Knight Ridder/Tribune Business News
Nov. 5--ONLINE MEDICINE BATTLE ENLISTS VENTURE ELITE: A report from the trenches of the Great Online Drugstore Battle resembles a dispatch from a real war. Neither side is anxious to talk about strategy, tactics or casualties. In an Internet-commerce world where people are usually only too happy to preach the merits of their products, the answers from PlanetRx and Drugstore.com are the terse and maddeningly vague recitations of a military press briefing.
But the color of the uniforms and the shape of the weaponry attract inescapable interest. Two start-ups, each with a high-profile CEO, each backed by the venture elite, are aiming to open Web sites, probably early next year.
Drugstore.com, begun as a concept by entrepreneur Jed Smith, is backed by the venture firm Kleiner, Perkins, Caufield & Byers. Its CEO is Peter Neupert, who once served as vice president of news and publishing in Microsoft's interactive media group. (Among other things, he supervised Slate, the Microsoft-backed online magazine). Drugstore.com's board includes Kleiner Perkins' John Doerr and Brook Byers. Its locale of business: Redmond, Wash.
PlanetRx, which was begun by entrepreneur Michael Bruner, has received $5 million from the venture firms Benchmark Capital and Sequoia Capital. (Kleiner Perkins does not reveal the size of its investments.) PlanetRx's CEO is Bill Razzouk, a former executive at Federal Express, and, briefly, at America Online Inc. Its board members include David Beirne at Benchmark and Michael Moritz of Sequoia (Beirne, in fact, recruited Razzouk). Its locale: Oakland, with a move to San Francisco planned.
Both companies are trying to tackle the complicated task of filling prescriptions -- and offering related products -- online. What makes it difficult is that any online pharmacy has to meld its current efforts with the traditional world of paper and doctors' scrawls. Because many doctors' offices do not use the Web and because many states do not allow electronic submission of prescriptions, both start-ups will have to field phoned or faxed prescriptions from medical offices. The idea is that, ultimately, the customer will find far more convenience in ordering, say, tetracycline from the Web -- and then waiting for a speedy delivery -- than in trekking to the nearest pharmacy. While they pledge to be competitive on price, neither Drugstore.com nor PlanetRx claims that lower cost is a fundamental part of its appeal.
A lot of other people have their eye on this same market, which is estimated to be as large as $160 billion per year through traditional outlets. An Austin start-up, Rx.com, plans to be operational next year. And some of the big drugstore chains could follow. But on Sand Hill Road, the question is: Which of the two venture-backed start-ups is ahead: Neupert or Razzouk? Kleiner Perkins or Benchmark and Sequoia? Redmond or Oakland? It's almost impossible to tell from the outside, though it is fair to point out that Neupert has been in his job a few months longer than Razzouk. Both PlanetRx and Drugstore.com say it's more important to do things right than to be first.
"We're up and running," says Suzan DelBene, Drugstore.com's vice president of marketing. "There's only one big milestone: Opening our front door, and we're not ready to do that."
"I think we've got an excellent blueprint. We're pouring concrete as fast as we can," says Razzouk. Ask him when the Web site will open and he says only: "Soon."
MEMORIES, MEMORIES: When Wal-Mart Stores Inc. brought a trade secrets lawsuit last month against online bookseller Amazon.com Inc. and its venture firm of Kleiner Perkins Caufield & Byers, Roger Borovoy, the former general counsel for Intel Corp., looked on with considerable interest. Wal-Mart alleged that Amazon.com, with Kleiner Perkins' help, had hired a cadre of Wal-Mart employees who knew the secrets of the chain's inventory control systems. The lawsuit broached a topic that Borovoy knows intimately.
Now in private practice with the firm of Fish & Richardson in Menlo Park, Borovoy was Intel Corp.'s general counsel in 1981, when the company filed a trade secrets lawsuit against Seeq Technology, a start-up formed by six former Intel employees. Intel also filed suit against Kleiner Perkins, which had financed Seeq. (It was one of the first deals done by a newly minted venture capitalist, John Doerr, an ex-Intel marketing whiz.)
Seeq and Intel ultimately settled the lawsuit, but what's important is this: Borovoy dissented on the notion of suing the venture capital firm. "Suing Kleiner Perkins made Kleiner Perkins furious," Borovoy said, who notes that the venture firm quickly went out and hired top-notch legal help. It's a lesson he says Wal-Mart might do well to remember. "You can sue anybody for anything. But to sue a venture firm, you have to prove the venture firm conspired to get Wal-Mart secrets." Borovoy adds that evidence of this is extraordinarily unlikely. VCs advise their start-ups carefully to avoid such fixes.
The ex-Intel counsel suggests that Wal-Mart also faces an uphill task in attempting to make its case that ex-Wal-Mart employees took inventory trade secrets with them when they joined Amazon.com. While noting that the Arkansas company could be helped by a clearly written employee manual, he says, "The basic law of trade secrets is that you have the right to take your general knowledge and skills with you....My experience in most of these cases is that these programmers are going to say that no one ever told them that what's at stake was proprietary."
DEAL TO WATCH: AlphaBlox Corp., a Mountain View start-up that provides Web-based business analysis software, received $14.75 million in later-round financing from a group of investors including Accel Partners, Polaris Venture Partners, Integral Capital Partners, and Mohr Davidow Ventures. Noteworthy were two new investors: the blue-chip investment firms Goldman Sachs & Co. and Merrill Lynch & Co. Goldman put in $5 million and Merrill Lynch put in $3 million. Both companies ordinarily make money in handling IPOs or equity offerings, dipping only rarely into the venture field. But the investment firms see something in AlphaBlox related to their own business. Ralph Blumenthal, a vice president at Goldman, Sachs, called AlphaBlox's market "an important and emerging space, particularly in the financial services industry."
Term Sheet -- a name drawn from the formal proposal that a venture capitalist offers to an entrepreneur -- is an occasional column about venture capitalists and the companies they fund. Contact Scott Herhold by telephone at (408) 920-5877, by fax at (408) 920-5917, or by e-mail at sherhold@sjmercury.com.
Visit Mercury Center, the World Wide Web site of the San Jose Mercury News, at http://www.sjmercury.com
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