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Autodesk’s Internet Investment Hits a Snag
As CapacityWeb Falters, Will Others Be Far
Behind?
By Casey Elston, Roopinder Tara
SAN RAFAEL, Calif., March 26, 2001- The collapse of the
Internet economy has served a harsh business lesson to many
starry-eyed startups and investors. Companies that sought
shortcuts to riches had their hopes dashed as one dot-com after
another crashed, each taking millions of investor dollars with
them. Companies swept up in the craze did everything from trying
to re-invent themselves to diverting resources from their core
business. CAD powerhouse Autodesk, Inc., in San Rafael, Calif.,
was no exception. While Autodesk followed a relatively
conservative approach, it still learned a sobering lesson as CapacityWeb.com, a business-to-business exchange, fired 50
people and closed its doors earlier this year, taking an
estimated $1 million that had once belonged to Autodesk. Two
others Autodesk investments, Buzzsaw and RedSpark, didn’t help
Autodesk’s bottom line either, together losing a total of $5.7
million during the fourth quarter.
Autodesk created Autodesk Ventures in the
middle 1999 as a separate division for the express purpose of
investing in promising new web-based startups. According to an
initial press release, the new division was to
"aggressively launch a number of incipient businesses
generated out of Autodesk's design expertise" and
"help facilitate Autodesk's transformation to a new economy
company."
Since its inception, Autodesk Ventures has put
up close to $40 million as it spun off two new companies and
invested in several other firms. The spin-offs, Buzzsaw.com and
RedSpark.com, represent not only a monetary investment but also
an investment in human capital -- both are liberally staffed
with former Autodesk employees including two former Autodesk
vice presidents. Investment choices appear to be extremely
varied and some are quite far from Autodesk’s core business of
design expertise.
| date |
Company/Event |
Autodesk
Investment |
| June 16,
1999 |
Autodesk
launches Autodesk Ventures |
|
| November
1, 1999 |
Buzzsaw.com
launched with $15 million of first round financing |
$6
million (estimated) |
| February
17, 2000 |
Autodesk
invests in CapacityWeb.com |
$1
million (estimated) |
| April 3,
2000 |
Buzzsaw.com
receives $75 million in additional funding |
$17.5
million |
| April 12,
2000 |
Autodesk
spins off RedSpark.com |
|
| May 2,
2000 |
Epicentric
receives $35 million in funding |
$2
million (estimated) |
| June 8,
2000 |
Pulse
Entertainment receives $35 million funding |
$2
million (estimated) |
| November
13, 2000 |
RedSpark
receives $14 million initial funding |
$7
million (estimated) |
| December
11, 2000 |
Alchemedia,
Facility Information Systems, IZOIC receive funding |
$3
million (estimated) |
| February
2001 |
CapacityWeb
fails |
|
But the crash of the Internet economy may have
awoken Autodesk from its dreams too early. Whereas at one time
the news was instant and unbelievable wealth following initial
public offerings (IPOs) or the creation of instant millionaires
after acquisitions, today’s news seems to only offer dot com
failures and layoffs. With IPOs and acquisitions – the two
most sought after “liquidity events” for investors -- just
about out of reach, Autodesk has no choice but to hunker down
and dig in for the long haul, extracting whatever value it can
from the investments its has made. “We have never had a
quick-hit mentality. Our investment strategy is a long-term
strategy,” notes Jon Pittman, vice president of Autodesk
Ventures. “Building a solid business is a five-to-seven year
proposition, a fact that was forgotten over the last 24 months.
Autodesk Ventures is a strategic investor looking for new
technologies and models that present opportunities for Autodesk,
providing avenues for various Autodesk departments to
exploit.“
Will others follow the way of CapacityWeb?
Autodesk concedes that there may be more. “A typical venture
capitalist expects only one or two out of every ten companies
they invest in to be a huge hit,” says Pittman. They expect at
least a third, if not more, to fail.” He claims the remainder
of Autodesk Venture’s portfolio is “on track” and notes
the company never plays the role of lead investor in these
deals, but follows experienced venture capitalists.
Buzzsaw First Out the Gate
Most visible among Autodesk’s investments
has been Buzzsaw.com, a spin-off that intended nothing less than
to change the construction industry’s purchasing methods and
project management. Buzzsaw touts itself as a broker in helping
builders make connections with collaborators and suppliers. Its
clients subscribe to the company’s services with one-year
contracts. Buzzsaw’s services include design collaboration and
procurement of new, more competitive bids from suppliers.
