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Leapfrogging Over the Obstacles

Dennis Tracz

Starting a virtual company was a new departure in my life as a serial entrepreneur. Several friends were involved in a computer hardware business, selling computers and related products to businesses and government agencies in the Washington, D.C., area. They had been doing this for about 15 years, but times were changing fast. Dell and other direct manufacturers were starting to use the Internet to go direct to customers. Bypassing the traditional resellers cut prices to customers, and my friends wanted to start an e-commerce initiative to compete. Even though I didn't have e-mail or Internet access yet, I was experienced with start-ups, so I agreed to get involved.

We decided on a membership club-type business model for our e-commerce site. was aimed at the small and medium-size business market and featured over 50,000 products, ranging from computers to paper. We had seen the success of Sam's Club and Costco with the membership-based business model, and since neither had an online presence at the time, we were excited to be the first Web site in this space.

Rocket Science Is Not Enough to Launch

The only hitch was that we were losing our first-mover advantage because of technology problems. In search of an e-commerce software package that could get us started, we went to the Internet World trade show in November 1997 and looked at a wide and sometimes confusing array of software. Prices ranged from free to over a million dollars and frankly, I couldn't tell the difference between them. After a difficult process, we decided on off-the-shelf software and started to work with an Internet professional-services firm in Raleigh, N.C.

The CEO was a former NASA rocket scientist, so we felt that we were in good hands. Despite this expertise, after nine months of incredible problems and expense we were unable to get our Web site up and had to go with another software package. Sean Burke, a talented developer from our new software company, Interworld, finally got our site up and running in 11 days—a year after our virtual company was founded.

Business started coming in right away. We had spent a lot of time setting up marketing partnerships with ClickRewards, CNET and others. Sales reached $50,000 in our first two weeks and we were getting excited about the potential for our site. By December we were up to $100,000, but we were also overwhelmed with customer-service issues. E-mails, phone calls, even letters were burying our four-person staff. Most of the 125 phone calls a day concerned order tracking, which we had not yet enabled customers to do online, and we were having trouble linking the catalog software to payment software.

Ramping Up Online

One lesson we learned was that prepackaged software was not scalable enough for us. Fortunately, we were able to hire Sean Burke full time and implement technology to help with customer service. Another was that we needed to outsource our call center and set up an automated e-mail management software system. Our main supplier, a large public company, was having great difficulty keeping up with demand generated by our site, and out-of-stock products, lost shipments and even credit-card fraud were starting to cause problems for our small staff.

Rebecca, my wife, used the special e-mail software to answer almost 1,000 messages a day, and the pace was killing her. The new e-commerce software was blowing up because of the high demand on our Web site. The outsourced call center didn't work well at first—a combination of overwhelming demand and poor training was causing many customers to get upset and complain. Yet sales were still growing rapidly--they would reach almost $8 million in 1999.

We really needed more people and infrastructure, so we decided to raise money from outside investors. After hiring a national law firm to draw up a private placement memorandum, we started soliciting angel investors and friends. We raised about a million dollars over the next six months, but the fun was just beginning. A deal with a portal was driving incredible traffic and sales to our site. Most of the money we raised would be used to pay for this and other marketing deals.

Venture Capital for Virtual Leverage

My (so-called) friends, who had talked me into getting into this business, were trying to get out of it because the intensity was too great. Finally, we were left with Sean, my wife, the former CFO of my friend's company and me to run ClubComputer. I approached over a dozen venture capitalists looking for more money but was told no, over and over. E-retail was starting to look like a loser to the investment community and we were out of luck. We started to realize that we needed a Plan B, and quickly.

Working at night, in addition to his duties, Sean had demonstrated how Java and Linux together could outperform expensive commercial packages. Together we went to see a friend of mine, who was a very successful entrepreneur and VC, to propose a new idea: an e-commerce software company. We spent 10 minutes explaining how our software worked and what our plan was to bring it to market. Twenty minutes later we left his office with a major commitment to launch our new virtual company. The investor told us not to talk to anyone else—he wanted 100 percent of the deal!

The new company, Buysellware, was set up speedily, and was sold to a public company that wanted to leverage the almost 30,000 members, in exchange for stock. This transaction enabled us to continue developing the new software while satisfying the obligations of and its shareholders. If it had not been a virtual company with minimal staff and overhead, we could never have managed the transition so quickly.

Working Virtually in Real Time

Buysellware is a virtual company like ClubComputer, with no office space at all. Our people are located in San Francisco, Raleigh, N.C. and suburban D.C. in addition to my home in Nellysford, Va. The new company has attracted a top-flight management team and several leading VCs as investors. The software has changed tremendously since days and is now the most sophisticated and advanced program of its kind on the market. Buysellware's product, called LeapFrog, uses enterprise Java beans, XML and Bowstreet and other leading technologies and will be the first software to be delivered as a service over the Internet. In other words, we have become a provider to the application service providers.

The biggest lesson I have learned from the experiences of the past few years is that the technology arena is fast-changing and entrepreneurs have to keep up with that changing environment. Shortly after we sold the entire e-retail sector blew up, causing many companies to go out of business. We were very lucky to avoid the disasters that hit the whole industry and are now moving even faster, in an even better area of cyberspace. Virtual companies, to succeed, require a commitment to technology, and I urge other entrepreneurs not to be afraid to invest big in IT-related processes and software.

Although we manage this company as we did the previous one, using the Internet and frequent conference calls, I try also to see everyone often by visiting them in person, and we are planning to set up an office in the near future for at least the technology folks, to increase creativity and efficiency. Paradoxical as it sounds, there's plenty of reality in a virtual company: real infrastructure, real money and especially, people. Taking all of them into account is essential to overcoming whatever obstacles stand in your way.

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