The New Economy Meets the Old South - Industry Trend or Event

The Internet may be revolutionizing the economy, but in Atlanta, the conservative business culture is teaching Net firms a thing or two about how to make a buck.

Atlanta's modernist skyscrapers running from downtown to midtown, and the corporate giants they house, have come to define the city's identity. Atlanta, as its promoters often remind us, means business. And it's the likes of Coca-Cola, Cox Communications and BellSouth that set the tone for the city's emerging dot-coms, many of which labor literally in the shadows of the city's corporate towers.

One such Net firm, eTour, recently left a converted warehouse for the Marquis I Tower on Peachtree Center Avenue. The dot-com's new 12th-floor spread -- an '80s version of futuristic cool with curvy furniture -- is less hip but a sign of the company's hard-won success nonetheless.

Very hard-won, considering eTour is one of Atlanta's hottest Net firms. A Web service that leads registered users to sites that match their interests, eTour grew from a business plan that the now 30-year-old CEO Roger Barnette put together with classmates while attending business school in 1998. He immediately sought funding from local investors, but had to settle for $400,000 raised from friends, family, fellow MBA candidates and a San Francisco angel investor. It was much less money than Barnette had in mind, but enough to put the site together, hire a few employees and justify another round of visits with local investors.

To no avail. The locals not only didn't believe that eTour -- which makes money by, among other things, selling targeted advertising -- was a viable business, they did not get the concept. "Blank stares," says eTour co-founder and marketing VP Jim Lanzone. "[They] had no idea what we were talking about."

But Barnette didn't accept no for an answer. The tall, preppy entrepreneur went back to local investors, and slowly the conversations began to pick up. "The response was, 'Well, people aren't going to sign up,'" he says. "Then people started signing up. We get about 25,000 registered users with little to no marketing. Then it's, 'Well, I don't think advertisers are going to pay for this.' Then advertisers started to pay for it -- Intel, eBay and Disney were our first three advertisers. Then, 'Well, I don't think it's going to scale.' And then it started to scale. Then, 'Well, I don't think you can sustain this scale.' People took meetings and they were nice enough, but the bottom line was we were treading new ground."

One year later, eTour had drummed up only $1.3 million more from Atlanta angels. Desperate for capital, executives took their pitch to Boston, New York and Silicon Valley, where VCs were more receptive. They found $10 million in VC money but weren't willing to accept the condition attached: relocate to New York. Finally in June of 1999, eTour raised $10 million from local angels and NeoCarta, a VC firm with connections in Atlanta and offices in Cambridge, Mass., and San Francisco.

ETour is now humming with about 170 employees, 3.5 million members and some $55 mil]ion in cumulative funding. But that one of Atlanta's most successful startups had to pass through several rings of fire to raise serious money says much about the city's conservative business culture. Though Atlanta sees itself as the capital of the "New South," its business culture remains traditional. A focus on fundamentals is as deeply ingrained here as the preference for Coke over Pepsi. Risk-takers and big spenders are viewed skeptically, and proven concepts and a clear path to profits are applauded. Why bet the farm on a new fruit that may dry up in the market when you can get a respectable return on a slightly juiced staple crop?

None of this would be remarkable if Atlanta weren't touting its plans to become one of the top Internet hotbed in the nation, possibly on par with Boston. Many in Atlanta embrace the hype as strongly as they do the Braves and the Falcons, and see the emerging Net sector as another sign of the city's big-league status. Though the city already boasts some major Internet players -- such as Healtheon/WebMD, MindSpring (now EarthLink) and Internet Security Systems -- what's compelling about Atlanta isn't how the Net is changing its image. In fact, the opposite seems to be true: Atlanta is taming the Net.

For all the talk about how the Web is revolutionizing business, in Atlanta, it's Net models that are being changed. Net firms are adapting to Atlanta's conservative business culture, not the other way around. And as more Web businesses pop up outside Silicon Valley, what's happening in Atlanta suggests that local culture as much as technology and money will determine what the future looks like.

In Atlanta you don't have to look far to see signs of tradition. Venerable corporate goliaths dominate the city, both physically and mentally. Their presence is so overwhelming that they're among the city's major tourist attractions.

