<nettime> My Experience With Electric Minds

[Howard Rheingold <hlr@well.com>]

My Experience With Electric Minds
By Howard Rheingold

Geert Lovink asked me to share a few of the lessons of my experience with
Electric Minds, so that others who are interested in growing virtual
communities might benefit from my experience.

So here it is, unedited, undetailed, off the top of my head. Obviously, I
have to leave out a lot to condense it.

In the Summer and Fall of 1994, I helped create HotWired and served as its
first Executive Editor. I quit a couple weeks after it launched, in late
1994. What I had in mind had elements of a magazine (editorial filtering,
creative design, regular,  high-quality, "content"), but was much more like
a community (many to many, unfiltered, audience-created content). I spent
most of 1995 having great fun updating my web page every day. I did all the
writing, editing, design, illustrations, html. I talked friends of mine in
America, Europe and Japan into writing for free. In late 1995, I got it
into my head that I should expand what I was having such fun doing. When I
sat down to figure out how to pay my writers and editors, hire a "real"
designer, license a webconferencing system, it looked like it would cost
tens of thousands per month, and take us three or four months to launch.

Lesson number one was that everything in a startup that depends on
cutting-edge technology takes longer and costs more than originally
estimated, even when you take lesson number one into account.

Deciding to pay people reasonably well (but by no means extravagantly) for
editorial content, art and design, technical services, led me to need more
money than I had. That's when I made what I now clearly see to be my most
fundamental error. I got caught up in the intoxication of venture-capital
financing, which was in a particular state of mania in late 1995. I
connected with a business partner I didn't know, but who knew how to go
about securing financing and putting together a company -- my second
fundamental error. I failed to listen to my own nagging doubts and made a
bad choice in partners.

I take responsibility for making the decions that led to both the success
and the failure of Electric Minds. We made a lot of bad decisions. Probably
not many more than average for startups. But the decision to go for venture
capital made all the other decision moot. So my new partner introduced me
to a fellow from Softbank Ventures, for whom a million dollars was a
relatively small investment. Softbank was an early investor in Yahoo, had
bought Comdex and Ziff-Davis outright. I told the guy from Softbank that if
we could figure out how to combine community and publishing, then the other
companies in the Softbank investment portfolio could leverage that
knowledge profitably. I believed, and still do, that it is possible to grow
healthy, sustained online discussions around Yahoo, Comdex, and Ziff-Davis.
Electric Minds was supposed to be an experiment. And the million dollars I
was asking for was just a down payment on a several-year relationship. At
that point, any business plan for an Internet business was a conjecture,
and thinking about how virtual communities could make business was in the
realm of science-fiction.  We agreed that the first step was to build an
exemplary product that would demonstrate the cultural viability of
combining editorial content and virtual community. We agreed that it would
take at least three years to become profitable.

Both Softbank and I  realized that we were gambling that within three years
Electric Minds could attract sufficient traffic to make significant
advertising revenues.

We were funded in March, 1996, and launched in November. In December, Time
magazine named us one of the ten best websites of 1996. By July, we were
out of business.  Softbank, which had been expanding its investment funds
to billions of dollars in size, mostly through Asian-based investors,
stopped expanding. And when something that big stops expanding, it's a big
loss. They were making millions of dollars a day just moving their
electronic liquidity around world markets. Moving electronic liquidity
around world markets is really the only game in town. All other industries
and enterprises are tickets to that game. When Softbank's bubble stopped
growing, they started thinking like venture capitalists again. It is my
belief that the person who sponsored us for Softbank was thinking properly
about the way to research the future of the medium, but wasn't thinking
properly as a venture capitalist.

VCs want ten times their investment, and they would prefer to get it in
three to five years. Good venture capitalists bring their connections and
experience to the table, and actively help the founders build a business.
In many business plans, including ours, a specific schedule of financial
milestones is established. In many VC investment contracts, there are
"claw-back" provisions -- what an evocative term! -- that empower the
investor to take more control of the company every time a milestone is
missed. When Softbank took a cold look at their investments, and started
weeding out the ones that were less likely to achieve a ten times return on
investment, they withdrew their verbal promises -- which had not yet gone
to written contract -- of bridge financing. We had revenues -- IBM had
contracted Electric Minds as the exclusive provider of virtual community
services when they conducted the Kasparov versus Deep Blue II chess match.
Although we had not started out with the intention of providing virtual
community building services for other commercial enterprises, the need to
ramp up revenues made it an attractive idea, and one that was not outside
our original mission to encourage virtual communities on the web.

