FLEXING VC INFLUENCE -- ADVENTUREDOTCOM: AS START-UPS POUR MONEY INTO CAMPAIGNS, PEOPLE ARE BEGINNING TO QUESTION WHAT VENTURE CAPITALISTS KNOW ABOUT MARKETING

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It was time for intervention. The Internet company, like a lot of its brethren, had recently launched a pricey ad campaign. But it wasn't working. Something needed to be done, and fast.

So the money guys-the venture capitalists-stepped in.

"In looking at the campaign bang for the campaign buck, we became concerned that while the expenses were certainly on target, the customer acquisition was behind schedule," says David Carlick, a partner at Vantage Point Venture Partners, an early backer of the start-up.

Earlier this month, the partners asked Mr. Carlick to help out, before it was too late.

LUCKY HIRING

Vantage Point is lucky; Mr. Carlick knows a thing or two about advertising and marketing. He ran his own ad agency in Silicon Valley, led Poppe Tyson's interactive efforts and then worked at two Internet start-ups before joining Vantage Point earlier this year.

But it isn't the first time and it definitely won't be the last time that an ad campaign causes a moment of angst for a venture capital group.

There's growing concern in the ad business and VC business that venture capitalists are ill-prepared to advise Internet companies on advertising, even as the start-ups they are funding plow record amounts of money into it.

What do VC's know about marketing?

"Absolutely nothing," says Phil Halperin, general partner of Weston Presidio Capital, a VC that has funded a number of start-ups.

DISAPPOINTMENT IN THE OIFFING

"There's going to be a lot of companies that will be disappointed with the results of their promotional efforts" this quarter, Mr. Carlick adds. "There's going to be a lot of unhappy campers at board meetings next year."

Since the start of the year, more than $6 billion in venture money has been invested in Internet companies, according to PricewaterhouseCoopers. Advertising Age estimates private dot-com companies, primarily funded by VCs, are spending at an rate of $2.6 billion annually on advertising. Some venture capitalists say as much as 80% of the funding they're giving to Internet companies right now is going toward marketing.

In years past, venture capital companies hardly had to worry about things like an ad campaign. Technology start-ups used venture money to build manufacturing plants or to fund research and development. Companies didn't even think about advertising until they had a product to market.

A RACE TO BE KNOWN

Now, Internet companies are spewing out multimillion-dollar campaigns even before they get a Web site up and running on the theory that the biggest, loudest campaign will win the most customers.

One reason for all the noise is it's a lot easier to get funding than it used to be. Not even a year ago, Internet entrepreneurs had to beg for funding. Now VCs are flush with investor cash, and they're funding Internet entrepreneurs as quickly as they can.

The dollar amounts are bigger, too. Companies that once would have been happy to receive a few million in venture funding now routinely get up to 10 times that amount. The money is coming earlier-and faster-than ever before, and much of it is going toward marketing and advertising.

GAMBLING WITH MARKETING MONEY

"Marketing can suck a lot of dollars very quickly," says venture capitalist Jennifer Fonstad, director of Draper Fisher Jurvetson, adding, "It's very risky, particularly if done poorly."

There's a lot of evidence that young dot-com companies are taking risks with their marketing dollars.

They are hiring agencies and making buys even before they get funding. Fashion retailer Boo.com launched an estimated $25 million campaign this summer before its site went live. London agency BMP DDB created the campaign.

Gloss.com, a cosmetics retailer, says it plans to spend $20 million on TV, print, outdoor, radio and online ads through 2000, via Ground Zero, Marina del Rey, Calif., but company founder and CEO Sarah Kugelman acknowledges that she hasn't raised all the funds yet.

"It's a very competitive time right now," she says, in explaining why the ad budget is expected to be so high. "It's important that we [solidify] our place in the market."

CLUELESS BUYING

Media executives say business development people at Internet companies are buying print and radio advertising at prices well above the rate card-simply because they don't know how the business works.

Some media companies are clamping down, insisting on payment upfront for some Internet company ad buys. So are some agencies; Young & Rubicam's Media Edge unit is demanding up-front payment from all dot-com clients at the time the expenditure is going to be made.

"Dot-coms don't realize that just because they got that first capital infusion [doesn't mean] there will be a second one. Advertising costs a lot of money," says Tom Handy, exec VP-chief financial officer of Media Edge.

Mr. Handy says he hasn't had any "major" problems with Internet companies not paying their bills; it was a defensive action taken earlier this year. He declined to say for what dot-com clients Media Edge buys media.

SUPERBOWL BLOWOUT

Reports have circulated that Super Bowl XXXIV, that crowning emblem of advertising excess, is nearly sold out of advertising, with at least 15 Internet companies buying air time. (The going rate for a :30 runs about $2 million.) That's leading some wags to suggest that football pools would be a lot more fun if you had to pick which of the Internet companies will still be around come Jan. 30.

"In a world where money is pouring into the sector, I have a hard time believing the [advertising] I see is going to work," says William B. Perkins, a longtime ad agency executive who recently became VP-marketing at Visto Corp., a venture-backed marketer of an Internet-based data storage service. "It's very easy to spend a big sum of money and not know what you get from it. That's dangerous. If you're not rigorous up front, it's going to come back at you."

The same could be said of venture capital companies. VCs that used to spend months doing technical due diligence before investing a dime in a company now commit funds based on gut feeling. It's a bit like the guy who sells tuna at the Tokyo fish market, opines Mr. Carlick. "What you're doing is looking for things that feel right."