Coke's World of Coca-Cola museum stands out like a beacon. A giant globe with the Coca-Cola logo marks the pavilion-style entrance where for $6 visitors get a blizzard of Coke history, memorabilia and commercial jingles, as well as a re-creation of a '30s soda fountain, a futuristic Coke dispenser with light and sound effects, and shopping opportunities galore. Folks whose appetite for corporate self-promotion isn't sated by the Coke tour can take the $8 CNN studio tour, where visitors press their noses up against the newsroom's glass windows.

Like eTour, most dot-coms are tucked away in either the mass of high-rises or office parks, with nary a billboard to light the way. But go looking for Internet businesses and you'll easily turn up 50 or more. Inside, dot-com workers are equally low-profile, dressed in khakis and polo shirts, knit tops and long skirts. The pierced and tattooed urban hipster types at many dot-coms in New York and San Francisco are not in Atlanta, for the most part. And you won't find any 21-year-old wunderkinds sitting in the CEO chair, either. While Atlanta dot-com executives hardly qualify for codgerdom, they have traditional business experience and conservative mindsets. Many of them issue directly from Atlanta's telecom corporations -- BellSouth, Cox Communications, Nortel Networks -- and the marketing departments at Coke and Turner Broadcasting.

Corporate influence is not the only factor in Atlanta's traditionalism, however. Despite having torn down much of its historic architecture in a relentless quest to be considered modern and cosmopolitan, the city retains a business style rooted in the Old South's emphasis on personal connections and old-fashioned basics -- values most visible when it comes to dining haunts.

Like the real estate developers of the boom before theirs, Internet players conduct meetings in down-home restaurants, high in comfort and low in pretension. In Midtown, Atlanta's burgeoning dot-com center, the hot spots are low-budget dining classics -- the shacklike Silver Skillet, in which fried eggs arrive in a pool of grease, or the landmark Varsity, where you can order a hot dog with onions on the side and a bag of chips, also known as a "walk a dog sideways, bag of rags" from your car.

Even in ritzy Buckhead, where venture capital firms operate from glass towers, VCs meet their supplicants at a strip-mall diner known for its cheese grits. Between 7 a.m. and 8 a.m., when the tech crowd streams in, sometimes there's a half-hour wait or more at the OK Cafe, a retro-Western spot with red leatherette booths, waitresses uniformed in blue and white wearing ruffled headpieces, and fittingly, a money tree in the back room. Its style maybe ersatz, but the old-school vibe is real.

Who you know is important anywhere, but maybe more so in Atlanta. Personal networks are particularly tight, particularly powerful and, in the case of Internet business, particularly small. "In some ways Atlanta's always been a kind of networked town," says Buck Goldstein, Mellon Ventures' Internet venture partner and a fourth-generation Atlantan. "It's dealt with its problems and opportunities in a collegial way. During the civil-rights period a phrase was coined that Atlanta was 'the city that's too busy to hate.' And it was essentially a relatively small group of business and political people who were determined that Atlanta wouldn't be Birmingham or Montgomery. ... I think that pattern probably applies to this community as well. If a company moves here and meets one of, I don't know what the number is, five people, they essentially can have access to anybody."

There are probably a few more than five key people here, but not many more. The most prominent group is known as the Atlanta "mafia." Among the wise guys are Taylor Glover, a Merrill Lynch senior VP and Ted Turner's personal investor; Premiere Technologies (now Ptek Holdings) founder Boland Jones; and several alumni of Atlanta's first generation of successful Internet companies, including Jeff Arnold, now CEO of the merged Healtheon/WebMD; Bert Ellis, founder of Web site design and development firm iXL; and Jeff Levy, co-founder of Relevant Knowledge (which was folded into Media Metrix in 1998) and now founder and CEO of incubator eHatchery.

No matter where you look in Atlanta's Internet world, it seems there's a connection to at least one mafia member. Consider NeoCarta, eTour's largest institutional investor to date. Arnold and Ellis sit on its Internet advisory board, and Merrill Lynch is a strategic limited partner. Levy, who was one of eTour's first board members, now sits on 20 public and private boards. He not only nurtures early stage companies at eHatchery, he also hosts well-attended schmoozathons every other Thursday or so at the incubator's chic Internet space in the converted Southern Dairies building. Ellis' iXL tends to get poached for talent by startups, but it's hard for him to complain because he's invested in most of them.

