A snapshot on an executive’s desk at DigitalWork.com captures a day in March when the 2-year-old company held the keys to Internet riches. The photo shows three young men in dark business suits, grinning broadly, on a narrow European street at the start of a 15-day financial tour to promote a public stock offering that valued their company at $360 million.
But 35 cities and 65 presentations later, on April 14, the day that DigitalWork had been scheduled to go public, Nasdaq’s record plunge did more than just scuttle the IPO. It set in motion a shakeout that continues to ripple through Internet companies and the economy as a whole.
Little has been the same since.
This is a look inside one of the hundreds of e-commerce start-ups that took off in the late 1990s, many of them fueled by easy money and high-tech hype. Hundreds are shutting down, but others, like DigitalWork, soldier on, though in a much less favorable climate.
All the rules for success have changed.
After spending millions in a race to build a winning Internet brand, DigitalWork now gets most of its customers through partnerships with bigger, better-known companies. After tripling its workforce in a contest to grow as fast as possible, DigitalWork has been forced to lay off a quarter of its employees.
The company’s once high-flying staff takes little comfort in the fact that many other dot-coms are feeling the same pain–not to mention investors of all stripes who have suffered as the tech-driven Nasdaq market cratered this year.
“Change is hard, period,” says DigitalWork co-founder and CEO Rob Schultz, a 33-year-old former consultant. “Managing a company through change is hard, especially when the Internet isn’t the center of the [investing] universe any more.”
With $14 million in new financing, DigitalWork has a better short-term future than many of its peers, but it still could fail to turn a bright idea into a moneymaking business.
DigitalWork’s customers are small businesses, those with fewer than 100 employees. The company provides access to services such as conducting credit checks, issuing press releases and sending out mass mailings.
Schultz and his co-founder, Craig Terrill, have retooled DigitalWork with the aim of turning a profit by the end of next year. Their goal hasn’t changed: to be the leader in selling Web-based services to the nation’s 10 million home-based businesses and small companies. But with financing harder to come by, their strategy is more conservative, their growth more deliberate.
They’re well aware that if the economy continues to slow, it will be harder to expand any business, let alone a company operating in an online industry that so far has generated little but red ink.
Still, they say they’re not discouraged.
“We’re a business,” says chief financial officer David Aniol, 41, another of the three in the snapshot. “We’re not some dot-com flame-out idea.”
There was a time when DigitalWork was one of the fastest-growing of Chicago’s burgeoning dot-coms–one of the first local start-ups to get substantial venture capital financing and a national leader in an emerging business-to-business niche.
Schultz and Terrill moved the company out of its cramped quarters in Rolling Meadows 14 months ago into a downtown high-rise at 230 W. Monroe St., then tripled the number of employees within six months to 145 people. There were plans, now scrapped, to move again after the IPO to offices three times as big.
The company’s swift expansion was fueled by a total $45 million raised last year from venture capitalists and partners such as Office Depot, Mail Boxes Etc. and PurchasePro.com. They were racing against better-financed competitors such as Seattle’s Onvia.com, a trading hub for small-business buyers and sellers, which was spending even more heavily to try to lay claim to a leading Internet brand.
DigitalWork splashed its name and jazzy red-and-black logo across full pages of national newspapers and magazines. Its signs greeted commuters rushing for trains at Chicago’s Northwestern station.
The company crackled with energy as its offices cranked up to operate at “Internet speed”–a term coined during a frenzied time when growth, rather than profits, was the measure for success.
Today, DigitalWork moves at the steady but still urgent pace of a young company trying to win customers, meet deadlines and hit financial targets.
Schultz, a reddish-haired man with an athletic build, never raises his voice. But he can be seen pacing back and forth when he gets excited, talking on the headset of his wireless phone in the glass-walled office he shares with Terrill.
Nobody was surprised, employees say, when Schultz, Terrill and Aniol called a meeting late on a Thursday afternoon in May to announce that the company and its investment bankers at Lehman Brothers were withdrawing DigitalWork’s IPO filing because of market conditions.
“There’s that elation over going public,” says Jeff Morrow, 36, who manages the firm’s software-applications design team. “When it doesn’t happen it takes things down a level. It would be hard to sustain euphoria.”
The canceled IPO affected every DigitalWork employee, because each of them owns stock. And the company’s officers got a double whammy when they were socked in April with income tax bills related to stock options they exercised as part of their pay packages.
To make matter worse, if DigitalWork were sold now, everyone’s shares would be worth less than they would have been in March, just like the battered shares of publicly traded Internet companies.
Onvia, for instance, which went public shortly before Wall Street’s tech stock collapse, is trading at $1.44, down from a March high of $78.
When DigitalWork cut 33 jobs in July as part of its plan to get profitable faster, it was the 11th round of layoffs that Morrow has been through in his career.
“It doesn’t get any easier, but you adjust a little bit faster afterwards,” he says.
