"Web Firms Putting on the Ritz" from the Los Angeles Times, February 8, 2000. © 2000 Los Angeles Times. Reprinted with permission.

Tuesday February 8, 2000

COLUMN ONE

Web Firms Putting On the Ritz
* Internet companies flush with venture capital are competing to hold the most lavish party for investors, media and tech insiders. Some say it's necessary to establish credibility; others say it's a waste of money.

Home Edition, Page A-1

By JOSEPH MENN, TIMES STAFF WRITER

SAN FRANCISCO -- The business model for Respond.com, which links people shopping for hard-to-find items with thousands of merchants, is utterly untested. The company barely has any revenue and may well never earn a dime.

But it throws one heck of a party.

On a recent weeknight in a trendy South of Market art gallery here, the start-up company spent more than $200,000 for a glorious bash, entertaining hundreds of guests from the "dot-com" and media worlds with circus performers, free sushi and an open bar. Employees handed out $50 bottles of Veuve Cliquot champagne as party favors.

It was one of several competing Web company parties that night, part of a confounding experiment in buzz creation that has swept San Francisco and New York and is rapidly spreading in Los Angeles, Seattle and other hubs. One recent Thursday evening in San Francisco saw invitations to at least six such parties circulating via e-mail, including those issued by Web sites Productopia and LookSmart, two by start-ups, one by venture firm Hummer Winblad and a "Eurotrash Cocktail" networking party.

The companies, flush with venture capital, give a variety of reasons for the saturnalia. Being in a constant struggle to recruit talented labor, they need to look like fun places to work. And if enough investors, members of the media and other "influencers" show up at such a party, their chatter could lead to interest in greater circles or even to press coverage.

"The whole story of the Web has to do with guerrilla marketing and viral strategy," said John Hummer of Hummer Winblad Venture Partners, which invested about $12 million in Redwood City, Calif.-based Respond.com. "All of this stuff is about customer acquisition. If this costs $200,000 and we get 200,000 customers out of it, it's a pretty good deal."

In Respond's case, however, it's not clear whether the company did indeed get any customers out of it. Chief Executive Will Clemens said Web traffic increased afterward, but he wouldn't say by how much. The party, he said, was more about celebrating "employees who have been working very hard."

As with movie stars at a Hollywood premiere, the presence of Hummer and fellow venture capitalists Jim Barksdale and Bill Gurley drew many to the party. They fielded one-minute pitches from would-be entrepreneurs who had to shout to be heard above the din.

Some business does actually get done this way. But most of the energy goes toward talking with friends, eating, drinking and flirting.

Looking to Los Angeles

More than anything else, the parties are simply feeding on themselves. Because everyone else is throwing a blowout, it has become a necessary rite of passage for a new tech company.

"You can't launch a start-up without a party, particularly in the B2C [business-to-consumer Web site] space. It's just not an option," said Margit Wennmachers of Outcast Communications, the San Francisco public relations agency that designed the Respond fete.

The prospect of more and bigger galas in Los Angeles has some in the event business drooling.

Web firms "are increasingly calling and speculating about how they could do an event, how they could have the same amount of glamour as a Hollywood premiere," said Pat Ryan, president of Party Planners West in Los Angeles. "I could see them becoming much more of the big-event marketplace in L.A."

Critics say the ostentation is fiscally irresponsible--the rich celebrating their own good fortune, or foolishness, in a way that benefits no one else.

Their Exhibit No. 1: an Oct. 29 event in Las Vegas not long after a start-up named Pixelon.com raised $23 million from venture capitalists for its Web-casting business.

To celebrate, make a splash and record live performances for its site, Pixelon put on a concert at the MGM Grand featuring 10 performers, among them Natalie Cole, Tony Bennett and Sugar Ray.

But why stop there? The concert was headlined by the Who.

Total price tag: about $10 million, the company says. It's not really sure, pending the results of an audit.

If Pixelon's "iBash" is an extreme case, it fairly underscores the excess.

In the last six months, the competition among Bay Area and New York blowouts for the highest-profile attendees and the best buzz has reached feverish intensity.

"We've gone from a manufacturing economy, to a service economy, to an information economy, to an attention economy," said Darian Heyman, who co-founded Web advertising agency Beyond Interactive of Ann Arbor, Mich., and attended the Respond bash. "You need more and more crazy stuff."

Stories of oddness and extremes abound: After all, the whole point is to get people talking.

Two weeks after the Respond bash, RuPaul was the featured personality at a San Francisco party by WebEx.com, one of several companies that facilitate online meetings. (Did RuPaul, who stars in its ad campaign, get stock options? "A lady never discusses business," the transvestite performer demurred.)

The night after that, comedian Dana Carvey hosted a San Francisco ball and charity auction thrown by Bay Area venture finance magazine Red Herring.

