October 30, 2020  
 
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How Gaebler Ventures Came to Exist

I share my own entrepreneurial journey, the ups and downs of eight intensive years of entrepreneurship, and what I decided to do as my next act way back in 2001.

I wrote much of this in Summer 2001 in response to an acquaintance who was interested in why I was starting three companies simultaneously.

She wanted to learn more about my "trying to get venture capitalist odds instead of entrepreneurial odds."

A lot of people have found that particular concept pretty interesting, the idea that if your chances of success in starting a business are one in three, then you'd better start three companies to ensure that you have a good chance of being successful at one of them. To me, despite some obvious pitfalls to be avoided, it makes a lot of sense.

This acquaintance was also interested in how I went from being an entrepreneur doing 3D software to being an entrepreneur in the beauty business. I guess most people don't jump industries like that too frequently and she wanted to hear about how that happened. So, I got to thinking about my entrepreneurial evolution.

Anyway, here's the text of that long email, my answer back to her, which may be an interesting read and gives you some background on where I've been before this and why I am now becoming a "multipreneur" and am starting three companies at the same time.

The Email

Dear [NAME DELETED],

Here's my entire entrepreneurial evolution. Thanks for your interest. It took a while, but it was good for me to write it down. Sorry that it's so long.

I'm not sure that it'll be of much interest to you. My 1993-1996 and 1999-2000 entrepreneurial experiences are ancient history now -- I don't want to dwell on them like the guy in Bruce Springsteen's "Glory Days" song -- and my new companies are at a very early, fledgling, bootstrap startup stage.

Not only that but they are decidedly unexciting companies, so called "lifestyle" companies that are intended principally to provide good value to customers and generate reasonable cash flow that will allow me to earn a decent living (in contrast to venture-backed companies that go for the big score and try to change the world). I'll get to that again later.

[SOME DELETED STUFF]

All for now!

Best regards,

Ken

--

VREAM (1993 to 1996)

I was a co-founder of VREAM, along with a friend who initially conceptualized and started fleshing out the idea while I was finishing up my management degree at Yale University's School of Management.

In 1993 VREAM positioned itself as a "virtual reality" software company. Today most people know what virtual reality is - it allows you to get inside of a computer-generated 3D environment and then move around and interact with computer-generated objects (and even interact with other people) in a computer-generated world. At that time, however, the average person had no clue what virtual reality was. It was restricted to the domain of research scientists who could afford expensive computers.

Owning an expensive computer was a pre-requisite for virtual reality because of its compute-intensive nature. As you moved around inside a computer world, the computer had to recalculate the 3D scene and present it to you in real-time fast enough to make you feel as if it were real.

A typical user might run his computer monitor at a resolution of 800x600, meaning the computer had to calculate a scene's picture and then render 480,000 pixels and it had to do that at about 20-30 frames per second to ensure that the end user really felt they were immersed in the virtual world -- it was widely believed that slow computers costing less than $50,000 couldn't render scenes fast enough.

We guessed (incorrectly, or at least very prematurely anyway) that if virtual reality were more accessible, it might become the next generation human-computer interface and supplant the current two-dimensional computer interface that we all know and love -- the mouse, the monitor, clickable icons, pull-down menus, etc. We also believed that we could bring virtual reality to the masses if we could get it to work on the common PC, which was quickly becoming ubiquitous.

At that time, machines based on Intel's 386 and 486 chips dominated the PC market. They were considered by most to be much too slow for virtual reality. We thought otherwise. We wrote some really tight code that allowed those slower machines to author and then host and render virtual reality environments. We started selling our authoring tools and the runtime engine that rendered the worlds to a small group of virtual reality enthusiasts.

These customers used our software for architectural walkthroughs, engineering simulations, visualizing data in 3D dimensions, creating 3D games, and all kinds of other applications. One customer used our software to help people conquer their phobias (e.g. fear of heights -- he even used it to treat impotence - thankfully, I never saw that application!). Our tagline was "the applications are limited only by the imagination" and it was true. This little market, which probably numbered 5,000 people worldwide, loved our products and, as a first-time entrepreneur, it was great to see the orders come in.

And the future was on our side. We rode the trend of faster computers -- the Pentium chip was much faster than the 486 and it made our software work even better. We also rode the trend of the mainstreaming of 3D graphics cards, which became increasingly popular as games like Doom hit the market. As the computers got faster and better at handling 3D, more orders for our software came in.

We were very popular. In this pre-Internet era, Intel and Microsoft needed guys like us to sell the faster PCs and new operating systems. They needed to be able to answer the "Why do I need a faster PC when my current PC seems to run my applications perfectly well?" We did demos for Craig Barret (then CEO of Intel) and Bill Gates (then CEO of Microsoft - duh) and they used our demos to show the world what could be done with the newest generation of PCs.

This brush with greatness made us feel that we were on the verge of greatness; I realize now that's a common entrepreneurial mistake of self-delusion -- thinking you are something special based on the company you keep -- but at the time it helped to motivate me and it motivated our team.

Nonetheless, despite growing sales and partnerships with companies like Intel and Microsoft, we were never flush with cash. The shrink-wrapped software business is tough, and this startup was definitely a bootstrap. We ran up personal credit cards to fund the company. Everything was done on the cheap. We paid $5 per square foot for a basement loft office where the walls were literally crumbling around us. We bought used furniture. We spliced together our own networking cables to save pennies. At trade shows, five of us would sleep in a single hotel room to save cash.

I paid myself a much lower salary than I had previously earned at McKinsey & Company (about 1/3 of my prior compensation) and that, coupled with the long hours I had to work, was an enormous personal strain. Luckily, my wife was very supportive but I can tell you it wasn't easy, especially as time progressed and the orders slowed after the bulk of the early adopters had bought our software and as it became clear that virtual reality wasn't crossing the chasm into the mainstream as quickly as we had hoped.

At home, we had a rolling "let's give it three more months" discussion every few months. Increasingly, for me, the mode became "failure is not an option." Having put my family at risk and my reputation and track record at risk, I really wanted to see VREAM through to a successful conclusion.