No one can recall anyone quitting in the months prior to April, when the nation was so infatuated with dot-coms that a CBS Evening News camera crew visited DigitalWork’s offices to film a hot company on the eve of an IPO.
Now, in addition to the layoffs, there’s normal attrition, with people leaving for other jobs and other cities.
“The people who [remain] are really the ones who believe in the business and have the stomach for what joining a young company is all about,” Aniol says.
DigitalWork also scrapped its marketing campaign to rely more heavily on promoting its services via partners such as AT&T, Citibank and IBM, as well as portals and Internet service providers such as America Online and Lycos.
The small-business market from which the company draws its customers is large and fast-growing but very fragmented. None of the services DigitalWork provides are new or unique. The firm says its value lies in bringing services together in an easy-to-use format, whether on DigitalWork’s own site or on its partners’ sites.
One DigitalWork customer is Dan Rupp, founder and editor of Air Safety Online, a 2-year-old home-based business in Oak Forest that follows the aviation industry’s safety record.
Rupp has been using DigitalWork since April to issue press releases at a cost of $149 each. He discovered the service by clicking on a link featured on the Web site of PR Newswire, one of DigitalWork’s partners.
“It’s simply much easier online,” says Rupp, who uses the service about once a month. “It’s certainly faster than having to pick up the phone and trade calls and negotiate.”
Research firm Cahners In-Stat Group follows 19 companies it categorizes as online business centers. Analyst Kneko Burney ranks DigitalWork No. 2 after Office.com and Inc.com, which tied for first place in Cahners’ ranking.
Combined, online business centers will generate less than $200 million in 2000, according to Cahners, which estimates that sales will grow to more than $1 billion by 2003 and $1.5 billion in 2004.
Burney expects the field to narrow to a handful within the few years, but some question whether any will survive.
“There’s this whole belief that just because you’re doing something online, it’s better,” says Aaron Goldberg, an analyst at Ziff Davis Media, a publisher and Internet specialist. “The fact that I do it online, big whoop. Is it substantially better than the way I did things yesterday? “
The only argument that will persuade Wall Street is numbers, and those are hard to come by. DigitalWork doesn’t release financial results. But unlike some “dot-com” start-ups, the company actually has sales.
In the latest publicly available filing, released last May, DigitalWork’s sales for the first quarter were $1.7 million, a 53 percent increase compared with the previous quarter. The company’s roster of “registered users” has tripled since last year to about 300,000, but DigitalWork doesn’t reveal how many of them buy services, or how frequently.
“It still very early on in this game,” says Warren Packard, managing partner at California venture capital firm Draper Fisher Jurvetson, DigitalWork’s first institutional backer.
He offers a quick, back-of-the-envelope calculation to illustrate his conviction that DigitalWork will generate significant sales. If 100,000 users each bought a single service every month, sales would total $300 million, based on DigitalWork’s average price per service of $250. Better still, DigitalWork’s sales would generate profits.
Meanwhile, the young firm continues to add customers and build revenues. It’s also got cash in the bank, thanks to a $14.3 million equity financing in October.
Bill Powell, an accounts manager who sells ad space on DigitalWork’s site, keeps a metal tray above his desk on which he’s scrawled a big green dollar sign. Whenever he scores a big sale, Powell bangs on the tray and whoops and hollers.
Will there be a day when DigitalWork’s sales zoom into the tens of millions and its bottom line turns black? Schultz is convinced that day will come.
“We’re in a new business environment where some very important businesses will be created” based on the Internet, he says. “We are one of them.”
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Living with a tech meltdown
Companies press on with Internet ventures in a harsh new world
The collapse of technology stocks signals the end of a boom that, for five years, drove the U.S. economy to new levels of productivity and prosperity. The meltdown is destroying many of the start-up companies the boom spawned, while dragging down the broader stock market and, in turn, the economy itself.
But the Internet hasn’t gone away, and its influence continues to reverberate throughout the business world.
The information superhighway, as it once was called, has changed the way U.S. companies do business, and the effect, experts say, is permanent. While the world has become a hostile place for “dot-com” start-up companies, the Internet continues to alter assumptions about how all companies do business and strengthen their relationships with customers and suppliers.
“What the Internet has done is created an expectation that business will be done in a very timely and efficient fashion,” says Tierney Remick, a managing director at executive search firm Korn/Ferry International.
Whether it’s as a new way of promoting and selling products to consumers or as a conduit for a company to buy its own raw materials, or if it’s being used by a sprawling multinational corporation or a corner boutique, the Internet has taught everyone to expect faster, cheaper, more personalized goods and services.
Today, in this section and on the front page, the Tribune provides a look at how four Chicago-area businesses are faring in the heat of the churning technology sector. It finds these four different enterprises still laboring, with varying degrees of success, to carry out their ambitious, technology-driven business plans.
