Have We Got Some Tulip Bulbs for You!

You'd think a guy who spent his time pointing out such unpleasantness would be some sort of wacky Luddite living in the northern reaches of North Dakota in a house constructed entirely of recycled popsicle sticks. At the very least, you'd think he'd be a value investor and a fan of Warren Buffett.

But Janszen in fact lives indoors, with hot water and air conditioning, and is fully conversant with many of the most cutting-edge aspects of modern technology. As executive director of Osborn Capital, a Lexington, Mass.-based venture-capital firm, Janszen searches for the America Online (AOL) of the future. Along with company principal Jeff Osborn, Janszen calls himself an "angel investor," one of the moneymen who invest in a company before it has a product -- when, in his words, it's nothing more than "a couple of guys and a good idea." Founded last year, Osborn Capital has invested about $3 million in seed money in 28 companies, mostly in amounts ranging from $25,000 to $150,000. One of Osborn Capital's children, Cambridge, Mass.-based Web host Interliant (INIT), has gone public, and a second, HarvardNet, is expected to do so tomorrow in the midst of a crowded field of 11 IPOs.

Janszen, 41, started his 15-year high-tech career at Stratus Computer in 1983 and then moved through a string of high-tech startups, mostly in sales and marketing positions, before joining his old friend at Osborn Capital late last year. His iTulip.com is a make-believe Web company which says of itself: "iTulip.com has a goofy and inexperienced management team with dreams of quick riches, a silly product and an absurdly unprofitable business model." We caught up with him yesterday to find out what drives an Internet-venture capitalist to run an Internet-parody Web site. "The paradox has been pointed out to me," he says. "You have to know them to parody them."

SmartMoney.com: What's caused the mania and high valuations in the Internet sector?

Eric Janszen: Everyone saw very early Internet companies such as Amazon.com (AMZN) lose money. And it's true about Internet companies that you have to make a lot of investment, which often causes you to run unprofitably for a period. But what happened was the market misunderstood this and thought that all unprofitable Internet companies would succeed because they were doing the right thing: They were forward-investing in growth. It's come to the point that it's hard for most investors to tell a company that really has the potential to be profitable in the future from one that doesn't. It doesn't take a genius to run a company at a loss.

SmartMoney.com: What are the consequences of this?

EJ: What that's done is spawned a lot of really bad startups. Take a look at the IPO roster this week in particular and I think you'll find some pretty amazing companies going out onto the public market trying to raise cash -- companies that really don't have any identifiable core competency or any way to make money for anybody in the future.

SmartMoney.com: How do you tell the junk from the jewels?

EJ: We tend to put the most weight on infrastructure plays. HarvardNet [a competitive local-exchange phone carrier, or CLEC], for example. Web-hosting companies, companies that have hard assets, that are building some sort of infrastructure. We tend to stay away from content plays, away from companies that are counting on advertising revenue as a primary source for most of their income.

Our favorite kind of play is a company like [Reston, Va.-based] Internos, which we're invested in. They create extranets for vertical markets. For example, they have an extranet called Builder SupplyNet that provides a marketplace for all the players in the building industry. If you think about it, if you can create efficiencies in an otherwise inefficient market, particularly in an old, entrenched market like the building industry, that's where you're providing some enormous leverage. We like business-to-business e-commerce plays.

SmartMoney.com: Why do you stay away from companies that rely mostly on advertising?

EJ: Let's put it this way. One of the only companies that approached us to advertise on iTulip.com -- and one of the tenets of iTulip.com is that it will be profitable by selling our product [a bogus stock certificate for $8.95 plus $1 shipping and handling] -- was a company called AtGuard. What AtGuard makes is a service that allows you to suppress banner advertising. You can browse around all over the Web without ever having to look at banner ads. And here's how they make their money: If you're an advertiser, and you don't want your advertisements suppressed by AtGuard, you can pay them a fee and they will defeat their own service particularly for your own ads.