Despite all the challenges, we still felt excitement at the office. We really thought that this was going to be the next big thing and we were way ahead of everyone. The passion that allowed us to create great software was driven by our belief that we were going to change the world, that we were going to make a real scratch on history with our technology.

This wasn't an unambitious project after all. We had defined a language for defining reality (how many people can say they have created a language to define reality?) and we had created technology to make that defined reality, in effect, real. We could create entirely new worlds and we could create them in less than seven days. In some respects, this was nothing less than God-like.

We kept a low profile. We thought that just as 2D user interfaces such as Windows and the Mac OS had supplanted command line operating systems, eventually 3D user interfaces would supplant 2D user interfaces.

We naively thought we would lead this transition. We actually thought that we would sneak up on Microsoft and surprise them -- that we would become the next Microsoft. If a Microsoft employee inquired about our products, we ignored them. Under the guise of poor customer service, we would not sell the products to them. We wanted to stay off their radar as much as possible.

We balanced this stealth mode with growing recognition that we had to make a name for ourselves. Moreover, by the end of 1994 there was another important reason to reach out and let people know what we were doing -- we needed investment money in order to get the company to the next level. By then, we were six employees in total, but we knew that we needed more staff to continue to improve and expand our product line.

We had never raised money before, so we were pretty inept at it. Mind you, this was not the boom funding time that occurred later in the 1990s when getting funding was as easy as waking up in the morning. Investors were still recovering from the economic dip of 1991-93 and they were not doling out dollars easily.

For us, raising money was an especially difficult task because we were all wearing so many hats and it was one more thing to do. I was doing the sales work and customer service (which turned out to be tedious because of our small market), the marketing, the accounting, shrink-wrapping the software by hand whenever we got an order, writing the products' user manuals, helping to test the products, etc. -- and my co-workers were all equally overloaded.

We wrote a too-long business plan and started working our meager network of contacts. Most of the people we talked to didn't get it. Only when we showed them the software in action did they understand what it was but, still, they believed it was too "far out" to warrant investment.

Moreover, the venture capitalists we talked to valued good experienced management teams above everything else -- although we were smart and hard-working guys, we had no substantive entrepreneurial track record and that didn't help.

Gradually, by talking to people, we learned and, as we learned, we refined our investment pitch. For example, the term "virtual reality" had entered the popular lexicon, but it quickly became viewed as hokey, a good basis for a science fiction story but not a good basis to start a technology company; accordingly, we eliminated the term from our business plan and started referring to our software as "advanced process and data visualization technology".

Despite these tweaks, it was taking too long to raise money. We started looking for money in November of 1994 (my wife and I also had our first child that month) and we wouldn't close on an investment round until November of 1995. I think very few people understand how stressful that entrepreneurial experience can be, those periods when cash flow is tight and you spend a lot of time thinking about whether you are going to make it or not. It looks attractive from the outside ("I can' t wait -- finally, I will be my own boss!") but in reality it's usually hellish. Only masochists should apply.

The Internet saved us. Around 1994, people in tech circles started talking more and more about Mosaic and the Internet. Netscape began its rise to greatness. Our technical architecture was perfect for the Internet because we could send complex virtual worlds across a wire very efficiently. You would think a virtual world would be a big file but we actually used a small text file that served as a recipe for a big, fat, previously-downloaded-to-your-PC program that could then render the world. It was the equivalent of sending a recipe for a cake across a wire to a house that could be on the other side of the world and if they had a cake-making machine there, it would automatically bake the cake for them; from the outside, it would appear as if you were sending a cake to someone via digital data traveling over wires.

We re-architected our software to embrace the Internet and made a free version of it available on our servers. Suddenly, our product became one of the hottest downloads on the Internet. VREAM became well known in tech circles. We were the #1 download on the Web for a short period of time (according to Wired Magazine). We received a prestigious award from PC Magazine and the Wall Street Journal wrote an article about the company.

3D chip and card makers started calling us to bundle our software with their products. We started doing more consulting work based on our technology. We simulated snowmobiles for Bombardier and we created virtual prototypes of next-generation restaurants for Burger King. There was more to tell the venture capitalists and they not only started to get it, they started to believe in it. This culminated in our raising $750,000 from a venture capital group in November 1995. We gave them roughly 1/3 of the company for their investment.

We used this money to hire more staff and move to better offices. We expanded our marketing efforts. We started working on the next generation of our software. At the time, $750,000 seemed like a lot of money but it went quickly. As 1995 progressed, we ate into our funds and our revenues grew but so did our burn rate -- cash outflow outpaced cash inflow.

From the outside, things seemed to be going well for VREAM. On the inside, we were struggling once again. Moreover, the Internet, which had saved us, now threatened to overshadow us. Tons of interesting things were materializing. Java became hot and was stealing the show in the minds of the media and in the developer community -- it was clear that 3D's 15 minutes of fame was moving into its final minutes.

We shifted gears to focus on selling the company and engaged an investment bank. We had a number of suitors and ultimately sold the company in November of 1996 for $10 million to PLATINUM Technology, whom we had gotten to know through our venture capitalists -- they intended to use our products to create 3D interfaces and facilitate 3D data visualization in many of their IT infrastructure products, partly in response to their then arch-rival Computer Associates, which had already started to do exactly that.

We had sold the company and achieved the cherished "financial exit". All the hard work had paid off! I had made some decent money on the acquisition, but I was even more happy that I had not failed. If I ever wanted to do another startup, this time I had a track record and I had some investors who had done very well by my efforts. I had also learned a ton of valuable lessons about starting and running a company.

We were lucky to get out when we did. The real-time 3D space had gotten very crowded as time had progressed. Even big companies like Silicon Graphics (SGI) and Microsoft had gotten active in real-time-rendered 3D on the PC. We were one of only three startup companies in the space that did well.

One other "winner" was Mike McCue's Paper Software that sold out to Netscape prior to our selling to PLATINUM. McCue (who now runs a company called Tell Me) did very well with his Netscape stock and I learned a lesson. While we were working hard to ensure that our software was better than any other competitor's software and maintaining something of a stealth mode, Mike McCue camped out at Netscape's door and convinced them to buy him. The lesson was simple: there's much more to success than having a good product and satisfied customers. When the time is right, you need to "go to the mattress" and sell the company to potential acquirers.