Get any mafia member on board and a dot-coin becomes a family business -- they invest in each other's companies and bring each other into the startups they fund. A few branches from the family tree: Ellis and Jones were early investors in Arnold's WebMD, Jones is invested in eHatchery and Arnold sits on Ptek's board of directors.

The local media is part of this small syndicate, too. If there's a Net story in one of the city magazines or newspapers, it quotes, and frequently pictures, members of the mafia. "I'm on the shortlist because it's a short list," Levy jokes. This mediagenic quality rubs off on the dot-coms these guys fund -- when the mafia invests in a company, it's considered newsworthy. Some of the lesser-noticed players in Atlanta's Net community complain that mafia members get more attention than they deserve, that their fame is more a reflection of good public relations than of importance and that they love the limelight a little too much.

But even the critics eventually end up dealing with Atlanta's Net elite. After all, much of the dot-coin angel funding flows through them -- and without seed money from angels, no one gets anywhere in slow-growth Atlanta.

The Buckhead Club on the Atlanta Financial Center's 18th floor exudes old money. The private dining room's polished dark wood and hunter-green furniture and trim calls for cigars and port, even at 7:15 in the morning. Which is approximately when John Yates, credibility-bestowing counsel to Atlanta's Internet young, pushes aside his breakfast plate and places his laptop on the table. It's time for Yates, a partner at law firm Morris, Manning & Martin, and Scott Ryan, 34-year-old CEO of 1-year-old Incanta, to brainstorm about local VCs who might be persuaded to pad the dot-coin's soon-to-close round of financing.

If anything typifies Atlanta's conservative business culture, it's the difficulty finding money -- particularly VC funding -- for Internet startups. Few, if any, of the city's first generation of Internet successes relied on Atlanta investors for early stage funding. Both iXL and Relevant-Knowledge raised money in New York. Internet Security Systems got a big chunk from California firms. The bulk of WebMD's initial funding came from founder Arnold's sale of his previous business and from a strategic partner.

Though an angel community now exists because first-generation founders reinvested their newfound millions, spurring interest from other wealthy individuals, early stage venture capital is still not easy to come by, especially for companies attempting to break new ground. Atlanta investors remain markedly more risk-averse than their West Coast counterparts. "Thought leaders" with high concepts to "leverage" in the "Internet space" need to come down to earth if they want money in Atlanta. Investors want to know how the company will bring in revenue -- and they don't want to wait very long to see it.

"We like to see the dogs eating the dog food," says Goldstein, "the theory being that we're not smart enough to know which business is going to happen and which is not. If a product exists and people are buying it and we can interview some customers, we can quantify it at least."

When capital is dished out, it's served in small portions. Seconds come only after a company has finished what's on its plate. This is partly because available funds here are relatively small -- only a few of the top ones are in the quarter-billion-dollar range -- but main reason is cultural.

"It's a very different mindset for how you assess risk and how you go about creating companies," says Monarch Capital founder Robert Guyton, an Atlanta native who returned two years ago after a stint in Silicon Valley, where he helped Inktomi go public. Guyton describes the regional difference with a football analogy: the Southeastern Conference's running game vs. the Pac 10's throwing game; three yards and a cloud of dust vs. the long bomb.

In this environment, Incanta struggled to come up with seed funding. The company, which delivers audio and video programming via broadband service providers, plans to make money through revenue-sharing programs and by charging content providers to push their wares over its network. Investors in Boston and Silicon Valley were intrigued, but weren't willing to work with Incanta long distance. Atlanta investors initially were put off that Incanta's customers are consumers -- even though the company is in the business-to-business space -- and found Incanta's broadband-content focus too much of a leap into an uncertain future.