However, the conservative construction industry has been
stubborn in adjusting to high-tech solutions.”
“Acceptance has been slower than we
imagined,” admits Buzzsaw chief executive Carl Bass, former
Autodesk CTO. “(Developers and project managers) don’t
always have the connectivity to do their work. We’ve
concentrated on architects and engineers, owners and developers.
There are some developer and REITS (real estate investment
trusts) who are more progressive in nature.”
Bass remains optimistic that the construction
ranks will begin to get Buzzsaw’s message. A total of $90
million gathered from Autodesk, Bank of America and Morgan
Stanley Dean Witter may be enough to leave it standing while its
less-funded competitors weaken and fall away. “(The market)
has changed from a competitive environment that had about 200
companies,” according to Bass. “We watched our competitors
burn a lot of money. But now we’re first (in the market).”
The investment downturn makes it less likely any serious
contenders will emerge in the near future.
Cleveland Before London
Buzzsaw.com has yet to show a profit. The
company lost $2.8 million during the last fiscal year. Has this,
combined with the prevailing investor climate forced the company
to scale back from its initial plans for a big cut of a
worldwide market and an IPO?
While its staff has remained consistently at
about 250, the three people who constituted their European
office were recently issued pink slips. Bass underlines the
company’s current objective to concentrate on the United
States. “Right now we have to win in Cleveland before
London,” he states. As Buzzsaw gains a greater foothold, it
will be able to expand its focus.
However, Autodesk Ventures officials say they
are happy with Buzzsaw on several fronts. The company is on the
verge of ensuring its permanence in the market. “There is a
huge untapped opportunity in construction,” Pittman says.
“And we have just scratched the surface.”
Buzzsaw will need another round of financing
by then. Bass is bent on driving his company to be at or near a
profitable state so it will look its best when it is again
paraded in front of investors. Bass admits a challenge lies
ahead. “If last year, investors were promiscuous, this year
they have been prudish,” Bass notes.
Bass admits that now is the time for Buzzsaw
to begin showing results. While Buzzsaw has a commanding market
share and claims to have 100,000 projects hosted on its site, it
is estimated that few are actually paying customers. In what
will probably amount to an acid test of its long-term viability,
Buzzsaw recently raised its prices for project hosting, asking
users to pay a minimum of $1,080 a year for one project with up
to 100MB of space – a service that was previously provided for
free.
RedSpark Follows
Buzzsaw’s blueprint was followed by for
other startups, notably RedSpark.com, which itself spun out of
Autodesk under the leadership of Dominic Gallello, one of
Autodesk’s fastest rising stars. RedSpark toiled in its labs
for a year before introducing its first product (RAPIDteam was
shown at National Manufacturing Week in early March in Chicago).
RedSpark’s objectives are similar to those
of Buzzsaw but relate to the manufacturing industry. Pittman
speaks glowingly of RedSpark, “RedSpark has great potential to
help leverage Autodesk’s position on the mechanical
designer’s desktop into the supply chain of manufacturing
enterprises.”
CapacityWeb Unravels
Potential wasn’t enough to salvage
CapacityWeb, an earlier Chicago-based business-to-business
exchange in which Autodesk Ventures was a partner. The company
shut down in February, expiring after 18 months in business.
Pittman concedes that b2b exchanges are difficult businesses to
grow as ties that bind existing business relationships are
difficult to break. CapacityWeb executives admitted they
underestimated the strength of this bond, finding out only too
late that manufacturers would rather work on improving their
current relationships than seek new ones, even if the
alternative might be more efficient.
When Divine Interventures, CapacityWeb’s
primary benefactor decided enough was enough, CapacityWeb became
yet another Internet victim. CapacityWeb had sought a lifeline
from Autodesk but got nowhere.
Other Autodesk Investments
Other companies invested in by Autodesk
display varying degrees of progress although it remains to be
seen if the progress will lead to profits.
- One, San Francisco-based Epicentric
(www.epicentric.com),
announced March 5 that it had completed the purchase of
Application Park, a Web services tool company. The
acquisition of Application Park’s software, which helps
users build applications and Web sites, represents a giant
step for Epicentric, which is known as a portal provider.
For the first time, Epicentric is capable of delivering a
complete e-business platform. One fallback for Epicentric:
Autodesk itself is a customer of Epicentric’s services as
its own portal, PointA is built with Epicentric’s
products.
