Dot-com dogs

How2.get big bucks

If you follow the parade of emerging dot-coms, the name "How2.com" may sound vaguely familiar. If you follow Silicon Valley goings on, you might think that it's a start-up funded by the prestigious venture capital firm Hummer Winblad, a kind of guide to anything and everything on the Web. But no, sorry, that's eHow.com. You might, if you happen to live in San Francisco, think you've seen dozens of billboards advertising the company's Web site. Wrong again, but close. That's Learn2.com.

How2.com has a lot in common with those other start-ups. Like them, it manages a Web directory that gives advice in a question-and-answer format. Mostly obvious advice, like this introduction to a section on how to cook shrimp:

Like most things that are worth doing, cooking shrimp is worth learning to do well. Shrimp is a delicious, succulent, mild-tasting crustacean that complements any type of cooking and crosses many ethnic culinary boundaries.

You have to click through to the next page to find any actual instructions.

The How2.com guide to how to choose fresh fish lists the habitats of 28 species of fish, taken from the National Fisheries Institute -- but not one way of telling if the fish lying on the supermarket counter is really fresh or has been sitting on ice for a week.

One big difference between How2.com and its lookalike competitors is that How2.com's founders and backers have a superabundance of chutzpah. In October, the company announced plans to sell $125 million of stock to the public. That's a lot of money -- a lot of tech company IPOs raise under $100 million; Yahoo's IPO in 1996 asked investors for only $37 million.

If you ask me, How2.com is hands down the worst major upcoming dot-com offering. Start with its history:

How2.com is a spinoff of a small security-software company called Citadel Technology. Just a little over a year ago, Citadel completed a stock offering of its own. The offering price was a mere 75 cents a share -- penny stock territory, a sure tip-off of a marginal company whose founders are looking to cash out with a quick pop in the stock's price. Right now, Citadel's stock trades for a little over $2 a share on the Over-the-Counter Bulletin Board, a happy hunting ground for companies too small and risky for the NASDAQ national market.

Before he invested in Citadel, company CEO Steven Solomon ran a chain of five Miami Subs fast-food restaurants. The relationship between Solomon and Citadel's finances is awfully close. Over the past year, Citadel has given Solomon more than $1.5 million in low-interest loans (most of which he has repaid). Solomon is a busy man -- in addition to running Citadel he also serves as CEO of, yes, How2.com.

Take a close look at How2.com. Naturally, it has existed only since January 1999. But going public within a year of launch is just about on par with the average dot-com. In the first six months of this year How2.com has had revenues of just $872,553. That's not much for a company trying to go public, but there's nothing really extraordinary there.

No, the really strange thing about How2.com is that its main line of business isn't Net-related at all. In May, How2.com acquired a company that administers consumer rebate programs. If you buy a VCR in a store and get a coupon that you mail in to get $20 back, your coupon might go through How2.com or a company like it. The company's prospectus doesn't break down the revenue from its different lines of business, but says that what revenue it did have came primarily from its rebate operation. So if you read the fine print, you find that How2.com isn't a Net business at all -- it's an insta-Net company that bought a traditional rebate business, apparently to pump up its revenue line, and is trying to get $125 million from the public with a catchy dot-com name.

The "concept play"

If ever there was Net company ready to go public on the strength of hype alone, it's the Digital Entertainment Network. In September, DEN filed a preliminary prospectus with the SEC as thick as a telephone book.

It's not likely that many people read all the fine print; DEN had all the right keywords. Prestigious New York money, a Santa Monica office near enough to Hollywood and a great story about providing broadband entertainment over the Internet to "Gen-Y." It's not clear what exactly Gen-Y is besides a fancy term for "people in their teens and early 20s," but marketers do love it. Most of all, DEN seemed to have real technology chops.

The founders, Marc Collins-Rector and Chad Shackley, had earlier founded a successful network-services company, Concentric Network. Collins-Rector was the businessman and Shackley, DEN's chief technology officer, was the techie boy wonder. Shackley, in fact, had been just 18 years old when the two started Concentric. Concentric has since gone public and hit a $1 billion market valuation -- though Shackley and Collins-Rector have not been involved in management since 1995.

DEN's founders were undoubtedly aware that big media companies have failed miserably in their efforts at interactive entertainment. But letting some techies -- and especially a tech head still in the MTV demographic -- give it a try sounded like just the thing. DEN, which launched in May, promised streaming video over the Net, on demand, and with tiny production costs to boot. But the "content" plays in tiny windows, no more than 2-by-2 inches on a typical computer screen. A bit of a tight fit for Gen-Yers used to 25-inch television sets.

DEN is the ultimate "concept play." Its revenues for the first half of 1999 weren't just small; they were zero. But for a concept play -- a stock in which investors put their money not because they're impressed by the financials but by the idea -- that's not necessarily a bad thing. After all, when you start at zero, it's easy to show growth, and the upside is unlimited.

Buried deeper in the financials, however, are some numbers that make more seasoned tech investors blanch. David Neuman, the president and a onetime senior Disney exec, gets a salary of $1.5 million a year, plus a $1 million signing bonus.

In the Net world, megabucks option grants are routine, but million-dollar salaries are almost unheard of. (The historical role model is Netscape, whose CEO Jim Barksdale was so well sated on stock that he forewent his salary.)

Neuman wasn't the only one with a seven-figure salary, either. Marketing head Edward Winter takes home a $1 million annual paycheck -- not bad for marketing a company with no revenue.

If all this sounds bad, about a month ago it got even worse. At the end of October, Collins-Rector resigned after settling an ugly lawsuit that BusinessWeek reported involved allegations that he had sexual relations with a 13-year-old boy. Shackley resigned also.

Collins-Rector and Shackley reportedly lived extravagantly in a mansion once owned by jailed rap impresario Suge Knight. Some observers saw their departure from DEN as a welcome sign that the company's profligacy was at an end. But remember: Neuman and Winter got the seven-figure salaries, and they are still on board. Now DEN has lost its key founders, but it still has enough highly paid Hollywood execs. Surely that's a recipe for success, right?

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