A second company that did well was DimensionX (started by Karl Jacobs, who now runs a company called Keen.com). After Netscape's acquisition of Paper, Microsoft decided to make an acquisition in the 3D space, and they bought Jacob's company.

Luckily, we also found a suitor in PLATINUM, choosing them over a couple of other interested parties, but many of the other competitor companies that had entered the market were not so lucky. I know this because my Visual Computing Group at PLATINUM ultimately consolidated the Internet 3D space, buying SGI's Cosmo Software division and Softbank-backed Intervista. Investors and founders did not do nearly as well on those later acquisitions. Both companies had actually created excellent technology, but SGI had over-invested and neither company was prescient enough to focus on a financial exit during the short window of selling opportunity.

The feeding frenzy of acquiring 3D companies came and went and the game of musical chairs ended. Computer Associates, Macromedia and other likely acquirers of real-time 3D companies never took the plunge.

Real-time 3D never did make it to the mainstream. Microsoft had made it tough for everyone, exercising its monolithic power to control the distribution of the software engines that could view the 3D content. Having to download a multi-megabyte software program to see 3D content -- necessary because it was not built into the operating system -- greatly limited the ability of 3D on the Web to gain market share.

We all worked together to create a standard language called VRML that defined the 3D worlds, but Microsoft never made the effort to mainstream 3D, which they could have easily done (and still may do one day). Microsoft even developed a competing proprietary standard called ChromeEffects that threatened to snuff the life out of VRML. But they had bigger fish to fry than 3D (e.g. killing Netscape) and their efforts in 3D dissipated. They left and left the industry struggling.

There were other factors that doomed 3D, mind you -- you had to be very, very talented to create good 3D content so there never was enough compelling content to jumpstart the industry; developers were busy learning Java and e-commerce so they had no time for 3D; and people often got disoriented moving around in three dimensions -- but runtime engine deployment, which was in Microsoft's court, was the biggest obstacle. Why would a webmaster bother to learn VRML when there were not too many people who could view the VRML content? Having once naively thought I could out-maneuver Microsoft, I realized that this had been lunacy. Their control of the operating system allowed them to determine whether other software companies would live or die. I vowed at that time that, in the future, I would avoid entrepreneurial concepts that put you face-to-face with 800 lb. gorillas that controlled your destiny.

Seeing other talented entrepreneurs in our little 3D space who had failed despite executing well on so many fronts, I concluded that luck and timing had played a huge role in my first entrepreneurial success. Of course, we had to execute well and make the right decisions just to have the chance of being lucky -- and we had to have the guts to be in the game in the first place -- but in any case I was very thankful on that Thanksgiving of 1996 that we had squeezed through with a victory.

I stayed at PLATINUM until September 1998. As a result of the acquisition, we had received stock at $10 per share and it went as high as $34 but then fell to $9 as the benefits of an aggressive acquisition strategy didn't materialize as fast as everyone had hoped. My paper wealth plummeted four-fold, which was distressing. (Eventually, in May 1999, a miracle occurred and Computer Associates bought PLATINUM Technology for about $30 per share in cash).

I left the company in 1998 because I saw so many great entrepreneurial stories out in the market that fed my entrepreneurial itch. I loved PLATINUM but was growing tired of big-company bureaucracy (and PLATINUM was probably much better than most, maintaining an awesome entrepreneurial atmosphere even as it grew rapidly). I had been able to do some things there -- I had helped to get them online selling software for example -- but everything took a bit longer than I thought it should. And the belt-tightening efforts undertaken to reach corporate profitability eliminated the ability to do, well, anything. (After we had worked very hard to create a new product, I went to finalize my marketing budget and was told there wasn't any money in the budget to launch the product: "Look on the bright side, Ken. You'll be much more creative without a marketing budget.").

I made the jump from PLATINUM into nothing and started thinking about what I wanted to do next. It was a prescient move because in February 1999, PLATINUM would massively downsize the company and part of that effort involved PLATINUM's laying off all of my former employees in what had become the VREAM Lab. I'd have done the same thing; we were a "bell and whistle", nice to have but clearly not a core offering and needing to be jettisoned in a hunt for profitability.

PLATINUM's downsizing worked out well for me because it allowed me to hire many of my former VREAM team, a battle-tested group that worked well together, for my next venture. I had intimate knowledge of their capabilities, their strengths and weaknesses. This would be key to getting a quick start in my next startup, BeautyJungle, which was initially intended to become the "Amazon.com of Beauty".

The Transition to BeautyJungle

After leaving PLATINUM to start something new, I set my sites on bigger things. I thought we had done well with VREAM, selling it for $10 million, but, around me, I saw young companies going public at billion-dollar valuations. I spent my days reading their IPO prospectuses. I didn't see the magic. These seemed to be companies that I, or anyone with decent skills and an ounce of ambition, could start. The key appeared to be just doing something that nobody else had done that had potential, or at least perceived potential, to create and dominate a new market that leveraged the Internet. My conclusion: if you were going to make a living starting companies, you might as well go for the grand slam. It wasn't really that I wanted a lot of money. I just enjoyed the competitive aspects of it, and I had determined that I really enjoyed creating and growing organizations.

As I thought through what I wanted to start next, I drew a broad canvas. I considered creating an internet television network that would bring television to the world via the internet (even to countries that only had one state-controlled station). I considered creating the world largest repository of books in text format, anticipating that eventually reading books on the Internet would become the norm and printed books would be printed in your home or at the local Kinko's on a just-in-time basis. Since I loved the initial stages of starting and growing a company, I considered the idea of creating a company that created companies, an incubator. I had all kinds of ideas.