When someone has two million dollars invested, in hopes of expanding it to
twenty million, they tend to push hard in the direction of attractive
revenue sources. I knew clearly what I wanted to accomplish when I started
-- launch a sustainable and high cultural enterprise on the Web, to show
how content and community could work together to create a new hybrid
medium, and to encourage the growth of many-to-many communication on the
Web. But the gravitational attraction of a $20 million goal can draw the
enterprise away from the course the founder originally envisioned. In order
to continue paying for what many reviewers had acknowledged as high quality
content and conversations, Electric Minds was on its way to growing from 14
employes to 30, with most of our revenues derived from contract work
building virtual communities for others. Jerry Yang at Yahoo was enthused
about us, and gave us permission to create an experiment in web-form-based
community building. We were in discussions with Ziff-Davis, IBM, and
Softbank Expos.

When we ran out of operating capital and dissolved the business, I found
myself not only relieved, but happy that I wouldn't be spending my time
doing what I had promised to do for Ziff, IBM, and Softbank Expos. The
Yahoo project still seemed like it could have been fun. But I never set out
to create a virtual community-building agency and didn't want to spend my
time running one. I never set out to make tens of millions of dollars --
which probably contributed to our failure to thrive.

When I had the time to think about where I had gone wrong, it seemed clear
to me, and still does, that if I had simply added inexpensive conferencing
software and continued doing my amateur editing and design, I could have
grown something less fancy but more sustainable, if not in financial terms.
Venture capital, I concluded, might be a good way to ramp up a Netscape or
a Yahoo or create a market for a kind of technology product that never
existed before. But it isn't a healthy way to grow a social enterprise.

It doesn't take too many people to sustain a small online community. Of
course, many great conversations take place via mailing lists. But
conferencing (BBS, message-board, newsgroup) media have their own unique
capabilities; they are also a little more expensive to run than a list.
When we created the River (www.river.org), the idea was to create a
cooperative corporation that would enable the people who made the
conversation to also own and control the business that made the
conversation possible. A couple hundred people each contributed a couple
hundred dollars, agreed to pay $15 a month, and that turned out to be
sufficient to buy a Pentium box and software licenses, and make a
colocation deal with an Internet service provider. Technical and accounting
services are voluntary. It works pretty well.

I have returned to spending my time the way I most enjoyed before my two
years as an entrepreneur. I update my web site a couple days a week
(www.rheingold.com) and communicate directly with my audience. I'm adding
inexpensive webconferencing software in a week or two, and I'm creating a
small community to discuss the things that interest me -- technology, the
future, media, social change. It's a hobby -- I carry the costs. It makes
me much happier to run it.

Setting up the River as a coop had its problems. Running a coop,
particularly among Americans, can result in perpetual and not altogether
pleasant shareholders meetings. There's a lot of blah-blah-blah in making
decisions democratically. People get angry and leave. But a sufficient
number remained so that the River has survived for three years. The legal
structure that enabled them to organize was a California cooperative
corporation. The legal restrictions on cooperative corporations vary from
country to country, state to state.

Increasingly, webconferencing software is becoming more and more capable,
and as several excellent products compete with each other, the prices are
dropping. It's not very expensive to add many-to-many communications with a
web-based interface to any web site. David Wooley maintains a list of the
various webconferencing products at:
http://freenet.msp.mn.us/people/drwool/webconf.html

Now, just so I don't forget to look at the bigger picture, I definitely
acknowledge that there are legitimate questions to pursue about whether
spending time typing messages to strangers via computers is a healthy way
for people and civilizations to spend their time. There is the perpetual
and also legitimate debate about whether it debases the word "community" --
and what is the word supposed to mean these days, anyway? -- to use it to
describe online conversations. All I can say is that many people might end
up much happier by starting out to grow a small, unprofitable, sustainable
web-based cultural enterprise, than to invite the
pressure-toward-hypergrowth that accompanies venture capital financing.

Howard Rheingold hlr@well.com
http://www.rheingold.com
Fax: 415 388 3913
what it is ----->is------>up to us


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