The reality is that's going to become very commonplace. The beauty of not only the Web, but when digital TV comes, is that users will be able to filter out stuff they don't want to see. There just won't be any way around it. Advertisers are going to have to find some other way to get in front of people. The promise of the Web was that you could really measure the effectiveness of advertising, and that's true -- and what clients are going to start to measure is how ineffective advertisements are on the Web. They're going to realize that your average human staring at the screen for so many hours per day is really not paying that much attention to any one of the potentially hundreds of ads that flash in front of them.

The advertising filtering is just the tip of the iceberg. There are many, many reasons why counting exclusively or primarily on advertising for your revenue doesn't make sense. It makes perfect sense in the television world and in broadcast media, but everyone needs to understand that the Web is not a broadcast medium in the traditional sense.

SmartMoney.com: What do you think of the recent Internet-stock "correction"?

EJ: I kind of like the way that this is correcting. I had a fear that it was going to correct very suddenly. The cause of the correction is really quite simple. When the Fed raised rates a quarter of a point, it signaled that the top was in, and I think anyone who was paying much attention realized that even a small reduction in the amount of liquidity out there was going to hit the most overleveraged stocks soonest.

Investors will just be much more selective. That's what we're seeing right now. For example, Red Hat (RHAT) did very well, but then, that's a very good investment. It could be a very significant player.

But other stocks that are more...what's another one that didn't do so well?

SmartMoney.com:HotJobs.com (HOTJ)?

EJ: Yeah, HotJobs for example. There's an awful lot of players out there, some really strong, entrenched competitors like Monster Board [part of TMP Worldwide (TMPW)], for example. Is there really room for that many players? Probably not.

What's happening is that everyone is counting a little less on momentum and a little more on what they're investing in. That was always our hope, that people would get less caught up in looking for a greater fool and much more interested in what companies deserve to have their money.

SmartMoney.com: What about the five big Internet plays, Amazon.com, AOL, CMGI (CMGI), eBay (EBAY) and Yahoo! (YHOO)? What do you think of their various models?

EJ: Well, I actually like all of those. They're probably still very overpriced. It's just hard to envision that the market capitalization of a Yahoo, for example, should be anywhere similar to a company that makes airplanes, like a Boeing (BA).

As far as the importance of their brand, it's really quite strong. The reason that Amazon is such a strong player is that initially everyone thought that these guys were competing with booksellers, but they're not. They actually have no competition. The reason they don't have competition -- at least initially, before Barnesandnoble.com (BNBN) came on -- is that their primary value proposition is not selling cheap books. It's giving you instantaneous access to other buyers' opinions of what you were about to buy. You can't go around a bookstore and ask a bunch of people, "What do you think of this book?" but you can do that on Amazon.

Most people go there -- I certainly do -- to find out what other people thought of a book. If I generally have a good feeling about what people said about it, well, I'm there, so I might as well buy it there.

SmartMoney.com: What about eBay, with its recent server problems?

EJ: I'd go back and look at AOL when they were having all their problems. If you bought that stock back when everyone was beating them up and saying what losers they were, you'd have made quite a bit of money now. I'd say the same thing about eBay. EBay is doing something fundamentally significant and very different, and sure, they'll have some problems, but they'll iron them out. What they've got is a fundamentally great idea and they've built a business that's not easy to replicate, and I think they'll do well.

SmartMoney.com: But isn't there more competition in the auction center -- with Yahoo and Amazon and so on -- than there was in the Internet-service sector when AOL had its problems?

EJ: But the trouble is that nobody really thinks of Yahoo as a place to go to auction stuff. [EBay is] a significant brand. It would be hard for eBay to lose it, just as AOL, in spite of themselves, didn't lose their brand. Now they arguably have the strongest brand on the Web, even though, if you thought about them four years ago, you would have said, "Ah, the Web is going to destroy these guys. Everyone's going to use browsers. No one's going to use that AOL big ugly client thingie." But they understood that they had a customer base that didn't want to use browsers.

SmartMoney.com: My mom uses AOL, and I don't see her using the Internet any other way.

EJ: Absolutely. They totally grok that.