But like eTour, Incanta's persistence paid off -- at least a little bit. After shopping around its business plan for four months, refining its product and pitch along the way, the company collected $2.1 million -- $1.4 million from Atlanta angels and $700,000 from Toronto-based Mosaic Venture Partners. And following his breakfast with Yates, Ryan drew at least one local VC, maybe two, into its minimum $8 million bridge-financing round.

Incanta's ability to move forward despite current market conditions that reinforce local conservatism may reflect the gradually expanding local capital market. PricewaterhouseCoopers' recent MoneyTree report counted 19 Georgia-based venture funds investing $128.3 million in 112 deals in the first half of this year, compared with 14 funds sinking $132.4 million into 134 deals in all of 1999, and 10 funds financing 80 deals for $68.5 million in 1998. Most of the deals involve business-to-business services and infrastructure-related plays.

The key word here, though, is gradual. Guyton, who started Monarch on the belief that the Southeast was ripe for an injection of West Coast-style funding, says, "It's probably become incrementally more aggressive, but I wouldn't say that it's changed as much as it needs to. You don't have any Benchmarks here, for example, and you don't have any splintering of young guys out of these old venture firms into new venture firms that are founded based on an understanding of what the Net is all about."

The most aggressive of the bigger local venture firms is probably Ptek Holdings' Ptek Ventures. Boland Jones, who started as an angel investor -- he was one of Incanta's seed funders -- launched Ptek Ventures earlier this year with a $150 million fund. He says Ptek has "a real eye toward more conservative fundamentals, revenues and positive cash flow. Something like Incanta is about as long-haired as we'd get. While it's new technology and there are not a lot of players, you can still get back to the fundamental cash flow." In general, Jones adds, "I'd rather be the third person in line. I like to see how the first person died with his deal, how the second one got 10 yards farther and how to capitalize on their work."

And this is a man a local Net honcho describes as "a real cowboy." "Isn't that scary?" laughs Jones. "We're usually the first to see the potential in a deal," he says. "Derivion [an e-billing application service provider] passed all around Atlanta, and every prominent person passed on it. Now everyone loves Derivion, and they've raised $70 million. In a case like that our ability is to bridge the gap between more conservative investors and a wilder idea, to tell the story with less hair on it, giving them good solid examples of how the technology can be applied."

It's Jones' personal style as much as his investments that sets him apart. Tall, lean and tan, Jones looks like someone who vacations in Aspen -- which he does. His office is stylishly decorated, nothing like the corporate generica and banker-style luxury common around town. When he introduced his venture fund early this year in the style of a Who Wants To Be a Millionaire? game show awarding million-dollar investments as prizes, some investors couldn't contain themselves. "We had a bunch of old-economy venture funders come up to us and say, 'I don't appreciate what you're doing; you're not serious,'" recalls Jones. "I say, damn the serious. We're as serious as everyone else; we're just having fun with it too. We had a good look at every one of those companies before we ever got there."

PlanetJam is the kind of company that's earning Atlanta's respect. Originally a consumer-oriented music site that labored to get funding, PlanetJam reinvented itself as a business-to-business company providing media placement and measurement services to the music industry. It's now blazing a clear and quick path toward profit.

"We're going to be able to launch immediately and turn on some revenue streams right away," says founder and CEO Chris Bell. "We don't have huge capital demands, we have good growth potential and we can be wildly profitable in 24 months. There aren't a lot of those businesses around. We're going to make 50 percent to 60 percent pretax margins, with a positive cash flow perhaps as early as six months."

PlanetJam can do that, Bell says, because it helps independent promotion companies get more mileage out of their largest line-item expense -- getting stations to play their records. The industry response has been warm, he adds.

Bell says he thinks PlanetJam's original plan may have had more revenue potential in the long term, but the route to reaching it wasn't direct and capital demands were huge. In PlanetJam's current incarnation, he says, "It's not a $500 million business, but it's a really cool $50 million to $100 million business. People used to be interested in that."

In Atlanta, people still are. "The sooner you can pull in your revenues, even if that means less revenue over time, that's a good story to Atlanta investors," says Incanta's Ryan. "They're always looking for a trick or a hidden business, something that no one's focusing on; if you can make this little widget over here while everyone else is paying attention to the big picture, you can build yourself a nice little business."

