On Borrowing Start-up Funding From Friends [ENT 600-50 Week 7]

Back in 1999 lots of really stupid money was following around a lot of smart sounding ideas, as long as they were somehow connected to this new internet phenomenon.  The internet for most people was just something they read about in the papers, but every day we read about yet another multi-million dollar IPO for a company that had something to do with the internet, even though no one involved in the start-up could possibly tell you how the darn thing intended to actually make money.   As Investopedia describes it,  “In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading.”

In the midst of this irrational exuberance, my friend Barry and I (well, Barry mostly since he was the idea guy) decided we wanted in on the Dotcom Boom as it would become known and set about writing a business plan for a revolutionary concept for 1999: an internet radio station.  Keep in mind there was no Pandora, no YouTube, and Bit Torrent was in its infancy.  Your internet connection was measured in kilobytes (1,000) per second, not gigabytes (1,000,000).  Fact is, the only way to listen to music was to turn on your radio or play your own cassette tapes and CDs.

We knew people with money who did some investing, but to call them sophisticated angel investors would give that term a new definition.  They were pretty much what Noam Wasserman described in The Founder’s Dilemmas  as “friends and family…investing to support someone they love, like, or admire.”  One was an distant heir to the Rockefeller gas and oil fortune who had already donated over $100,000 to a legal foundation we operated that was battling the government over free assembly issues.  The other was a guy doing alright in Boston who wanted to help some good people make something useful happen.   And Barry and I were good people who had an excellent reputation for making lots of good things happen. And hey!  This was something to do with the internet so….!  Just like the Underpants Gnomes!

We knew we could sell the idea to investors and our friend from Boston was quick with a $2,000 check drawn on his investment account so we could get some equipment and get started.  We would get some rudimentary functionality happening, bring in some good tech names on our advisory board, then meet up with our larger investor who would then write us a six figure check.  I departed the warm confines of south Florida the day the Bush v. Gore recount started for stops in Boston, Nederland, CO, then Missoula.  The first two legs went great (except for the bizarre news of the recount) as we easily collected the smaller check, hooked up with my good friend Rob Savoye and some techie advice and credibility, then off to Missoula….Montana…..in December.  And boy was it chilly in Missoula!  And completely free of six figure checks.

Because this was the end of 2000, not 1999.  And when those companies with the giant IPOs, immense venture capital backing, and irrational exuberance–it turns out–actually never figured out how to actually make any money, what became known as “the Dotcom Bubble” burst in 2000.  As Investopedia describes it, “In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.”  Our large investor–who was neck deep in internet cash–was already taking it on the nose from the bubble bursting; hence there were no longer six figure checks available for start-ups by well meaning guys with no experience in the field they hoped to enter and no way to explain how their company would ever make any money.

To quote Wasserman and wrap this discussion up nicely, “In fact, whether a founder is willing to risk taking money from friends or family may be a good indicator of whether or not that founder has laid a solid groundwork for success.”  Pandora had started up in January of 2000.  We’d never heard of it.  So much for internet radio.  And so much for two pretty good friends.

 

1 Comment

  1. Arjay,
    That’s a great story. I’m sorry it didn’t work out, it was brilliant idea though! Oh Pandora, Spotify, Amazon Prime Music! What would you have called your Internet Radio company? I love your stories they suck you in!
    1999… I was in 5th grade and then 6th grade.. My brother was heading to college and graduated in 2000.. Good times!

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