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Andreessen's Loudcloud in IPO high-wire act

A little more than a year since its launch, Marc Andreessen's brainchild has been forced from its lofty perch by the sobering realities of today's high-tech slowdown.

Heralded as the brainchild of celebrated Chairman Marc Andreessen, Loudcloud was thought to mark a coming of age for the 29-year-old wunderkind as his first venture beyond the shadow of Netscape Communications.

Gartner analyst Ted Chamberlin says the future of management service provider Loudcloud depends on how well a very talented team meets some very big challenges.

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Started with fellow Netscape alumnus Ben Horowitz, the company boasted a grand vision of running the infrastructure behind much of the dot-com world. It received instant recognition and credibility with the mere presence of Andreessen, who gained fame as Netscape's co-founder shortly after building the prototype for what later became the Navigator browser as a student in Illinois.

But a little more than a year since its launch, Loudcloud has been forced from its lofty perch by the sobering realities of today's high-tech slowdown. Like many others, it has been torn by a decaying market, a quick cash burn and skittish partners leery of the service company's ambitions.

"There's no way they can be avoiding the problems other service providers are in," said Carrie Lewis, an analyst with The Yankee Group. "All are struggling with funding and revenue models."

To the surprise of many, the company launched in late 1999 with a far-reaching plan about as far removed from Netscape's consumer brand as possible: It would offer a new category of Net infrastructure management, a kind of around-the-clock guaranteed protection for companies that didn't want the headache of managing their own sites.

However, that same ambitious scale has carried a high price--putting Loudcloud in the unenviable position of requiring large sums of cash at a time when investors and financiers are feeling anything but charitable. Already, proceeds from funding rounds totaling close to $200 million are disappearing quickly, being spent on network operating centers, engineering testing facilities and other costs.

At many turns, Loudcloud has been forced to change its focus on the fly to protect its coffers and satisfy financial backers. That has increased confusion on the part of many customers and analysts who are unclear on exactly where the company fits into the industry's smorgasbord of service providers.

The company filed to go public in September to raise another $100 million needed to support its expansion. Because market uncertainty has kept the IPO on hold, however, Loudcloud is scrambling to sign up non-dot-com clients to prove it has a stable long-term business, hoping to rekindle skeptical investors' faith.

In the process, it has bumped against the interests of powerful hosting companies such as Exodus Communications, which Loudcloud needs as partners for its service. Wary of Loudcloud encroaching on their territory, these hosting companies have made clear that any move by Loudcloud too far away from its original, high-end, niche market model won't be appreciated.

"Nobody should be surprised if an expansive agenda by (Loudcloud) is reacted to competitively," said one source close to a major hosting company.

Still, Loudcloud may have little choice but to seek revenue anywhere it can. In documents filed with the Securities and Exchange Commission, the company outlined high and growing levels of expenditures.

By the end of July, it had an accumulated deficit of $122 million, much of that from stock liabilities. For the quarter ended July 31, it reported revenue of about $1.9 million, with total costs close to $50 million. These costs would grow as it expanded its business, the company warned in its financial statements.

A December amendment to that filing said that by October, Loudcloud had won contracts worth $76 million, with an average contract lifetime of one and a half years. The company is barred by federal regulations from commenting further on financial matters while it waits for the IPO.

The need to support those daunting numbers, in combination with the disintegrating Net business, has prompted the company to move away from its initial start-up customer base. Adding even more urgency to this push has been the specter of Wall Street scrutinizing every prospective IPO for solid proof of long-term revenue.

"It's a big concern with any Internet company what the viability of its client base is," said David Menlow, president of IPO Financial Network. "This is a tenuous point for the marketplace. And financially, this company doesn't meet the profile of the stronger companies."

All of these factors will play into investor assessment of the delayed IPO. Analysts say the company is still a potentially attractive offering, with support from two of the most respected underwriting firms in the business. But investor interest has been called into question as companies in related areas, such as hosting firm Exodus and data center Equinix, have suffered in recent months.

From start-up to pay up
For Andreessen, today's unforgiving business climate has been a rude awakening. Only a few years ago he was hailed as the golden boy of technology after developing the seminal browser technology known as Mosaic at the University of Illinois, a breakthrough that led to his co-founding of Netscape at the tender age of 22 with Silicon Graphics veteran Jim Clark.

Based at the heart of Silicon Valley in Sunnyvale, Calif., Loudcloud tapped into an industry when it launched that was hot at the time and is still believed to carry enormous potential. Forrester Research predicts that this "managed hosting" business will reach $11 billion in revenue by 2004. Even if smaller Web companies are going out of business, large old-world companies are increasingly looking for reliable outsourced Web service, Forrester analyst Jeanne Schaaf says.

Loudcloud gathered its first clients and publicity quickly, aided by the founders' well-known history. That soon changed.

"When we started way back we had mostly start-up customers," Horowitz said. "But due to the radical change in the financial climate, we've gone to the (large) enterprise market faster than originally planned."

The number of recognizable corporate names on the client list is still small: Nike, Britannica, Fannie Mae. The company is still touting new medium-sized businesses as clients, such as storage networking company Brocade Communications Systems. But Horowitz said that Loudcloud's revenue, about 30 percent of which came from large companies last September, is on track to stem 50 percent to 70 from percent large customers in upcoming quarters.

Fallout from the bottom line
Loudcloud's moves have underscored a sense of desperation that has pervaded Silicon Valley as companies fight to avoid becoming--or even being too closely associated with--the next dot-com casualty.

Last summer, several of the large hosting companies that Loudcloud worked with to store customers' data revolted, saying that Loudcloud was stepping too far into the managed-services business that they wanted to be in themselves. Sources say those companies are still keeping a close watch on Loudcloud, with a relationship that remains tense.

On the other side, reports began coming in from smaller Net and technology companies that Loudcloud wouldn't take their business. That has won Andreessen and Horowitz some vocal enemies.

John Kaufman's Scopeland Software is one of those. Kaufman said his San Francisco company tried to hire Loudcloud last year, after reading glowing press reports. What they got was a meeting with a "condescending" sales team that indicated Scopeland had to measure up to Loudcloud's high standards, not the other way around, Kaufman said.

"These were some of the most spoiled brats I'd ever come across in this business," Kaufman said. After another inconclusive meeting with engineers weeks later, the company was told that Loudcloud could not take it as a customer. "If you're not funded with $100 million and backed by one of these top venture capital companies, then we're not interested," he said he was told by Horowitz after calling to complain.

Horowitz doesn't deny that the company has turned potential clients away, saying it has done so to keep Loudcloud's own bottom line in order.

"We've have always said (there is a minimum standard), although we might have strengthened it a little," he said. "We have a credit analysis policy that prevents us from taking on companies that we're worried might not have an ability to pay. It sometimes does make people upset, but it's the right business decision."

The course has met approval from some Wall Street analysts, who say the delayed IPO might even be a good thing for Loudcloud. The extra time may be just what the company needs to strengthen its customer list and make sure it has its capital expenditures in line with current market realities, said IPO Financial's Menlow.

Others would just as soon steer clear of companies like Loudcloud, wary of the hype that preceded the industry's precipitous fall last year.

"We have always been skeptical of development-stage companies looking to tap the market," said Steven Tuen, a portfolio manager with the Kinetics Internet Fund. "It is probably something that, if it does come to market, we would pass on."