In another departure from the West Coast model, Atlanta dot-coms don't spend much on marketing, with many startups spending virtually nothing. Most Net firms here are business-to-business or "plumbing" operations, and don't need to build national, publicly known brands. With limited capital, advertising seems like a luxury. In addition, big ad campaign spending goes against the local grain. Investors mock the big-spender-on-a-hot-date approach to ad buys that many California companies take.

"By and large there is a lot more prudence and caution about how ad dollars are allocated," says Alan Taetle, a VC at renowned Noro-Moseley Partners and former executive VP of marketing and business development at Mind-Spring. "It's a local approach and attitude that sales matter more than marketing."

Ryan agrees. "We are planning promotions [and] doing ads with service provider partners," he says. "But we've certainly placed a lot more emphasis on the technology and on using personal selling rather than advertising. It's actually a strength. People from the South tend to be great salespeople -- it's a strong aspect of the culture."

Since it needs consumer attention, eTour has probably spent more on advertising than any other Atlanta dot-com in the startup stage. The amount is modest by Silicon Valley standards: about $10 million on print ads and posters, as well as television spots in Atlanta, Boston, New York, San Francisco and Seattle, plus a radio deal for equity with four station groups covering about 30 markets. Still, despite its recent capital infusion, the company is reducing spending and focusing on PR and promotions.

"We never felt we were on the bleeding edge, but if we've been conservative and smart with our money we're going to be even more so, and make sure we don't rely on capital infusions to get positive cash flow," says Sam Howe, eTour's chief marketing officer.

When you add it up, Atlanta is unlikely to produce a revolutionary dot-com that blows its investors into the billion-dollar club. That's not its style. But as prodigal Net companies struggle and die in other cities, those in Atlanta may end up having a longer life. "Once you've passed the test and made the grade, the conservatism starts to work in your favor," says Ryan. "It's just as hard to fall out of favor. Once you've got people on board, they're committed."

Grand and imposing in the ornate, barrel-chested style of 19th-century capitol buildings, the gold-domed Georgia State House is one of the few remnants of Atlanta's past. A walk through the main entrance, under a four-story portico supported by six columns and into a rotunda flanked by marble staircases, leads past portraits of heroes to Gov. Roy Barnes' office.

In the reception area on a typical 90-degree June day, one of the governor's aides points out, apropos of Atlanta's effort to turn itself into a tech mecca, that if the city could convince the International Olympic Committee that the average summer temperature in Atlanta is 72 degrees, surely it can persuade high-tech companies to move here.

In his office, the governor walks over to a rocker opposite his desk and lights a pipe; its sweet smell soon fills the air along with his light drawl. It's clear that the city's legendary promotional zeal extends to the Capitol. The governor says Georgia has a good story to tell about its hospitality to technology businesses, but no one's been telling it -- until now.

To get the word out, Barnes, along with Levy, Goldstein and other Atlanta Net players, recently went on a trade mission to Israel designed to sell Georgia as a U.S. headquarters site for Israeli high-tech firms. Among the enticements available to Israelis and anyone else who's interested: a private-public partnership to develop broadband technology and jobs in Georgia, a program with the state's universities that trains tech workers for specific jobs, tax incentives for locating headquarters and creating jobs in Georgia and a relatively low cost of living and doing business. The recruitment paid off: Six Israeli companies, including CT Motion and Scitex, will soon be opening offices in Georgia, which generally means metro Atlanta.

Atlanta's Net boosters contend that's just the beginning. They believe Atlanta can become the regional technology center for the Southeast, surpassing the Research Triangle Park in North Carolina and the Washington metro area, and will eventually attract more venture funding than Austin, New York, Seattle and maybe even Boston. Only the scale of Silicon Valley is considered to be out of reach.

"We need to connect with the next generation of startups and tell them that there are other places, other than Silicon Valley or [Massachusetts'] Route 128 or somewhere else," says Barnes.

That's just what the Metro Atlanta Chamber of Commerce is trying to do. Its multimillion-dollar "Industries of the Mind" initiative includes ads targeting experienced workers and face-to-face meetings with company executives in Boston, Chicago, New York, Northern Virginia and Silicon Valley.

