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Copyright 2001 John Zipperer. 

From Internet World:

Internet Whirl: 
Where Are the Jacobins When You Need Them?
By John Zipperer 

(2/1/01) Just when you thought people had accepted the absurdity of the burst dot-com bubble and all of the surrounding hype, along comes the next wave trying to build a posthumous legend that will make the players involved come off as successful or tragic heroes.

This myth making comes in the form of a new video from Spartan Punk Productions entitled StartupNYC.com, which premiered recently in Manhattan. That was a good location for the premiere, in the city that most loves to talk about itself, but also because after viewing the video, the rest of the country just might want to tar and feather the entire dot-com community.

The video takes a look at two dot-coms: TheSquare.com and Incogniti.com, with people from other companies chiming in from time to time with their experiences. The theme of the video seems to be parties; in fact, the section covering January to April 2000 is entitled "The Never-Ending Party," which segues into the April-to-October section called "The Party's Over." In fact, much of the video was made at dot-com parties. One interviewee says, "Every night, I'm invited to another party, everyone gets completely hammered, and the next day they forget their business model."

We hear about obscene amounts of money being spent on parties -- remember, this is investors' money, so they're wasting other people's money -- and various goings-on at parties that make them sound like dorm parties gone bad. More specifically -- and more accurately -- they're frat parties fueled by too much money. Unfortunately, it doesn't sound like most of the people in the video regret all that wasted time and money.

This is not to say these folks didn't put in some hard work. We hear of a man working so long that he passes out on the floor of his office from exhaustion. That guy's now worth millions, leading TheSquare.com's James Marciano to say, "That's a great story." Sounds positively depressing to the rest of us, but that's probably why I'm not working at a dot-com.

We start to get a rundown of the issues involved with starting a dot-com: raising seed money, angel funding, burn rates, and the like. We're told about people borrowing hundreds of thousands of dollars from family, deferring their Harvard school loans, and meeting with investors. We hear them mention their former schools -- such as Harvard and Dartmouth -- and it begins to make more sense. Put enough Ivy League graduates in a neighborhood and throw enough networking parties, and sooner or later they'll begin a new business or three. It's as natural as growing a Chia Pet. Children from privileged backgrounds know how to do this stuff because they're raised around parents who do it and they're educated at elite schools that make sure they are able to do it.

That's not necessarily wrong, but neither does it support the myth of the Internet as a cyberland of opportunity in which the lower classes can become rich after starting a company in a garage. The film is filled largely with young white men. Maybe one could sell it as a video dating service; certainly the guy who sleeps on his office floor could benefit from a social life.

But then things went sour for the party boys, and the investors went elsewhere. Tim Nilson, founder of Run Media, tells us, "Unfortunately, there's still great guys that are doing it for the love of the business, and they have a great idea, and they won't get the funding because the market doesn't appreciate B2C at this point. That's sad to see, because if they had timed it differently, they would have made a killing, right?"

Well, they're not "doing it for the love of the business" if making a killing is the measure of their success, but let's not quibble anymore. This video is not about business models and creativity. It's about hypermarketing, and it's told by people who think Charles Darwin wrote a book about business exit strategies. Toward the end of the video, one dot-comrade says the shakeout has meant "only the best companies are survivors." More hype, more cliches, even in the face of disaster.

The video's Web site promo states that "Ultimately we find out that to make it in Silicon Alley, it takes more than hard work and dedication, but timing and a little bit of luck as well." Make that timing, a bit of luck, a lot of hype, and birth into the ruling class.

(Internet Whirl is a weekly column written by John Zipperer, associate managing editor of Internet World magazine. It appears in this newsletter every Thursday. E-mail: jzipperer@iw.com. )

Are You Shark Bait?
The E-Business World Is Waking up to the Need for Errors and Omissions Insurance 
By John Zipperer

(1/15/01) Even bad publicity for an industry can be a good thing if it wakes up people to a danger requiring attention. Last year's high-profile attacks from hacking, viruses, and denials-of-service--and the copyright brouhaha over Napster--brought necessary attention to the technical vulnerability of many companies doing business online. They also woke up a lot of those companies to their legal liability in such cases.

Having errors and omissions (E&O) insurance for a Web business may be a new idea to some dot-com leaders, but it's old-hat for companies following business practices that predate the Web. And in this fast-developing insurance submarket, both kinds of companies should take notice. If they don't have E&O insurance, they probably need to get it. If they already have an E&O policy, they need to check it to make sure it adequately covers them.

In either case, the time to settle the matter is now, not after a lawsuit has been filed against you. Heart Center Online, for example, a venture of EA Web Holdings, is a medical specialty site devoted to providing information on heart-related health issues. The site has moderated and unmoderated community features, as well as physician-edited articles and other information. In the lawsuit-heavy world of medicine, the site's officers knew they needed to protect themselves, their investors, and contributing physicians, who otherwise wouldn't touch the site with a ten-foot pole.

"It's hard to see why people would bring a lawsuit, or what sort of claim they would have, but we have to be prepared for that," says Kevin Kelley, counsel for EA Web Holdings. In addition to site disclaimers and rules of use, Heart Center Online approached an insurance broker to provide it with E&O coverage.

For startups, E&O concerns may seem so remote that they can run the risk of putting it aside for that distant day when cash flow materializes. Others may simply not be aware of their exposure unless their founders require some sort of protection for themselves.

"I think a majority of people who are doing business over the Web are not aware of how much at risk they actually are and have not considered what they're going to do after the fact when something goes screwy and they've actually experienced some loss," says Bill Spernow, research director in the Gartner Group's information security strategies group.

