(FORTUNE Magazine) – Maybe it was a stroke of luck that Bill Daugherty and Jonas Steinman didn't know much about the Internet when they came up with an idea for a portal to compete with Yahoo. Otherwise they might have quit before they got started.

For Daugherty and Steinman, buddies since their days together at Harvard Business School, inspiration struck over cheeseburgers at lunch one day in midtown Manhattan. They were talking about the Internet, like everyone else--this was January 1999--when Steinman, a health-care investor with Chase Capital Partners, remarked that it was strange that all the portals and search engines looked alike, especially since the industry was still so new. As they chatted idly about how you would build a different kind of portal, Daugherty, a senior vice president at the NBA, said the most successful promotion that he'd ever seen was McDonald's Monopoly sweepstakes, in which the company gives away up to $1 million. That was the aha! moment. Why, they wondered, couldn't an Internet portal give away money to attract an audience and set itself apart? Daugherty and Steinman weren't looking to start a business--they were both happily employed, with four children between them and a fifth on the way--but they couldn't let go of the idea.

"We became obsessed," Daugherty, 37, says. "And we realized that we were potentially qualified to pull this together."

"Although I'm not quite sure how we arrived at that conclusion," adds Steinman, 35. "We can't program our VCRs. But we were going to compete against Yahoo."

So begins the unlikely story of iWon.com, the first portal to offer Internet users what Lycos, AT&T's Excite, Disney's Go, CMGI's AltaVista, and NBC's Snap have not: a true alternative to Yahoo. Less than a year after its launch, iWon's audience has grown so big so fast that by some measures it has become the No. 2 portal, after Yahoo. That's pretty impressive for a couple of newbies who came late to a crowded field and have spent far less than most of their rivals.

The idea behind iWon is so simple that it's amazing no one else thought of it. What Daugherty and Steinman have done is combine two proven concepts--an Internet portal and a sweepstakes. Portals generate more advertising than other Websites; Yahoo will bring in more than $1 billion this year, analysts estimate. Sweepstakes have been deployed to great success by such brands as Coca-Cola, Visa, and American Express. "If somebody stands on a roof and throws off dollar bills," Steinman says, "people are going to show up."

iWon gives away about $27 million in prize money a year--one $10,000 prize a day, 30 $1,000 prizes a week, a $1 million prize each month, and $10 million on tax day. That's enough to get plenty of attention but not too much to explode the business model. All told, the sweepstakes cost the company less than you might think: about $17 million a year. That's because iWon pays out its big winners over 25 years, so a $1 million winner gets a check for $40,000, then must wait a year for another. This is all made clear on the Website, albeit not in big, bold letters.

iWon has used the sweepstakes to build one of the Web's largest and most accurate databases, since practically all its users register for prizes. They also tend to return to the site frequently because each time they click a page there, they get more chances to win.

Advertisers are enthusiastic. "I love the portal," says Brayton Johnson, CEO of Qfactor, an interactive-media planning and placement agency in Bethesda, Md. iWon got his attention when his staff began using it, and he has since bought space for several clients, with good results. "Every study I see about its popularity, the number of page views, the time that people spend--it's phenomenal," he says. Major sponsors include Sprint (which doubles the winnings of users who are Sprint customers), Capital One, Lexus, and Kraft.

To turn their brainchild into a business, Daugherty and Steinman networked the old-fashioned way. Daugherty knew Neil Austrian, a former president of the NFL, because he'd worked for the league's European arm; Austrian became chairman of iWon, invested seed money, and got Daugherty and Steinman in to see Mel Karmazin, then CEO of CBS. In April 1999, CBS agreed to invest $30 million in cash and $70 million in advertising time in iWon. Chase Capital, Steinman's former employer, was another early investor. Subsequent funding has come from Bain Capital, Goldman Sachs, Wit Capital, and Soros Capital. Altogether iWon has raised about $200 million; CBS remains its biggest shareholder, with a 37% stake.

Once they had CBS's backing, Daugherty and Steinman raced to get iWon to market in near-total secrecy--not even revealing the name to potential partners or employees. Calling the site Project Bulldog because Daugherty is a University of Georgia graduate and Steinman went to Georgetown, the two partners signed an agreement with each other promising not to disclose their "secret sauce"; that way they could honestly tell content and technology partners that they were contractually bound to keep their idea a secret. By outsourcing everything from site design (Sapient) to Web searching (Inktomi) to advertising sales (DoubleClick), they were able to get iWon up and running by Oct. 5, 1999, with just five full-time employees. From cheeseburgers to launch, less than nine months had gone by.