Inside the city limits, iXL's Bert Ellis is on a mission to turn Midtown into dot-corn central. IXL has taken over a 350,000-square-foot building near Georgia Tech and slapped a logo on it big enough to see from a plane descending into Hartsfield International Airport. A handful of Atlanta's new-economy players are already occupying the Greek Revival mansions of Midtown's leafy Ansley Park - the city's oldest old-money neighborhood. And lofts, naturally, are in the plan.

"Mainly, if we're more visible because we're packed denser in a place, then it feeds on itself, and we think more people will come to Atlanta not making a single bet," Ellis says. "None of us want people bouncing around," he adds, but people want to know there are choices if the job they come for doesn't work out. "It's captured the imagination and the checkbook of the Chamber of Commerce. To further promote Atlanta, you need a personality and something physical to promote."

The physical part seems to be happening. The personality part might prove a little more difficult. Atlantans are happy enough to tout things about the South that make Atlanta appealing - say, the Southern hospitality, which does survive here. But they also seem ambivalent, which isn't surprising considering the casual condescension Atlantans often face from outsiders.

"I'll tell you how people think of Atlanta," says Jones, citing the comments of a Net industry watcher at a venture conference earlier this year. "He says something to the effect of 'This venture business is so big it's even reached the likes of Atlanta. There are actually a couple of good deals in the South.' We didn't take it too seriously," adds Jones, putting on a cracker accent: "We just finished these grits and we're goin' to go out and get us an Internet deal." Barnette recalls running an ad that listed eTour's three offices on the bottom: Atlanta, New York, San Francisco. "I met with a CEO in San Francisco and he said, 'Why'd you put Atlanta on there? It makes you look small-time.'"

But Atlanta wants to be considered big time. Often locals hype Atlanta as an "East Coast" city, conjuring an association with the Northeast that outsiders wouldn't naturally make. (Location aside, the city has more in common with Los Angeles' sprawl and strip malls.) Net promoters, in particular, say the size of Atlanta's Net community could soon rival New York's.

Locals sometimes call Atlanta the "New York of the South," a sentiment that other residents find a bit much. "I'm a native Atlantan and Atlanta in general, as much as we promote it, has a certain inferiority complex - it's Southern and not New York," says Goldstein.

If not New York, then what? Atlanta's Internet community undoubtedly will continue to grow, particularly with the arrival of Draper Fisher Jurvetson affiliate Draper Atlantic, which is opening an office in the city that it promises will bring a "swashbuckling style" to Atlanta. PricewaterhouseCoopers reported that in the first half of 2000, Georgia companies (almost all in the Metro Atlanta area) received $1.3 billion, substantially surpassing the state's total for all of last year. That put Georgia in front of North Carolina, which drew $845 million, and just ahead of Washington, which collected $1.1 billion. But Georgia and Atlanta have a long way to go to catch up with Massachusetts, which topped $4.4 billion in venture capital in the quarter, and the New York metro area, which drew nearly $2.5 billion.

But no matter how high the city climbs in the tech ranks, it's probably not going to resemble the East Coast cities it envies. If Atlanta's going to be big, it's going to be big with its own kind of company -- flash-free Net plumbing suppliers and business-to-business exchanges and services built on conservative business fundamentals and nurtured in a Southern way. Which means Atlanta's greatest mark on the Net Economy is likely to be proving the Net is not a force unto itself, but a malleable medium that can be reshaped in the image of a local culture.

Look no further than PlanetJam's Chris Bell to see the import of culture in Atlanta. When he worked for Intel, he says, he got job offers in Santa Clara, Calif., every week. He just didn't want to join the high-intensity, high-cost lifestyle in Silicon Valley. "We're committed to Atlanta," he says. "Yes, at times it's difficult, and maybe it would be easier to be somewhere else, but lifestyle is important, cost of living is important. We've got good talented people, a city we like and we live in an age where communication is getting better all the time. It's not all about access to capital."

Sandra Stewart (sandras@sirius.com) is a freelance writer in San Francisco. She last wrote about Internet panic for The Standard.

COPYRIGHT 2000 Standard Media International
COPYRIGHT 2001 Gale Group