Bad Times for Broadband Office - Company Financial Information

Industry Standard, The, April 23, 2001 by Lark Park

Backed by venture giant Kleiner Perkins, BBO was poised for greatness. What went wrong?

SOMETIMES STAR POWER JUST ISN'T enough. With one of the best pedigrees in Silicon Valley, Broadband Office was poised to become the next big technology celebrity. Nurtured by Kleiner Perkins under the tutelage of two of its top venture capitalists, Vinod Khosla and Kevin Compton, BBO was going to be an all-in-one provider of phone and Internet access, topped with a range of services -- like Web hosting and software to automate human-resources tasks.

But after two short years, Broadband Office is running out of cash, offering a lesson in humility. No matter how much a company has going for it -- big backers, big partners, big budget -- it can still miss the mark. Several people close to the company say BBO's problems go beyond the economic downturn: They blame the missteps of its own management.

Broadband Office was born with a promising future. Real estate companies wanted to diversify revenue, and small and midsize companies were hungry for the latest technologies. BBO would satisfy both needs by wiring offices with high-speed connections. The company convinced eight of the nation's largest real estate investment trusts and others to hop on board, giving BBO access to 20 percent of the commercial real estate in the country. Rivals Microsoft and Sun Microsystems plowed a combined $50 million into the company, and former FCC Commissioner Rachelle Chong signed on to navigate the mire of telecommunications laws.

By the fall of 1999, word of the 6-month-old startup was getting out. BBO executives were effusive to the press. Board member Khosla appeared on CNNfn, proclaiming the opportunity for BBO was "at least as large, if not larger" than stars like Juniper Networks and Cerent -- companies then valued at more than several billion dollars each. After just a year, BBO's staff had grown from nine to 700 -- an explosive rate even for an Internet startup -- and was reportedly valued at $1.5 billion.

Now BBO's star is no longer rising. Since December, the company has struggled to put together another round of financing. Several sources close to Broadband Office say it's almost burned through the $250 million raised from private investors. Khosla and other execs won't comment on the burn rate. Khosla says BBO has raised less than $250 million, but he acknowledges Kleiner Perkins is supplying bridge loans, a form of financing often seen as a desperate measure for a startup.

Of course, beleaguered BBO has plenty of company these days. The real estate markets have cooled, and the networking and software markets are in deep freeze. Still, that a prized jewel in the Kleiner crown should lose its sparkle so fast is undoubtedly embarrassing for Silicon Valley's top venture firm, especially since the company started out so blessed. In addition to a sterling list of investors and access to one-fifth of the commercial real-estate market, BBO boasted a network built by a former director of Internet pioneer UUNet.

Acting CEO Dan Chu declines to say anything more than that BBO remains focused on its goals. Board member Khosla also wouldn't answer many questions, saying the company is not yet ready to talk.

Yet according to interviews with nine former BBO employees, all of whom ask to remain anonymous because of nondisclosure forms and compensation issues, the company was beset by a lack of direction and a management team prone to misfires and infighting. "It seemed like such a sure bet," says one former employee, who like others close to the company felt BBO had fallen victim to hubris. "The attitude was like, 'We don't need to pay close attention."

All startups face problems with communication and organization when they expand quickly, but BBO's hypergrowth exacerbated its share of troubles. Employees placed on one project would be taken off a few days later and put on another one. Some would start an enterprise only to find that others were duplicating their efforts. Hundreds of thousands of dollars in software licenses went unused. Unpaid bills caused vendors to stop shipping computers and office supplies. Contractors walked off the job because they weren't paid.

But it wasn't only rampant growth that went unmanaged. BBO made basic mistakes in strategy that cost it precious time and money. The company wired more than 500 buildings for broadband access, but some were in cities where it had no sales force to pitch prospective customers. At the same time, BBO hired sales staff in cities where it had not wired buildings. Worse, there was indecision about its primary business -- how to offer applications on a single platform. As the debate raged (whether BBO should resell other companies' applications or develop them in-house) the company shifted strategies back and forth. Consequently, BBO spent money on employees, facilities and expensive computer and networking equipment that sat idle.

Inevitably, turf wars erupted. In December, BBO's board created a spinoff company, Zephion, to handle the wiring, while BBO was left with applications and software. The move proved a good one: BBO no longer had to bear the heavy capital burden of wiring buildings. But the separation was sudden and far from amicable. Some 200 employees left with Zephion. (BBO laid off another 69 employees in March.)