% stake in their, well, idea.

Now, nine months later, that idea is about to become a real company. Seth and Thomas have a business plan, a Website, 4,000 square feet of office space, seven employees, and a state-of-the-art voice-mail system. In three months they will launch WhataboutU.com, a site for college students. But before they do, Seth and Thomas need to raise more money--$15 million to be exact. The trouble is, this time around, raising it isn't going to be easy.

A year ago, for thousands of newly minted entrepreneurs like Seth and Thomas, raising money was a bit like turning on the faucet. "People thought every idea with a dot-com would be worth a billion dollars," says Bob Greene, a partner at Flatiron Partners, a venture capital firm. As a result, says Babette Henagan of Linx Partners, "anything you threw up on the wall got funded." Last year private investors--venture capitalists, angels, rich grandmothers--put $36 billion into startups. In the fourth quarter alone, they plowed in $14 billion--the same amount invested in all of 1998.

But over three cruel April weeks, everything changed. Nasdaq's 1,500-point plunge has been a nasty wake-up call for investors--both public and private. Once-highflying stocks have been decimated. After trading at $86 in October, eToys is now at $7. Amazon dropped 30% in a month. Dozens of IPOs have been delayed or canceled.

"The euphoria is over," says Henagan. We're entering a new paradigm: Suddenly paying any price to get in on a dot-com doesn't seem like a great idea. "When you take a big slap on the tush like we have... you become a little less optimistic," concedes Greene, who owns stakes in nine companies that delayed their IPOs last month. For the thousands of new dot-coms, this is grim news.

"A year ago all people wanted to do was talk about our idea," sighs Seth, stepping out of WhataboutU.com's New York City headquarters, a converted warehouse in Manhattan's newly gentrified garment district. "Now they want to talk about our revenue streams. They want to know, 'When are you going to break even?' " It's a late-April day--the Nasdaq has sunk another 3%--and Seth, 27, and Thomas, 28, are walking across town to meet with a venture capitalist. Bright, young, and ambitious, the pair have quickly picked up on the market's new mood and have refined their pitch to match it. "You have to present yourself as a real business with real revenues," says Seth. "This whole [idea of losing] $30 million to make $1 million is out." Also out of favor: anything to do with e-commerce and banner ads. "You go in and start talking about [that] and they'll show you the door," says Thomas.

Twenty minutes later they are in a large, windowless room on the east side of town, sitting across the table from a stern-looking venture capitalist. Sure enough, the VC is grilling Seth and Thomas about money, not ideas. Fortunately they do have revenue streams. For a fee, WhataboutU.com will offer college students services such as lecture notes, essay reviews, and house hunting. Still, the VC is not biting. "I'm concerned about this essay-review thing. How many people are you going to need? How much do you have to pay them?" he asks. These days what startups spend is a hot topic in venture capital circles. Too many VCs have been burned by companies that, after spending millions on advertising and expansion, have nothing to show for it. "If I see a plan that says, 'We're going to spend $250 million and not going to make squat,' I pass," says the investor with whom Seth and Thomas are meeting.

When asked about their marketing plans, instead of talking about TV or radio ads, Seth and Thomas talk about using cheap on-campus interns to promote the site by word of mouth.

So will they get their money? Eventually. Venture capitalists still have plenty of cash and are looking to invest it. "It's not whether you're going to invest; it's 'What price will you pay?' " says Greene at Flatiron. Indeed, the sky-high market valuations have crashed to earth. "A year ago [WhataboutU.com] would've had a shot at a much higher valuation--$50 million to $60 million," the VC tells me after the meeting. Today the company will probably get a third of that.

Still, neither Seth nor Thomas is discouraged. Later that day, over cigarettes and sandwiches, the pair reflect on the new reality. "I think it's healthy," insists Seth. "Now companies really have to prove themselves." As for getting rich: "You can't be doing this now because you want to get rich quick," Thomas says. "You've got to be in this for the long haul." A new paradigm for dot-coms indeed.

--Katrina Brooker