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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
Rheingold Site
Fax: 415 388 3913
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