Doing another 3D software company never crossed my mind. That industry was no longer hot so there wasn't much entrepreneurial opportunity there. Plus, I was bored with 3D. I guess I have a limited attention span. I think all entrepreneurs do, by definition. Case in point, we don't call Bill Gates an entrepreneur anymore, even though he started Microsoft. Rather, he is just a businessman, something that requires a longer attention span. Good entrepreneurs are good at creating new things, at jumping into environments they know nothing about and figuring out how to crack the secret code and create valuable companies. But typically they are not the people who stick around to continue to grow the company on a forever basis. That's just not their thing, and it isn't really mine either, at least so far. A Bill Gates who can create and continue to run a company is very rare indeed.

As I contemplated my next steps, I realized that keeping things fresh and interesting has always been my career modus operandi. When I finished college, my perspective was that doing the same thing for twenty years would be torture. I was attracted to consulting because you got exposure to a lot of things but at the end of the day you moved on and learned something new. I learned a little bit about a lot of things and ultimately the mosaic came together and I figured out how everything fits together, which I think, more than anything else, has allowed me to become an effective contributor to organizations I am involved in. I get the big picture and I get all the little pictures. I see the forest and I see the trees, as they say. I can lead but I can also roll up my sleeves.

Ultimately, though, consulting got boring too. The main deficiency was an artifact of the main benefit. You breezed in, gave some advice, and breezed out but it was never clear whether you could actually do what you were telling others to do. You left the heavy lifting to your clients and often you never even knew the end results. That observation, coupled with what was probably some early brainwashing from my entrepreneurial grandfather, led me to this path of starting companies. I am happy as long as I am learning something new. Life gets boring if you know what you are doing.

BeautyJungle

Anyway, back to the transition period. In my search for the next big thing, I did a lot of networking with other entrepreneurs. I got a message from a woman who was interested in starting a beauty e-commerce company. She didn't have much hard-core entrepreneurial experience, but I decided to look into the market and I liked what I saw.

First of all, nobody owned the category online. There was an opportunity ripe for the taking. Moreover, Amazon.com was worth a gazillion dollars so clearly there was money to be made here. Even iVillage was on its way to a billion-dollar IPO. I didn't get it -- it was just an online magazine (yawn) that catered to women, but the market put an ultra-high value on its subscriber base.

It seemed like, in a worst case, it didn't even matter how many beauty products we could sell online. If we could just create a decent-sized customer-subscriber base, then that, in and of itself, might be enough to go public or be bought by an iVillage or an Amazon. Others who might want to buy us included large retailers, the manufacturers, and other portal sites -- if, god forbid, you couldn't get to an IPO, a lot of people might want to buy the company.

Second, there were over fifty million consumers of beauty products in the United States alone. I compared this to the little 5,000-person virtual reality market I had been chasing and came very close to shouting "Hallelujah!" out loud. No more begging people to buy your products. The market was big enough that you only needed a small percentage to buy from you and you could ramp revenues aggressively.

Third, people spent a lot of money on beauty products. Market figures varied but they were generally in the $35 billion to $50 billion range for the U.S. alone. Again, applying the law of small percentages, which is always dangerous, there was a chance of creating a big market. Moreover, it was a market that everyone was intimate with, so it seemed likely that an IPO would go over well. I think people like to invest in things they understand. And beauty wasn't going away. Even in a recession, probably in a depression, people need and want to look good.

Fourth, there seemed to be compelling reasons to buy beauty products online. The prestige products were not easily available to consumers. In a rural or remote area, the prestige manufacturers were torturing consumers -- they would read about the hottest new products in Vogue only to find that local stores had never heard of them and couldn't even buy them. The internet could solve that problem.

Also, the shopping process was tedious. You couldn't buy mass beauty products and prestige beauty products in the same stores. A product that was available at Walgreen's was not sold at Neiman Marcus and vice versa, and yet most women used a mix of mass and prestige products in their daily beauty regimen. Even when you did go to a Neiman Marcus, you had to go to multiple counters and checkout multiple times. What a hassle! What if you could put all beauty products under a single roof and provide one-stop shopping -- wouldn't that be great?!

The only downside seemed to be that some women liked that experience of going to the store but informal conversations with the women in my life suggested that just as many women, if not more, hated having to go downtown and find a parking spot, just to re-stock on their favorite products. Industry estimates were that 70% of the market was replenishment and 30% was so-called "what's new / what's hot" so in theory 70% of the market could be transplanted to online sales, and possibly even more because "what's new / what's hot" had its own problems. Stores were slow to merchandise the newest products because changing signage was a major hassle. On the internet, you could instantly re-merchandise and let people know about the newest products.

You could even eliminate what I called the "content-purchase disconnect" in which you read about a new product in Vogue, you want it, but you never buy it because too much time elapses between your reading the article and getting the impulse to your actually buying the product. I envisioned doing partnerships with Vogue in which they would put their content online and allow customers to instantly purchase the products from my new company. Manufacturers would sell more products, Vogue would get a cut, customers would be happy, and we'd be on our way to a billion-dollar IPO!

Finally, unlike a lot of stuff that was being sold online, these products were perfect for e-commerce. They were high margin and yet they were lightweight, which translated to reasonable shipping costs.

It didn't take me long to convince myself that this was a no-brainer. I started to move things forward.

What did I know about beauty? Absolutely nothing (I hadn't known much about 3D prior to my VREAM experience either). In fact, up until then, I viewed the beauty industry as a way to exploit women. I had some doubts about whether I could credibly push beauty products but I overcame these doubts not only through the greed factor but also, as I talked to more and more people, I grew to understand that beauty is a much-enjoyed and special treat for many women, and I caught the religion of the beauty industry. Indeed, the more I read about the industry, the more I became fascinated by the industry.

Eventually, I would become as bored with the beauty industry as I had become with 3D, but in 1999 it was new and it was fresh. I was learning. I sucked up information on the beauty industry. I read Cosmo and Vogue on the train and got some weird looks. I read financial analyst reports on companies like Estee Lauder and Revlon, and I read up on the beauty industry's distribution channels. I knew I had to become an expert to do well.

Becoming an instant expert on things you know nothing about is a core competency of all consultants and, given my consulting background at McKinsey and Arthur Andersen, it wasn't long before I was impressing people with my knowledge of the industry. There were some things I didn't learn during that initial research, including the fact that the industry was incredibly incestuous and intolerant of newcomers (i.e. me/us) and that there were a few 800 pound gorillas who essentially controlled the future of the industry (something I had previously vowed to avoid after my Microsoft encounters) but it's just as well or I'd have never had had such a good learning experience.

