In chasin what I thought were moonbeams
I have run into a couple of walls …
—Jim Croce, from “The Hard Way Every Time”
All over America tonight, bartenders are listening, or pretending to listen, to a modern twist on an old, sad song. This story doesnt begin with, “There was a girl …” or “There was a horse …” This one begins with, “There was a Web start-up …” The Internet as imagined by Edward Hopper.
Steve Zarrilli, 39 years old and fresh off his first major career setback, doesnt need to bend a bartenders ear, but his story sounds awfully familiar. Less than a year ago, US Interactive (USI), the start-up e-consultancy he headed as CEO, carried a surreal market cap of $1.5 billion. Zarrillis 600,000-plus stock options were potentially worth somewhere in the ritzy neighborhood of $57 million. The company was growing at 100 percent quarter to quarter—head count quintupled to 900 over an 18-month period—and was embarking on the acquisition of another sizable integrator called SoftPlus. Investors were clamoring for even higher growth. Nay-sayers were few and far between.
“To be honest, I knew [our stock] wasnt going to continue to climb forever, that we were significantly overvalued at $92 a share,” says Zarrilli, over lunch at a midtown New York restaurant. “I thought a reasonable valuation was $15 to $25, or about six to eight times annual revenue.”
Neither Zarrilli nor anyone else “in the path of the tornado” foresaw how catastrophic the reckoning would be. In USIs case, apart from the sharp drop in demand from both dot-com and established customers, there was a host of specific problems. Chief among them was financing a piece of the SoftPlus deal with an $80 million note, to be paid from the proceeds of a secondary offering, as a means of minimizing dilution. In a bull market, taking on a little debt was an excellent idea, as agreed to by the board and by USIs financial advisers. But when the secondary offering faltered in a collapsing stock market, suddenly the decision proved calamitous. On top of that, Zarrilli lost the support of two large shareholders on the board, whom he accuses of “trying to neutralize me.”
After a protracted test of political wills, Zarrilli was ousted last September, with USI stock trading at $9. Since then, the stock has fallen below $1, to a mere 31 cents as of Jan. 2. The company is fighting a furious battle to survive and avoid the ignominy of being de-listed from the Nasdaq.
Zarrilli, however, has landed on his feet as chairman and CEO of Solution.com, a $12 million, privately held B2B software company. He managed to sell about a third of his USI holding at prices well above the bottom, netting several million dollars. And unlike many of his industry counterparts, Zarrilli never borrowed against his equity and thus avoided margin calls from frantic brokers and the need to unload personal assets.
“Throughout the whole thing, I never changed my lifestyle or moved to a bigger house,” says the former Big Five accountant. “So I never got into financial trouble.”
Best of all, Zarrilli discovered that his bout with disaster was an advantage in the open market. He had a number of attractive offers from established service providers, before deciding to head up a company whose assets do not walk out the door every night.
“At Solution.com, I was told that Im more qualified to run the company because I had a near-death experience,” he says. “Id been through a perfect storm and lived to tell about it.”
Paul Dinte, a Washington, D.C., headhunter who specializes in the IT services sector, seconds the notion that a career setback need not be a deal-breaker (indeed, see “4 Comeback Kids, at left). He says potential employers are inclined to attribute an Internet start-ups failure more to the financial marketplace than to “the fault of individuals.”
“Not all opportunities end up with good results, but that doesnt mean the person failed,” says Dinte.
Pick Yourself Up, Dust Yourself Off, Start All Over Again
—Jerome Kern and Dorothy Fields, from the movie “Swingtime”
Nicholas Hall, an entrepreneur who founded Startupfailures.com and has lots of personal experience in crashing and burning, agrees that as difficult as it is for successful execs like Zarrilli to handle their first career missteps, “persistent action in the face of fear and failure” will almost invariably result in better opportunities down the road.
“A period of doubt, [when you] start to question what youre doing with your life, is normal,” says Hall, who suggests using this interim period to craft a new “life vision” for yourself.
This is what Mel Bergstein did when he was ousted by the board of Technology Solutions Co. (TSC) back in the early 1990s. Bergstein went on to found DiamondCluster International (formerly Diamond Technology Partners), one of the few publicly held Web consultancies that makes money. Bergstein says he had long envisioned starting up his own company, but was hamstrung by restrictive clauses in his old employment contracts.