Initially, the site was barely adequate. "I can tell you with full confidence that we launched the worst portal on the Internet," Steinman says. It's much improved since, particularly iWon's search function, which combines Inktomi's search engine, LookSmart's directory of Websites, news stories collected by Moreover.com, and information from a company called FactCity. iWon's content offerings aren't nearly as wide or as deep as Yahoo's, but they seem to satisfy most users. In a recent survey of 27,000 Internet portal users by the NPD Group, a research firm, iWon ranked either first or second in 20 of the 21 attributes used to determine user satisfaction.

Clearly, though, the sweepstakes is what's driving iWon's growth. The company has blitzed CBS's TV and radio airwaves with commercials hyping the giveaways. (They're not subtle. You may have seen the one with the guy sitting next to piles of money.) Every time iWon awards a prize--that is, every day--the company seeks and often gets local publicity. (MATLACHA MAN: IWON! IWON! read a headline in the Fort Myers, Fla., News-Press). iWon also runs joint giveaways with such companies as Anheuser-Busch, BMG Music, and Buick, which supply extra prizes and get to market to iWon's audience.

The other big benefit of the sweepstakes is that users supply accurate information when they register; no one wants to risk missing a payout. That enables iWon to automatically personalize content, giving users their horoscopes, local weather, TV and movie listings, and in some cities, local ads. More important, iWon gets to know its users better than most other Websites, collecting information on how they heard about the site, which outbound e-mails bring users back, and what pages they visit within the site. Needless to say, these are all valuable data.

"We don't sell, lease, share, or give any of the data you give to us to any other partner," says Daugherty, "but we can monetize that data in a way that's very user-friendly. And we can slice and dice the data in various ways. If you, as a user, are spending more time on the auto site than usual, you become a very good candidate for a General Motors ad." True one-to-one marketing is still theoretical, mind you. iWon has just hired its own sales force and hasn't begun offering narrowly targeted ads yet.

Of course, there's a downside to using a sweepstakes to build a business: Skeptics say it cheapens the value of the audience. "Where's the true value to the consumer? Is it in the site, or is it in the giveaway?" asks Michele Slack, a senior analyst with Jupiter Research. "Advertisers are going to ask, 'Do I want my brand to be associated with this?' They're never going to attract a Rolex."

The iWon guys counter that their audience is upscale, with an average household income of $75,000 a year, and say that their users don't come to the site just to play. It takes only about two minutes on the site to collect the maximum of 100 daily sweepstakes entries, Daugherty notes, but the average iWon user spends about 11 minutes per visit, more than at other portals. iWon users also visit the site more often than other portal users, according to Media Metrix.

This takes us right into the thicket of Internet audience measurement, an imperfect art at best. iWon ranks in the top ten to 25 Internet sites in terms of reach, which measures the number of unique users to each site; it's behind Yahoo and either ahead of or behind the other big portals by that standard, depending on who's counting and when. But because its users visit more often and stay longer at the site, iWon generates more page views than all the portals except Yahoo. Most advertisers want both reach and frequency, but in the end "what drives revenues is page views," asserts Steinman.

Today, Daugherty and Steinman operate iWon out of a renovated warehouse sandwiched between the train tracks and the Hudson River in Irvington, N.Y., a New York suburb. They chose that site because it's exactly 22 miles from each of their homes, and because it's far from Silicon Valley (or Alley). "We like the fact that there are no distractions," says Steinman. "This is the true Internet bubble." Roughly 200 people work in the Irvington office, and iWon has just opened smaller ad-sales offices in four other cities. Most of the senior people are experienced executives hired from places like ESPN and Goldman Sachs. And everyone gets stock.

As a private company, iWon doesn't disclose its financials or its valuation; the founders say it's not profitable yet. But Daugherty and Steinman, CBS, and the other early investors have reason to expect substantial gains if the company goes public. iWon drafted papers for an IPO early last year but opted not to file after Internet stocks tanked in March. "People tell us we could go public now, but we don't want to force it," Daugherty says.

What's iWon worth? Well, Spain's Terra Networks acquired Lycos in May in a stock swap then valued at $12.5 billion. Disney paid $1.9 billion in stock and other assets for the portal Infoseek, the predecessor to Go. Excite was valued at $7.5 billion when it merged with @Home, and CMGI spent $2.3 billion for a majority stake in also-ran AltaVista. Another second-tier portal called GoToNet, which includes games and the Silicon Investor finance site, was just acquired by InfoSpace for about $4 billion. All those were stock deals, and some predated the March Internet meltdown. But consider what Daugherty and Steinman have built with just $200 million of other people's money, and you see why they're smiling these days. They know what it feels like to win a sweepstakes.

REPORTER ASSOCIATE Irene Gashurov

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