It was easy to get things going. I sent out the "we're getting the band back together" message to former VREAM employees who had conveniently been cut loose from PLATINUM right about when we need them. We even made arrangements to re-occupy our old VREAM office and rechristen it the new BeautyJungle office. We circled up some high-profile investors to anchor the first round of funding. I anted up my "skin in the game" personal investment; investors want to see that management is motivated to make the venture they are backing successful. For them, the perfect scenario is that you mortgage your house and put it at risk by investing the loan proceeds in the company.

I made my investment in BeautyJungle via a corporate structure I formed called "Gaebler Ventures LLC", thinking that I might be able to get BeautyJungle going and recruit some great executive management and eventually transition myself out and start other companies. In this way, Gaebler Ventures would become like a venture capital firm or an incubator, with an initial big success (BeautyJungle), that I could subsequently leverage to create other new companies. In the end, this was a pipe dream. I became way too consumed with BeautyJungle to ever think about starting anything else and I became a very integral and personally motivated element of the management team, so much so that transitioning out would have been very difficult.

In what seemed like no time at all, we closed a $3.6 million Series A financing round in June 1999. Our ability to raise that money so quickly, using nothing more than a Powerpoint presentation, was a stark contrast to our difficult VREAM fundraising efforts but it was a boom market, we had a track record, and we had a good idea to chase after. We hit the ground running and successfully launched our site and a 72,000 square foot distribution and customer service center in November 1999.

Along the way, we learned some lessons. For starters, you can't just walk into a prestige beauty manufacturer with a pile of cash and buy a bunch of product. The prestige end of the beauty market is notoriously restrictive regarding the distribution of their products. Ostensibly, this is because they are concerned about protecting their image. Many would argue that it's more about protecting their price points. In any case, the industry is very much driven by aspirational marketing and branding. So, you need to seduce the prestige manufacturers into working with you and convince them that you will protect their brands.

We did this through a great demo site that we customized for each manufacturer we called on. We used their imagery and we isolated them from their competitors. It was clear that our interests were aligned with theirs and that we, unlike some others, would do well by their customers.

The big challenge was that we wanted drugstore products and prestige products available on the same site. After all, that's what customers wanted, one-stop shopping. But no prestige manufacturer wanted that because they feared a woman who wanted to buy a $30 lipstick might opt instead for a $3 lipstick. I counterargued that you wouldn't go to a car site looking to buy a Lexus and walk away with a Ford Escort instead, but that didn't seem to work. Eventually, we came up with a clever site design that completely separated the drugstore products from the prestige products.

Nonetheless, we didn't make much progress signing up vendors in the early days. There was a big education process that we went through. E-commerce was new to everyone. They were worried about "channel conflict" -- won't our existing retail base be upset if we started selling our products online? We assured them that we would maintain appropriate pricing, that we had no intention of being a discount site.

Moreover, we would never ever sell products that we were not authorized to sell. Doing that was dealing in "gray market" goods, which was said to be the kiss of death in the industry (although frankly they seemed to silently condone it because it helps with sales). Issue by issue we learned and we adjusted but progress was slow.

Some smaller prestige manufacturers took advantage of us, selling us way more product than we could ever possibly sell. One company did that not only to us but also to our many competitors that quickly emerged. That particular beauty manufacturer was later sold to a bigger manufacturer and I'm convinced that they were able to do so based principally on the revenues they made by taking advantage of naive dot coms. Most of those particular products ultimately ended up sitting in warehouses and never making it to any customers.

But the thing that worked against us most was that we were industry outsiders. We solved that problem by recruiting industry insiders. We hired two highly respected editors from Vogue. I recruited a friend of mine from business school out of Revlon's marketing department. We grabbed merchandising people out of Barney's. We brought on a Procter & Gamble beauty veteran of twenty years. We set up an office in New York so we could be close to the manufacturers. I recruited another acquaintance of mine, a highly respected senior executive out of a large corporation that I had done some consulting work for long ago, to run our distribution and customer service operations.

Ultimately, we became industry insiders, we gained credibility on every functional front, and most of the prestige manufacturers agreed to work with us with the exception of the two that really mattered: Estee Lauder and Lancome.

We launched the BeautyJungle brand with clever ads in all the major beauty magazines. We had engaged the services of an advertising firm that had done a lot of work in the beauty industry and this further added to our credibility and momentum in the industry.

In November 1999, we launched the site and customers started enthusiastically buying. Things were looking good for us. Despite the entry of a lot of competitors, we quickly became one of the top three or four entrants that everyone mentioned as the top runners. Gradually, most of the late entrants dropped out of the race and there were just a few of us left.

We closed a second round of venture financing totaling $20 million in March of 2000. The venture community had started to get cold feet on business-to-consumer e-commerce but we had addressed that issue in spades through a business-to-business strategy. Manufacturers and retailers were now racing to get online. Content sites and online retailers also wanted to get into the business of selling beauty products online. As part of our B2B strategy, we offered a turnkey solution by repurposing our own internal technology and our backend distribution and customer service center to provide a simple, affordable answer to the industry's e-commerce problem.

Don't start from scratch and spend tons of money, we said, just leverage what we've already created. We have the technology. We have the images and product descriptions. We have merchandising talent. We have all the products in our warehouse already and we have talented beauty consultants that know how to turn $50 orders into $300 orders. Let's create a single e-commerce and distribution infrastructure for the entire industry, we said. All of us can gain benefits at much lower collective cost.

We were well positioned to win the beauty B2B space. Every part of the industry had unique needs that we had come to understand through working in the industry. For example, the large drugstore chains that had grown through acquisition struggled with managing the SKU-intensive beauty category and in some cases had too much inventory investment stored across multiple distribution centers. We pushed them to put their entire inventory in our big warehouse and utilize an "Other People's Inventory" or OPI model.