Given the frenzied atmosphere and the growing importance of advertising, it's becoming clear that venture capitalists will need to know as much about the subject as they used to have to know about engineering.

MARKETING SKILLS 'INEVITABLE'

"It will become more incumbent upon them to develop more marketing functional expertise," says Kirk Walden, national director-venture capital research at PricewaterhouseCoopers. "I have to conclude it is inevitable, because the numbers are just too big."

That isn't to say VCs are clueless about marketing. But although they recognize the need for it, Mr. Walden says, "their ability to evaluate various [marketing] alternatives is not nearly as well-defined."

Ultimately, observers say, VCs will need to provide the same kind of fiduciary oversight of their Internet companies' marketing choices that they would of technology or staffing.

"The good VC guys care about where the money is going. Others are not as careful," says Brian Hurley, principal of agency Grant, Scott & Hurley, San Francisco, which does work for venture-backed clients Tavolo, an online gourmet food store, and Della.com, a gift registry.

STEPPING UP EXPERTISE

Some VCs are taking steps in that direction. At Draper Fisher

Jurvetson, partners host informal meetings to bring together marketing executives from their portfolio companies. At one meeting in June, eight start-up executives discussed radio advertising.

"Understanding how to effectively spend marketing money is important," says Draper Fisher's Ms. Fonstad. "Figuring out what the right metrics are is a challenge."

A few venture capital firms have gone the route of Vantage Point, bringing on a partner with significant advertising expertise. Sequoia Capital signed Mark Kvamme, co-founder of tech agency CKS Group, as a partner in July.

Walden Group brought on Rich LeFurgy as a general partner earlier this year. Mr. LeFurgy is chairman of the Internet Advertising Bureau and a former executive at Starwave, Walt Disney Co. and N.W. Ayer & Partners.

None of the three admen-turned-VCs joined up to become marketing consultants. They were brought on to look for investments in new companies. But consulting on Internet investments is a growing portion of their job.

"I'm the partner people come to when it comes to marketing," says Mr. Kvamme.

SOUNDING-BOARD ROLE

At Walden Group, Mr. LeFurgy acts as a sounding board for start-ups' marketing plans.

Mr. LeFurgy laughs when asked what VCs know about advertising. "The truth is, not very much," he says.

VCs are expected to help with the financials, lining up bankers and partners, but VCs that provide advertising, marketing and sales assistance are a more direct form of help, he says. Management, however,

isn't always expecting that, he says, "so 'helping' while providing a sense of ownership is the trick.' "

That hasn't stopped VCs from getting involved in one aspect of advertising: choosing an agency.

"Agencies have benefited from the venture capitalists more than [agencies] are benefiting from the dot-com companies," says Courtney Buechert, managing director with Leagas Delaney, San Francisco. He and other agency executives say much of their dot-com business comes from referrals from VCs and that VCs can wield a heavy hand when it comes to advertising.

Few VCs will say they're out of their element when it comes to advertising, but they do acknowledge they're working without a net.

"The noise level is so high," says Jeff Brody, founding partner of Redpoint Ventures, referring to the amount of dot-com advertising going on. "What worked even six months ago or even a quarter ago has changed."

LIMITED DUE DILIGENCE POSSIBLE

"There isn't a lot of due diligence you can do," he adds.

Mr. Brody, a venture capitalist who backed WebTV Networks, is clearly focused on the bottom line.

"The single biggest expenditure for some of these companies is marketing," he says. Mr. Brody adds it's easier to "turn on and off" spending on marketing than it is to control such expenses as payroll.

The stakes-and the budgets-are higher than they were in the days of WebTV, however.

Back in 1994, Mr. Brody sat in on company meetings where it debated whether to fund a single TV spot-scary stuff for this admitted "technology guy." Now, he says he's got five to seven Web companies in his portfolio that have fourth-quarter ad budgets "bigger than the whole-year budget was at WebTV."

Redpoint has created relationships with several consultancies and market researchers that can help with marketing functions, Mr. Brody says. He admits there's a need for VCs to develop more marketing expertise, but he stops short of saying that function should be brought in-house, as VCs have done with recruiting experts.

E-SATURATION A PROBLEM

"Will we feel the need over time? Possibly," Mr. Brody says. "We're not feeling we're out of our depth right now."

Some VCs are counseling their companies to stay out of the ad fray entirely, a strategy that may end up looking rather smart come Jan. 1.

"E-saturation is happening all over right now," says Sequoia's Mr. Kvamme. "No one knows what's going to happen [next quarter]. . . . The idea of the broad e-commerce [company] getting eyeballs through traditional media is on the wane."

That's what a lot of dot-com companies and their financiers may start to realize as the fourth quarter goes on. Figuring out what to do next will be critical to the survival of many companies, and that's where VCs can provide assistance.

But there's another, more basic reason VCs should want to get more ad-savvy: Start-ups need help and they're looking for it in the companies they choose to fund them.

"One of the people we're looking at now as a VC specifically has retail and branding experience," says Jeff Bonforte, CEO of I-drive, a marketer of Internet-based data storage systems that is currently seeking a second round of funding (its first- round backers include Draper Fisher). "When they do an evaluation of us, it just feels different" because of that branding experience.

Says Mr. LeFurgy of Walden Group: "It's going to become imperative for VCs to understand advertising and what the implications are."

"Venture firms are going to have to get better at the things that matter."

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