Fame and The VC Game - Company Business and Marketing

Industry Standard, The, Sept 18, 2000 by Jonathan Rabinovitz

Net entrepreneur Sabeer Bhatia hit it big once with Hotmail. To do it again with Arzoo.com, he's finding his name is a powerful asset.

SABEER BHATIA WAS BRACING FOR A long flight from Geneva to Bombay, India. It wasn't the flying that made him uneasy, but the task that awaited him at the other end. Bhatia was going to promote his new company, Arzoo.com. And his every move would be scrutinized.

The 31-year-old entrepreneur is no novice to the risks and rewards inherent in Internet startups. Bhatia sold his first effort, Web-based e-mail system Hotmail, to Microsoft for $400 million in 1997. In Silicon Valley, that deal made Bhatia a brand name. In India, it turned him into a superstar as big as Michael Jordan is in the United States.

Once in Bombay, Bhatia would step off the plane into a glaring media spotlight. There would be high-profile television interviews, a big news conference and meetings with some of India's high-tech leaders -- and Bhatia would try to parlay each into an advantage for Fremont, Calif.-based Arzoo.

The 18-month-old startup is building an online marketplace that links technical experts to individuals and companies that need help with everything from Java tricks to servers on the fritz. Bhatia hopes to leverage his fame to recruit thousands of engineers in India and elsewhere into the army of technical consultants Arzoo will need to succeed.

But fame is a double-edged sword: It also raises the stakes for Bhatia. Arzoo isn't just another startup that can quietly shut its doors if the idea fails. Bhatia's role as a national hero and symbol of can-do entrepreneurial spirit adds weight to his responsibilities: He has to make Arzoo work.

"I can't shut a company down like a first-time entrepreneur can. The world expects too much from me now," Bhatia says from his Geneva hotel. "It's my reputation at stake."

Bhatia's strategy touches on a debate in the venture capital world as well: whether to bank more on the talent, experience and even fame of an Internet entrepreneur or on the growth potential of a startup's market.

Some VCs argue that the most important factor in a startup is its leaders' abilities. But other investors will forget the millions a CEO made for them yesterday the moment today's startup hits troubled waters. For Arzoo, it's been both.

Arzoo originally set out last year to tap into what was then a hot market for online retailing. The company had what Bhatia called a revolutionary idea to simplify shopping on the Internet: allow Web shoppers to carry their online shopping basket from site to site, using the same login and credit-card information for all sites. If questions arose, they would be able to turn to an expert consultant online for immediate help.

Back then, Net retailing was hot, and venture capitalists were calling out of the blue for a stake in Bhatia's startup. During a round of golf at Pebble Beach, one VC half-jokingly offered to invest, knowing next to nothing about the company.

Menlo Ventures, one of two VC firms that backed Hotmail, was at the top of Bhatia's list. Menlo received about $60 million from Microsoft's purchase of Hotmail. At the time, it represented an unusually huge return on a $3 million investment.

Most impressive was the bargaining Bhatia did with what was then a more powerful and intimidating Microsoft. The software giant offered $160 million; Bhatia boldly countered with $700 million. They settled on $400 million.

Partners at Menlo told Bhatia that if he could get more than $200 million from Microsoft, Menlo Ventures would erect a bronze statue of him in its lobby. The plan was nixed by Bhatia's mother, who angrily told her son that only people with the accomplishments of Gandhi and Buddha should pose for monuments.

Statue or no, Menlo Ventures welcomed the idea of working with Bhatia again and spoke of him in glowing terms. "He's a hardworking, charismatic guy who's done it before," Doug Carlisle, the Menlo partner who handled Menlo's Hotmail investment, said last October.

Bhatia also lined up financing from Softbank. But he insisted on letting Menlo in on the deal, arguing that one should remember one's friends when it comes to new business deals.

Things changed abruptly last spring. Internet stocks began to plummet, dragged down by a collapse in e-commerce shares. As an asset, the value of Internet fame declined as well. Even so, Bhatia was stunned to get a call from Carlisle in March, saying Menlo no longer wanted to invest.

While he still personally wanted to finance Arzoo, Carlisle explained, his partners had voted against it, saying there were too many unanswered questions: How much would it cost to gain users? How would Arzoo charge customers? And was there a market for Arzoo's service in the ailing world of online retail?

Menlo's questions were good ones, Bhatia admits, but they didn't seem important enough to ask only a few months earlier. In the stock market downdraft, it seemed, market potential was worth more than an entrepreneur's credentials.

"We love Sabeer, but there's a whole bunch of other things we needed to look at," Carlisle says.