Smaller retailers had issues as well, particularly with purchase lead times and access to information about new products. We launched a separate site, BeautyWall, which allowed small retailers to buy products online. The Revlons of the world loved this as they were recognizing that they were over-investing to service their smallest customers -- better to spend more time working with KMart and Walmart than focus internal resources on small high-maintenance retailers.

We even came up with a "pick-to-planogram" concept that shortened the time it took to get product to the shelf and reduce labor costs in the store. At the highest levels of the industry, we got attention and made progress.

But in April 2000 the market started to tank. B2C was written off in the press. A week later B2B was written off in the press (the press giveth, the press taketh away). $20 million seems like a lot of money but it only goes so far when you are chasing after ambitious goals. We were pushing ahead on the B2B front, which required a lot of investment. At the same time, we felt we had a lot of value in the consumer site so we pushed forward with that. We had been rated the #4 e-commerce company in the world, right behind Amazon.com, in Fortune magazine. Newsweek had picked us as the #1 beauty site. We had invested a ton in building the brand, although nothing at all compared to some other dot coms.

We spent our money very efficiently but the plan had always required that we raised another $50 million quickly in what was meant to be a pre-IPO financing round. Investment bankers had been courting us in early 2000 but by summer 2000 they were nowhere to be seen.

That time period between summer 2000 and the end of the year was awful. We had a lot of balls in the air and that, in and of itself, was painful. A salon industry consortium that we tried to put together and had high hopes for never materialized. On top of that, we were trying to raise money in a dead market. We engaged an investment bank to raise money or sell the company.

No investors were interested. It had nothing to do with our potential. The bubble had just burst and the IPO market had closed. It was game over. We had a lot of interest in buying the company but nobody pulled the trigger. We had conversations with senior executives at some of the world's most prestigious companies but everyone was stepping back to reassess their strategies.

In due diligence conversations, I got the impression that the technology people and distribution people said to the senior executives something like "those guys have done a good job, but instead of acquiring them, why don't you just double my budget? If you do, I can do what they've done." Most of those big companies won't ever create what we had, but the observation was on target. There was nothing that we had created that was entirely defensible. Anyone can hire smart programmers and build what we had built. Critical mass -- becoming the standard -- was the only real defense, and we hadn't gotten there.

I had envisioned our becoming the nucleus of the beauty industry; every flow of information, every transaction, every product that needed to be distributed would flow through us. It made a ton of sense for the industry. A lower overall cost structure with increased product sales, moving the market from a push model to a pull-through model, connecting all the dots across the entire supply chain. It made sense but it was too big and too complex.

Industries don't change overnight; they resist change overnight. It would take time and money and we ran out of both. I still feel to this day that had we raised more money, we might have eventually transformed the beauty industry.

We'll never know. We did all of the obvious things. We cut our burn rate drastically, moving to a zero-dollar marketing budget, and, with regrets, we laid off a lot of people. There was no break-even model to get to though, or at least none worth pursuing. We were too early on the B2B front in terms of our progress. Making more progress required investment and there were no material revenues coming in. And on the B2C site, despite the acclaim and the respect we had attained, there just were not enough women buying beauty products online. We peaked at $20,000 in orders per day with an average order size of $50.

On a $50 order, we could make something like $10 per order as a contribution to the bottom line in a best case. With the infrastructure we had built, which was meant to be able to scale to $200,000 and then $2,000,000 in orders per day in consumer transactions, plus handle millions of dollars in B2B transactions as well, we had a burn rate that could only be downsized so much. It would take a lot of $10 contributions to cover our costs, and, truth be told, we only got to $20,000 per day by offering some healthy buying incentives to our customers which further cut into our contribution margins.

My own sense is that the bricks and mortars shot themselves in the foot by not embracing the e-commerce companies. A single massive warehouse containing all the products and making them available through one online site could have made customers happy and increased the entire industry's revenues. For this to happen, all manufacturers would have had to cooperate.

Estee Lauder (which own Mac, Bobbi Brown, and a ton of other popular brands) and L'Oreal's Lancome chose not to partner with the dot coms and this meant that customers couldn't do all their beauty shopping online. They still had to go to the store for some of their favorite brands. Lauder did start selling products on its own site but that causes economic problems (orders are not big enough to offset shipping, credit card and other costs) and it translate the physical world's shopping hassle of going from store to store, or counter to counter, to the online world where one must go from manufacturer site to manufacture site.

I also think manufacturers should have adjusted their margins (i.e. costs of goods prices charged to retailers) to the new economics of e-commerce. Why are cost of goods percentages what they are? It's because of the cost structures that have evolved over many years in the bricks and mortar world. All the costs in the entire industry value chain -- the purchasing of raw materials, the development and marketing costs, the transportation costs, the cost of owning retail stores -- determine the profit picture for each industry participant.

E-commerce-world retailers couldn't make profits at bricks-and-mortar-world cost structures because there was a new cost, the cost of shipping the product to the customers house or office -- manufacturers and customers refused to subsidize that cost, which made it hard for dot coms to be profitable. In the end, they became retail chains with only one high-overhead store (their site), with only a small window into that store (800x600 pixels) where you could view one product at a time, and a surcharge for shipping that they had to either pass onto customers (who didn't want it) or take against their profits, often putting them into a negative profits situation. Had all the manufacturers agreed to sell online and had they agreed to lower prices to online retailers such that they could be profitable, the industry might have seen an overall uptick in revenues and profits.

Long story short -- in November 2000, we moved to close the company down. At the last minute, a serious inquiry regarding acquisition materialized and I really thought a miracle was about to occur. But this "hail mary" pass, as we called it, wasn't caught. The interested party took a pass and we closed the company down just before the holidays. We sold some of the key assets to public company FashionMall. Everyone went their separate ways and investors, including me, wrote off their investment in what had appeared at one point to be a sure thing.

Next on the Agenda

I went home and licked my wounds for a while. I still had some loose ends to wrap up with BeautyJungle that kept me busy through January 2001. I recouped some precious time with my family and started thinking about what I would do next. Beauty had been my life for two years and I had lost track of what was happening on a lot of other fronts. The market was crashing, and the negative wealth effect reared its head every time I looked at my investment portfolio. My VREAM nest egg was diminished. I had set some of it away for my kids' education and some for retirement. I didn't want to touch that. I had lost some of it through my investments in BeautyJungle. The declining markets and my own personal burn rate were eating away at the rest of it. I needed to decide what I was going to do next -- the "What do you want to be when you grow up?" question again.