Insurance broker Brian Mohen, managing director of Arden Financial Services, says that the newness of online E&O has attracted the high-risk insurers into the market to provide a bridge product between a company's existing insurance coverage and cyber liability. But it's the newness of the market--largely untried in court or claims history--that is the crucial element, and it's what makes even the high-risk carriers want to set the bar high for coverage. For example, Mohen says the danger of a company's online service being disrupted and causing harm to third parties is real, but insurance carriers shy away from covering the major cause of that damage: employees and former employees. "The industry rule that most people use is that roughly 75-90 percent of all computer damage, sabotage, or hacks will be done by people who are part of the company," Mohen says. Unfortunately, many policies will not cover such damage.

The worst-case scenario concerning E&O cases would hit you with four damaging expenses: The court costs associated with fighting and perhaps paying off a claim against your company; the costs of litigating against your insurance company if it doesn't handle your claim as you'd hopped; the loss of the premiums you've been paying for a policy that you thought adequately protected you from the very mess you're now in; and the public relations disaster from publicity about the problem that caused the original suit against you. This four-headed monster can be avoided by going about obtaining insurance carefully--but aggressively.

A company's specific exposure may not be that great, "but you try to judge the exposure you have and go for the coverage you need," says Doug Hamilton, chief financial officer for IPNetwork.com, a site that focuses on intellectual property markets. Although a group of technology workers who start a Web company may not see the need at first for coverage, they may get religion when they try to get funding. "Some of these VCs will insist on insurance, especially if they're smaller VCs that don't want a bigger exposure," says Hamilton.

Selecting a Broker 
The first step in ensuring coverage is to go over a company's existing policies to see whether they already cover online exposure. Unless you had a far-sighted and aggressive negotiator when you set up the original policy, however, this is unlikely to be the case. That coverage may not have even existed eight months ago, but the market for such insurance products has developed rapidly since that time, and it continues to grow.

"We do have some E&O products and services that we offer to Internet companies, and we're looking to develop more," says Tom Ishikawa, chief marketing officer for the e-business group at CNA Insurance. He adds that his company receives feedback from customers and from its agents and brokers about new offerings that are needed, and that helps guide the company's future offerings.

If online E&O appears to be covered by your existing policy, check the policy carefully for any opt-out clauses or other disclaimers by the carrier. If it's not covered, your current carrier may be your first stop to see if it can begin to provide the new coverage.

Check your coverage for time deductibles in addition to monetary deductibles. Some insurance carriers may only pay for damages accrued after a certain amount of time has passed since the problem first hits, such as four hours. Only after that four hours deductible has passed will your damages be covered, and then only after your monetary deductible has been taken out. The downside, of course, is that most of your damages may be in the first hour or two of a problem with your Web service before backups come online or the problem is fixed. Mohen likens this type of deductible to being taken to a hospital after a car accident and "those first four hours of hospital attention won't be covered--but that might be when you need the surgery."

Because finding a policy can be a headache, many companies go through insurance brokers who find them the policy that meets their needs. Few customers deal directly with the insurance companies. Michael Zeldes, executive director of www.KInsuranceCenter.com, an online insurance broker, estimates that 99 percent of business policies are written through agents or brokers.

As Internet businesses mature, they will be better able to provide the best kind of support for selecting a broker: word-of-mouth among colleagues. But if you're choosing a broker without the benefit of knowing other people's opinions of the broker, you can protect yourself by approaching the situation without any illusions.

"Most insurance brokers are registered agents of the insurance companies for whom they sell policies," says Joshua Gold, a partner with the law firm Anderson Kill & Olick who specializes in insurance-coverage litigation.

Gold suggests that when you meet with a potential broker you ask flat out whether or not the broker has any arrangements or agreements with insurance companies to steer people toward policies from any specific company or companies. You want the best policy period, not what is the best deal for some other party.

Choosing a Policy 
Though there are insurance programs that every business needs, such as worker's compensation and fire, Zeldes says that technology companies have special needs. He points to what is called cyber liability insurance, which protects not only from things that may go wrong on your own Web site but also from situations that result from affiliate deals in which your Web business is entangled with other Web businesses.

So how do you select a policy? Experts say that it's only this past year that insurance companies have come up with policies tailored to e-businesses. The downside of this is that such policies have not yet been tested in court. So it is important to ask the insurance broker whether any claims have been paid under the policy you're considering. If there were disputes over the claims, ask what the disputed points in the policy were so that you can negotiate these points to your satisfaction. If there isn't yet a claims history for this type of policy, what similar policies does the carrier have and what is its track record with them? And be aware of what is not in the policy. What is the insurance company opting out of covering? How hard will it be to make a claim?

Pricing for E&O coverage will vary depending on the items covered by the policy and your own company's situation. Ballpark figures given by Net companies and insurance representatives range from under $10,000 to more than $50,000 a year. Even that broad range likely will change as insurance companies develop a history with the product.

Once you have your policy, be sure to go over it in detail to make sure it provides the coverage you expected. If there is a discrepancy, clear it up right away with the broker and get either a letter of understanding or a side agreement. This should be done before you have a claim; once you have a claim, Gold says, "All bets are off."

Insurance Terminology

CYBER LIABILITY: Professional liability for e-business companies, whether they are developing new technologies or operating on a technology platform. This covers electronic E&O insurance, multimedia liability, and network security.

ELECTRONIC ERRORS AND OMISSIONS: Coverage for claims resulting from harm caused to a third party--including buyers or other venders--when the engine or the code on the site doesn't work.

MULTIMEDIA LIABILITY: Whenever a site posts content, there's the possibility it will be sued for libel or trademark infringement, or face a patent suit for a site design similar to another site's. Chat rooms and other community features are liability threats, too.

NETWORK SECURITY: Hackers can break into databases and steal credit card numbers or other data; coverage can include loss of business and payments to prevent the security breach from becoming public knowledge.