Around the same time in New York City, CarOrder.com plunked down $1 million for a gimmick-filled extravaganza that included a performance by Jim Belushi's rock band and free tolls for anyone taking the Holland, Lincoln or Midtown tunnels that day.

"The first million-dollar party gets some ink," observed Managing Director Alex Knight of Arch Venture Partners in Seattle. "But you very quickly get into an arms race."

Mimicking Hollywood

Part of the craze is a desire to imitate Hollywood, long known for sparing no expense on premiere parties: It certainly wasn't cheap to fly stars, other Tinseltown pooh-bahs and the media to Alcatraz for the 1996 premiere of "The Rock," for example.

Ironically, just as spending for Net parties is exploding, many movie studios are cutting back. Splashy events don't lead to favorable media stories the way they used to, executives say, so the companies are being more selective in deciding which movie gets the elaborate premiere party.

The dot-com dos are different in other ways as well: They don't show the product, and most barely even try to generate direct news coverage on television or in print.

That strikes Hollywood pros as peculiar.

"Would I spend $300,000 on a premiere party that would generate no coverage? I would probably say no," said Ed Russell, Sony Pictures' executive vice president of publicity.

The tech-company party wasn't always this way.

In San Francisco and elsewhere, they began as small gatherings where people would share ideas about the direction of the Internet, without so much as a rock band or even a T-shirt giveaway to mark the moment.

Former Haight-Ashbury comedy club owner Bob Ayres, now 45, recalled hosting small monthly gatherings of software people in his living room in the early '90s. He decided he would have no part of the giant, drink-fueled corporate or networking parties of today.

"It's ridiculous what's going on right now," he said. "It's loud, it's drunk, and most of the people have no idea what the companies do."

Instead, Ayres in 1997 started a series called "The Next 20 Years," with the likes of futurist Paul Saffo and Sun Microsystems' John Gage appearing as speakers and taking questions. "The conversations are so much more thoughtful," Ayres said.

Another precedent for the current big-party craze is the giant technology trade shows such as Comdex and Internet World. Industry people's eyes would glaze over with so many demonstration booths competing for their attention. The after-show party was much more relaxing and effective than yet another floor demonstration.

"You need to stand out of the crowd at the press level, the finance level and at the industry level. A good event can accomplish it," said Oliver Muoto, co-founder of Web site software seller Epicentric. "And the demos always go smoother after two pina coladas."

For many, the Respond bash's big draw was the presence of A-list venture capitalists, who were bombarded with short pitches.

"The first $2 million I raised for Lumeria came from going to parties," said San Francisco tech veteran Fred Davis, CEO of the Net identity-management start-up firm.

Also common are schmooze-fests, like those of the Drink Exchange in San Francisco and some of the Venice Interactive Community gatherings in Los Angeles. Companies pay to be listed as sponsors, and neophytes can make contacts.

About 1,200 people attended a Venice party last month, said organizer Brad Nye, who added: "It's just insane."

Other variations are the employee-recruiting party, the we-got-bought party and the we-got-funded party.

San Francisco-based Alexa Internet, which tracks paths that Web users follow, threw one of those after its purchase last year by Amazon.com. Epicentric's Muoto observed the under-clad Brazilian dancers performing there and declared: "I lo-o-ove technology."

Even if there's no other point, the parties are held because people expect them.

If a start-up raises $10 million or so and then fails to have a party, "there's a lot of anxiety of people inside the company" wondering what's wrong, said Muoto, who circulates an e-mail newsletter rating upcoming tech social events.

"It's almost like a rite of passage," said WebEx.com CEO Subrah Iyar, whose money-losing company spent $50,000 on the RuPaul marketing-campaign launch party.

But how did things spiral to the point that companies would spend millions in one night just to get positive word-of-mouth?

"In a word, desperation," Lumeria's Davis said. "That's fueled by the ego that's rife among the 'dot-communists.' Obviously, not all of these companies are going to survive."

As with the Internet stock bubble, participants disagree more about when the party escalation will end than about whether it will.

"These are the good old days," said Red Herring Chairman Tony Perkins, who thinks the end of the free-flowing champagne is in sight. "There will end up being a lot of casualties."

Sooner or later, profit will matter.

That day may be approaching for Pixelon, the company that brought the Who to Las Vegas.

The venture capitalists on the board of the San Juan Capistrano-based company recently ousted founder-impresario Michael Fenne and brought in Robert Carsia, a former Time Warner vice president and technology consultant as CEO.

"One of the reasons I took over is because of that party," Carsia said, adding that Pixelon would get its site running better before embarking on traditional marketing.

"I don't want to be known for the biggest party," Carsia said. "I would rather hold the record for the biggest IPO."

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