As I thought things through, I realized there were four possibilities for me.

1. Getting a Real Job

Having once been anathema, doing the same thing for twenty years at a big company now seemed increasingly attractive. It would be nice to be at a big company where you make a big contribution but the weight of the world isn't on your shoulders. At VREAM and BeautyJungle, if I weren't there, the company would immediately feel the effect and might not survive unless others stepped up to carry my load (which, realistically, they probably would have).

In a larger company, my impression was you'd be missed, but life would go on. Those companies got to be big companies to a large extent precisely because they have routinized their processes, made people cogs in a wheel, and ceased to be dependent on individual contributions.

Another benefit of being at a big company might be the ability to learn from others. Entrepreneurial life requires a lot of self-teaching. It would be great to work for somebody who knew a lot about something I know little about -- maybe work in a corporate development group for someone who has done a ton of merger and acquisition deals and could teach me all about it.

But there are downsides to corporate life. The people I recruited out of big corporations for BeautyJungle have told me how their lives were transformed by joining a small and entrepreneurial company. They said they had been experiencing slow death by conference call. Lots of meetings, lots of bureaucracy, and little progress. They said they could never go back to that.

Did I want that? Partly yes. Understanding the mechanics of how large companies work was important to me, given that I wanted to master the intricacies of business. If I could work in a large corporation for ten years, I could get some great skills and get good at adding value in a large organization. It would also undoubtedly be good on my family life, and perhaps it would be good for my sanity, freeing me from the stress of entrepreneurial life.

But the reality is the employment market sucks out there. I talk to the headhunters and they don't have that many retained searches. My background is unique and I suspect that corporate HR departments -- those that are hiring -- will view me as an oddity and not see a spot for me, especially given that there are others out there, others who are not generalists and can start in a new position with a zero percent learning curve. A book on search firms I am reading confirms this. Should you take an entrepreneurial plunge? Not too early in your career, the book advises. If you do it too early, it is a one-way street. Great, would have been nice to have read that ten years ago.

2. Starting a New Venture-Backed Company.

Time is healing my entrepreneurial wounds. Entrepreneurial life takes its toll on you. I can't do the all-nighters any more for example. Moreover, most startup companies fail. As such, they often are two- to three-year gigs at best. The markets are getting more competitive and more efficient, so failure will undoubtedly be swifter going forward.

Venture-backed companies are "high risk, high return" companies. What that means is that all your hard work is likely to result in nothing. That's what happened to me with BeautyJungle. Great learning experience but very painful and no financial reward at the end of the day.

Given the Herculean effort involved and the likely risk of failure, not to mention the current state of the markets, this seems less attractive to me than it did in 1999. Still, if I had an exceptional concept or hooked up with a company that had decent funding and good prospects, I'd be interested. There's nothing like the adrenalin of a startup and the challenge of inventing or radically changing a market.

Still, having just failed in my last venture I wonder whether I am attractive to a venture capital backed company. Everyone says that a failed entrepreneur is more backable than an untried entrepreneur, but I wonder if that's really true. Nobody is calling me saying "Congratulations on your failure, Ken! I have a great opportunity for you now."

Between VREAM and BeautyJungle, I am batting .500, which is great for baseball and I'd like to think it's also good for starting companies. I think someone who has won and lost is ideal actually because they know both sides of the coin. They've made mistakes that they've learned from. They've also shown they can do enough things right to succeed. It seems like an oxymoron: people who have failed are more likely to be successful. Might be a tough sell.

3. Joining a Venture Capital or Private Equity Firms

This could be the optimal solution. Having been through two venture-backed startup experiences, there is a sense that being a venture capitalist might be a good thing.

Venture-backed companies come and go but the venture capitalists always have a longer tenure than the entrepreneurs they back. They raise their funds and put the money to work over time by investing in companies. Typically, it will take ten years until they see the final results of their investments. During this time, they receive not only a management fee (a percentage of the value of their portfolio) but also a percentage of the profits their investments generate.

Their potential for upside is ostensibly less than that of an entrepreneur. The entrepreneur has the possibility of avoiding too much dilution and thereby maintaining a decent sized percentage ownership in the company. The entrepreneur owns his or her percentage outright and so, in contrast to the venture capitalist, doesn't have to split his profits with investors.

Yet, the average entrepreneur is a failure. Only one out of three venture investments are expected to succeed. Only one in one hundred is expected to be a big success. Some die sooner than others and some die a slow and painful death.

Venture capitalists fail too -- they raise one fund but can't raise another because the ROI on their first fund wasn't there -- but they have more security and a longer guaranteed employment period than an entrepreneur (although clearly an individual venture capitalist runs the risk of getting sacked from his firm).

Moreover, they have better odds of success than the entrepreneur. He or she is the gold miner looking for gold in the gold rush and the venture capitalists (along with a host of others) make their living by encouraging the gold miners to pursue a dream that is most likely to result in failure.

Rather than enshrine the entrepreneur as some ideal persona who carries the rest of the world on his back and chase after that, I think it might be nice to be on the venture capital side of the table for a while.

But venture capital's being a good gig plays out in the economics of supply and demand for venture capital positions. Lots of people want to be venture capitalists and very few new venture capitalists are anointed each year. I don't think I want to spend a lot of time looking for a needle in a haystack.

I also look at the venture capitalist web sites and, somewhat surprisingly, most of the venture capitalists have a strong financial background, such as a CPA. I resolve to get my CFA (chartered financial analyst) certificate over the next three years but decide to take a pass on chasing a venture capital or private equity position in the short term.

4. Starting a New Bootstrapped Company

The beauty of starting a bootstrapped company is that you can get it going quickly. You don't have to polish up your story perfectly for venture capitalists. As Phil Knight and the boys at Nike say, you can "just do it".

