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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