Epicentric was founded in January 1998 and has grown to
270-plus employees. It has 110 customers. Epicentric has
developed a solid reputation, as evidenced by its
“Editor’s Choice” award from CRN magazine, a
newsweekly that covers the technology solutions industry.
- Pulse is a rapidly growing firm that
developed a platform for interactive media on the Internet.
The company’s tools can be used for 3D content. It caters
to the education, CRM, e-commerce, marketing and
entertainment industries. Pulse first gained notice for
creating the 3D rendering in the CD-ROM game “Iron Helix
shortly after the company opened shop in 1994. Pulse is
currently propelled by the success of Pulse Creator, which
allows the design of interactive 3D characters and object,
and Pulse Player.
Autodesk was among the minority partners who helped
contribute $35 million to Pulse Entertainment during the
second quarter of 2000. Subsidiary Discreet has a joint
marketing and distribution agreement with Pulse. Discreet
joined the party so its 120,000 3D Studio Max developers
could produce content primarily because Pulse’s 3D
technology can be easily employed by Discreet’s 120,000 3D
Studio Max content developers. SOFTBANK Venture Capital is
the lead partner.
- Izoic, Inc. (www.izoic.com)
helps automate “call before you dig” call centers across
the United States. Mapguide and other Autodesk products are
working with the firm. Izoic developed the Collaborative
Infrastructure Management web applications to help cut
capital and operating costs in the infrastructure management
industry. The company has an exclusive arrangement with the
American Public Works Association to deliver Internet-based
services concerning virtually all elements of
infrastructure.
- Alchemedia Technologies, Inc. (www.alchemedia.com)
develops solutions to protect Web content. The company has
offices in San Francisco, Dallas and Israel. Autodesk joined
major funder The Carlyle Group, Hollinger Capital and others
to fund Alchemedia’s “C” round in December 2000.
Autodesk was intrigued in part by Alchemedia’s strategic
expansion. The company bills itself as the leading provider
of visual content protection technology. But it recently
shifted its focus to protecting read-only content behind the
firewall. Alchemedia’s Clever Content technology recently
received a “Best of the Best” mention from PEI (Photo
Electronic Imaging) magazine.
- Facility Information Systems, Inc. (www.fisinc.com)
of Camarillo, Calif., is another firm Autodesk helped fund
in December. FIS provides facility management and planning
software for large organization infrastructure management.
Its solution incorporates AutoCAD Map and MapGuide.
Autodesk’s AEC group is working with FIS.
Analysis
Despite an upbeat attitude, Autodesk
investments face the same challenges that have already derailed
many Internet companies. Investors who paid dearly for equity
shares in companies when valuations were impossibly high will
have a very difficult time getting a return on their
investments. Many dot-coms have proven unable to exist on their
own and sought additional funding only to have their calls go
unanswered. This can lead to upheavals and defections of key
personnel. Companies may enter into hasty consolidations at a
fraction of initial valuations. In the worst case, there are
boarded-up and abandoned, as with CapacityWeb.
What will the future hold for Autodesk’s
other dot-com investments? Even the well-heeled Buzzsaw, which
got $90 million in funding, admits it will need more cash before
the end of the year. By that time it must convince a rather
conservative audience of construction workers that they need to
embrace the Internet. RedSpark faces a bigger challenge in
getting established. It was able to get $14 million in its first
round of financing but getting a larger second round will be
extremely difficult if not impossible. There’s very little
financial data available for the other companies on which to
base a positive prognosis. We wouldn’t be at all surprised to
see layoffs and a few failures.
We expect Autodesk Ventures to play a reduced
role in Autodesk’s near future. Without any big winners in its
investment portfolio, its role will likely be diminished to
occasional mergers and acquisitions – in other words business
as usual before the Internet gold rush. We expect that Autodesk
will limit, if not totally eliminate investment in Internet
startups.
It could have been a lot worse. Ironically, it
may have been Autodesk’s own corporate inertia that may have
prevented even more damage. The company was chided about its
slowness to embrace the Internet economy. Carol Bartz,
Autodesk’s CEO, stated during the height of the Internet
investment craze that Autodesk was 6 months late in creating
Autodesk Ventures, the division that would sink millions of its
money into fledgling dot-coms. But at a time when many
stockholders and analysts would have had Bartz bet the farm on
the Internet, Bartz still held back. In retrospect, the decision
appears wise.
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