If you can make it through the tough startup time, you can possibly get to the point where you are self-sufficient based on positive cash flows. You maintain ownership so you control your own destiny.

In my experience, the axiom that "you'll do better if you have a smaller piece of a big pie that if you have a bigger piece of a small pie" proved false; I did much better on VREAM, where founders maintained a bigger portion of equity, than I did on BeautyJungle, where we gave away equity and raised a lot more money (and expectations) going for the quick grand slam.

This mandatory grow-quick-and-big-or-die mentality that comes part and parcel with venture capital investment makes me gun shy of taking venture money again (although I've always enjoyed and received great value from my venture capital backers). I prefer to maintain more control and have less external pressure.

But even VREAM required venture capital at some point, and I wonder if I can start something that could actually become self-sufficient without taking in external investment. This, it seems to me, is the ultimate test of entrepreneurship and something inside me wants to pass that test.

I decided that I am not going to look for a job anymore. I am not going to try to think of the "next big thing" and raise a ton of money for it, I am not going to chase after a venture capital or private equity position -- instead, I am going to start something small and grow it organically.

What to Start?

In thinking through what I want to start, I have decided to steer clear of creating "big idea" companies that will attract venture capital (i.e. create a new market with enormous revenue, profit and growth potential). For technology companies, the market seems to have become too efficient to chase after that kind of thing. Tons of money and tons of smart people are out there waiting to do battle in any given area. For any single area, the likelihood is that there will be over-investment and a lot of failures. I am trying to avoid doing that again.

I think back to some of the vendors I worked with -- the PR firms, the search firms, the IT consultants, etc. These were low-overhead service businesses with high profit margins. Maybe I should start something like that. Your ability to grow the company is contingent on your ability to sell new work and deliver good value to customers. You aren't trying to create a new market or drastically change an existing market. You don't have the risks of creating something that hasn't ever been built before. The rules of engagement and the end product are well defined.

Of course, there are downsides to competing in these commodity businesses. Precisely because they are not revolutionary, there is a lot of competition. But I don't mind competition at all and, based on my previous track record, I think I know how to create companies that can beat the competition and gain a significant share of the market. I just want to do that again and have it be cash flow positive such that I can pull out enough money each year to feel like things are going well -- I think they call this a "lifestyle" company. How hard can that be?

I think everything through and decide that I am going to start three companies. The first company I am going to start is a communications firm that will help companies refine and deliver their messages to various constituents. I have used such agencies in the past, both at VREAM and BeautyJungle, and it seems like there are a lot of companies doing it but I always felt there was a higher standard that they could have reached for.

The second company I am going to start is a retained search firm that will help companies to find good people. Again, there are a lot of them out there, but I think I would like to do this. I have been a consumer of these services before, so I get the basic concepts. I can leverage my connections and I will be involved with company formation and growth, which I love.

Finally, my third company will be a company that provides advisory services for business transactions (e.g. investments, mergers, acquisitions). When a venture capitalist invests in a software company, for example, they need someone to come in and determine how good the code is -- is it just a demo designed to fool people into thinking the product is near completion or is it actually finished? -- and how it stacks up against the competition. I have been on both sides of the table for these due diligence efforts and I think I can help to make sure that good decisions are made.

Starting three companies works well on a variety of fronts. I can learn a lot through this process because I know just a little bit now about each of these businesses and each business is distinct in terms of how they work. It will be a little like Harry Potter's Hermione Grainger taking ten classes at once -- I will learn a lot but it will take its toll on me. But if you are going to experience the pain of doing a startup, you may as well experience the pain of doing three startups simultaneously.

There are also a lot of synergies to doing them at the same time. For example, I am creating the web sites for the companies now and I can leverage a common template. I can set up the corporate structures all at once. I am sure that my startup costs for these three companies are less than what three separate individuals would spend if the companies were started separately. Also, I hope that there will be selling synergies. If I can provide advisory services to a private equity firm, perhaps my communications firm can assist their portfolio companies. In theory, the businesses will grow together better as part of a group than they would separately. Overhead costs will be less, and they will be centralized within Gaebler Ventures. I will need one MIS department, not three, for example. And in terms of supporting my family, I can be moderately successful in the three business and the pooled profits will allow me to make a decent living. So, for example, if I can pull $60,000 out of each company, I can pay myself $180,000 per year.

Moreover, starting three companies, in industries I know only a little about, will force me to bring on people that know what they are doing, who might in a perfect world eventually take on day-to-day operations and free me up to start other companies. The goal is to create my own safe haven. If there is another boom period, I may chase after another grand slam opportunity, but I want to have the comfort of knowing that I have not put all my eggs in one basket. Going forward, I want venture capitalist odds rather than entrepreneur odds.

The market is crumbling around me as I consider what to start. Lots of layoffs. Consumer confidence is at a low point. There are articles about how it is a terrible time to own and operate a search firm. Many companies have curtailed hiring. In contrast to last year, good candidates are easier to find so companies don't need to rely on search firms as much. Similarly, there are articles suggesting that communication firms are struggling. They did great during the boom, but business has slowed now that the bubble has popped. And there are articles suggesting that mergers and acquisitions have slowed and venture capitalists are not making new investments, which seems to not bode well for my company that will offer business advisory services in the area of due diligence.

This bad news doesn't faze me. I figure that it's best to start companies in a down economy because you have less pressure to succeed. Unlike established companies, I will have a very low burn rate. I can look to the future and not spend my time dealing with the after-effects of the past. Indeed, the opportunity costs of learning on the job are not as great in a down economy -- you just need enough work to keep going. It's a big world out there and I assume I can find customers for my offerings if I design them well. Plus, there is a lot of talent on the street, incredible talent, looking for work, for a place to land.

Mind you, there will be a lot of challenges, but I think I can overcome them and get my businesses launched and grow them profitably over time. As it does for all new business ventures, time will tell. I am targeting a September 2001 launch date for the businesses, which means I will have the web sites up and the collateral materials and I will start selling. As long as I have some business by October, I'll be on track with my plan.

Well, that's it. Pretty long but hopefully it answers your question.

-- Ken Gaebler


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