Against the Odds.

WITH ALL THE HYPE, IT'S GETTING VERY HARD TO DISTINGUISH WHAT IS REAL AND WHAT IS VIRTUAL IN THE increasingly insane web world of Latin America. Reared in the no-nonsense neighborhood of Dorchester in Boston, Robert Davis, 43, knows something about cutting through hubris. When the New England native became Lycos Inc.'s first employee in June 1995, it was little more than a research project at Carnegie-Mellon University.

Under the hard-nosed CEO, though, Lycos has become one of top 10 websites in the United States. Its market value has soared to more than US$7 billion from some $2 million in original venture capital. And it is expanding around the globe. Davis recently visited Miami to announce Lycos increased operations in Latin America. In an exclusive interview, he spoke with LATIN TRADE Editor Mike Zellner about what's hot and what's not on the Internet. Highlights:

You are 22 years old, you live in Mexico City and you want to launch an Internet company, where do you begin?

You log onto Lycos.com to get an idea of what the web is all about and then you go to the jobs page and apply for a job...[laughs] ... The greatest opportunity still out there are the commerce destinations. Content sites are a lot tougher to compete with these days. There are some established players--the traditional media and a handful of others--that have built their brands and have a lot of money to spend. They make it very, very difficult to build up anything meaningful. That's not to say someone couldn't do it, but it becomes very tough. The vertical destinations typically don't have the critical mass of audience to be earnings positive.

Wait, you lost me. What do you mean?

If you look at the advertising dollars and the way that they are allocated--spending is more concentrated on the web than traditional media. There are so many sites that advertisers are probably not focused on an 80/20 rule, it's probably more like 98/2, or 98% of all the ad dollars go to 2% of the websites. So, the small special interest sites very much struggle to get any ad revenue. What they end up doing is jumping into a [advertising sales] network, like DoubleClick.net, Flycast.com or 24by7.com, and relying on them to sell advertising at a 40% discount, not a high cost per thousand and not a high sell-through rate. Establishing a content destination is tough to do today. I wouldn't do that today despite the fact that it's our business and I assure you that I'm not trying to discourage competition, it's just a tough way to get yourself established right now.

Commerce on the other hand is very broad based. There are an abundance of niches that are still completely available. There are niches that are available on a global basis.

Give me an example.

Hospital supplies. Chemicals. Pharmaceutical drugs. Virtually every business-to-business category that you can imagine still sits out there as an untapped opportunity. Beyond that, if you start to took at consumer goods online, you can almost open up the Yellow Pages and look over the categories to see what is available. There is still a lot out there. Major appliances--there's an Internet opportunity there. It's a tougher thing to do because you wind up with a delivery mechanism [issue],which makes it trickier. But if you are buying a washing machine or other appliance in a physical store or over the web, you never take it home with you. It is the nature of the product. So, it's easier to say where you wouldn't go then where you would, because where you wouldn't go is limited to a handful of places where there are established competitors.

OK, what businesses would you avoid?

You wouldn't go into books. You wouldn't go into CDs. You probably wouldn't go into computers because the margins are low and the competition is plentiful. You wouldn't go into software for the same set of reasons. Electronics, there is an abundance of competitors. Pet supplies, the same thing. You work your way through possibly a dozen categories of sites, possibly 20 at the outside, and then it becomes wide open. There are really no established players.

How do you get between the hospital and the hospital supplier, say, or the consumer and the appliance maker to take part in the commerce between the two?

What you need to come forward with is a good value proposition that says, 'Here is how I am going to benefit you.' It's not as difficult as it might sound. Suppliers are generally encumbered by their ancient history, which means suppliers generally have a set bureaucracy, an old way of doing things that makes it difficult for them to evolve into the web. I'm speaking at a conference in Orlando to a couple of thousand manufacturing executives. There's a group of people as an industry that is looking at the Internet and saying what does it mean to me and how does it impact my business. I know there is an opportunity out there somewhere but I don't quite understand what it is and how I play with it. As you start to look at that, that entire room starts to become an opportunity for partnerships for the 22-year-old in Mexico City who is looking to start an Internet company.

How does the 22-year-old avoid losing the soul of a start-up when seeking money?

You have to be smart. If you negotiate for a few months to get the best terms possible, you may give up a little less ownership than if you go for the money right away. But, by the same token, you would likely also have lost your first-mover advantage. You would find yourself on the outside looking in. I guess what my attitude would be is that it's always smart to eat when dinner is served, especially for that first financing opportunity. If you have a financing opportunity, do a smart shop of it, which means compare what the alternatives are but don't get greedy because greed kills. Getting a business off the ground in an expeditious fashion is what is most important.

Is there some away to avoid losing control?

There's a big difference between taking money and giving up control. You can pick up some wonderful financing partners turning over less than 25% of your business. In many cases, well less than 25% of the business. It does not have to be an environment where your backers are running the operation for you, nor should you ever allow yourself to get into that sort of environment. In today's market, you don't need to.

Where do you go if you are looking to shake the money tree? Do you go to Wall Street? Do you go an investment bank? Do you go to private investment funds?

Assuming it's that 22-year-old and assuming it's a seed stage environment that he or she is looking at, I'd go to venture capitalists. Funds are plentiful right now. They would have a greater appreciation of what is trying to get done. However, having said that, the odds of success for that 22-year-old are infinitely greater, in terms of financial success, working for an established player rather than trying to start their own thing.

Why?

Look at the reality of it. If they are lucky, five out of 100 businesses survive. Out of those five that survive, no more than 1% of those become anything more than living dead, and by the living dead, I mean a business that keeps itself in business but generates no meaningful return overtime. And even that is probably a generous number, You end up with one in 10,000 businesses or less that prosper. It's not to discourage anyone from trying to grab their own brass ring, but if you are a student of statistics, you will see that the odds just say that you can't get it done. In fact, if you were talking to a Las Vegas bookmaker no one would back you on the odds of getting it done. It's not going to happen.

If the odds are as bad as you say, then why are the venture capitalists backing entrepreneurs?

The venture capitalists don't rely on all of these business succeeding. It's about managing the downside risk with one or two homeruns. If you're part of that living dead where the venture capitalist can take his or her money out to even up, then that's an OK thing so long as the venture capitalist has one Lycos, one Amazon, or one eBay in the portfolio of investments. Having said that, for every venture capitalist deal, there are another 1,000 that don't get financing. I see business plans coming across my desk by the truckload. There are several hundred business plans a month that get forwarded to us from folks who have ideas, concepts and businesses. These are folks who are chasing dreams and, you know, some of them may succeed. I am not trying to say don't do it, I'm just trying be realistic about the odds and the odds are very, very small.