“You try to look for the advantage in every situation,” he says. “Getting fired at TSC was an opportunity to do something Id been talking about for years. For me and the 27 other [ex-TSC staffers] who formed Diamond, it was also a chance to make good again, because after coming off a big failure, I had a lot to prove.”
Also critical to Bergsteins career comeback after the TSC debacle were a willingness to own up to being canned (“The worst thing you can do is try to deny a failure”), a twice-a-day workout regimen, and a 36-year marriage to a wise and supportive spouse.
In addition, Bergstein was fortunate enough to absorb some valuable lessons in defeat. One of the biggest lessons learned from the problems at TSC, says Bergstein, was the importance of building a “platform for growth”—infrastructure, training, recruiting, etc.—before going off and booking a mountain of consulting business.
Jim Sims, the former CEO of Cambridge Technology Partners, also ran smack against a board of directors that rejected his plan for moving the company into the post-Y2K era. Like Bergstein, Sims saw this rejection as an opportunity to go off and run his own show, this time free of shackles. Sims new company, Gen3 Partners, is 75 percent controlled by himself and his partner.
“One of the things I learned is that successful consulting companies will be those that are controlled by management and not by financial markets, that will be able to chart their own destinies,” says Sims. “Youve got to be in a position where you can deal with morale, turnover, layoffs, financial problems, and all the other negative things that have nothing to do with the long-term solution.”
David Bayliss, the former marketing VP at struggling services rollup BrightStar, likewise has taken away some pearls of wisdom from his experience there. Bayliss spent about a year at BrightStar before joining Zamba Solutions as marketing VP in August. “The thing that really appealed to me about Zamba was [that it has] a strong, passionate, unified group of individuals,” says Bayliss, “as compared with BrightStar, where, as a rollup, you had a disjointed culture.”
Though Bayliss carries a persistent feeling of disappointment from his tenure at BrightStar, he also recognizes that there is only so much a single executive can accomplish, and that it makes no sense to beat yourself up over matters you cant control.
“The issue is how do you [fix a disjointed culture] and do the other 15 things you have to do. My primary responsibility was to help create a brand and drive awareness in the marketplace. There are only 24 hours in a day.”
Surely, the industrys retrenchment will be tough. Executives and former executives at companies hit by layoffs and wholesale restructurings say these shakeups can take their toll on business and personal relationships. “Having to change what were doing in midstream,” says iXL alliance guru Lorin Coles, affects friendships with partners and members of his internal alliance team.
“Going through this is no fun,” he laments.
Youre So Vain, You Probably Think This Song Is About You
Web services personnel also have learned from the folly of arrogance. Or, more specifically, the difference between the kind of vanity that led consultants to hoodwink their customers, and the cockiness that is essential to defining and creating a new market.
Steve Guengerich, who recently resigned as VP of strategic partnerships at Agillion to head up his own marketing communications firm, says he learned all about this difference when he worked for Steve Papermaster at BSG, a client/server pioneer. Papermaster will never be confused with a shrinking violet.
“Steve was out there in the marketplace trying to educate people by whatever means necessary,” recalls Guengerich. “And that involved a willingness to step up and stand out, to shake things up. But thats not the same as being arrogant.”
Guengerich believes that out of the current mess will emerge a host of new “gaps and opportunities,” to be exploited by the smartest service providers. The ex-BSG manager notes that client/server technology came to the forefront during a period of slow economic growth, when customers were locked into onerous IBM leases and needed an alternative to those heavy capital costs. In much the same way, he suggests, Internet computing initiatives will flourish in down times, provided the e-services industry rejects the “get-rich-quick” mentality.
Bergstein also believes that those who weather this storm will come out stronger. “Failure always stays with you, you never forget the sting,” he concludes. “But getting knocked down is a fundamental part of life, at least for those people who are committed to winning. Success is all about getting up again. A career is a long game with a lot of innings.”
Still, could this horrific inning have been avoided? Could the men and women running these e-services companies have slammed on the brakes before falling off the cliff?
In hindsight, there are plenty of things they could have done—run their businesses more rationally, laid in sufficient infrastructure to support hypergrowth, limited their hiring sprees—but none of that was easy six months ago.
“In an environment like that, where everybody is screaming for you to run faster and faster or stop dead, its tough to slow your pace,” cautions Zarrilli. “All I can say is its nice now to at least have a tangible asset under my feet.”