Once bitten, not shy

It is hard to forget theGlobe.com, founded in 1994 by then 20-year-old Cornell classmates Stephan Paternot and Todd Krizelman. Not unlike Facebook, the site was a “virtual community” where people were invited to share interests like relationships and movies via chat rooms.

And, like Facebook, theGlobe had a stunning valuation. When it went public in 1998, its shares saw a first-day gain of 606% and the company had a market cap over $1 billion. Practically overnight, Paternot and Krizelman were worth a combined $150 million. The rakishly handsome Paternot was a hot commodity, appearing on “Good Morning America” and the pages of Vanity Fair and Vogue. (Screen shots of his TV appearances still run in a slide show on his website at www.paternot.com.)

Then, poof! The tech market nosedived, and shares of theGlobe plunged before Paternot or Krizelman could realize their paper gains. Krizelman faded from slight, quietly heading to Harvard Business School. Paternot, meanwhile, was fast-tracked from media darling to symbol of preposterous excess. He turned his attention to acting and producing a couple of independent films and also started Actarus Funds, a series of seed funds that invest in Web 2.0 startups.

Actarus has backed eight startups in the last two years. Its investors include a Logitech co-founder, several hedge fund friends and Paternot’s affluent family.

Recently, VCJ caught up with Paternot, now all of 34 years old.

Q: What’s your investing criteria?

A: I’ll invest anywhere up to $500,000, so it has to be first stage, first financing. And it needs to be a proven entrepreneur.

Q: That’s funny coming from you, once a first-time entrepreneur supported by angel investors.

A: Well, since I’m not the one building the business, I really need to trust the team I’m betting on, and [repeat entrepreneurs] understand what it takes to build a business. There are always going to be interesting new concepts, but they often require a million course corrections, and if you have a mediocre team, you’re out of luck. Also, guys who’ve successfully built and sold a businesses are more realistic about valuations. They’re also more flexible and they get it and they know how to communicate with investors more clearly than first-time entrepreneurs.

Q:Speaking of investors, VCs passed on theGlobe.com. What did they tell you at the time?

A: We met with a lot of VCs back in 1995, but they were more focused on software and operating systems and enterprise solutions. None of them understood what community was.

Q: How ironic in 2008. Do you consider theGlobe.com a predecessor to Facebook?

A: I think the parallels are more philosophical in terms of vision. Fundamentally, it’s about community and connecting people together. As far as execution, that concept has evolved as technology has become more sophisticated. The concept of theGlobe.com was connecting people around topics of interest, movies, illnesses. It was, let’s provide them tools to self-express and self-publish. It was basically a combination of social networking and blogging as we know them today, using chat rooms and personal publishing tools.

Q: Unlike you, Mark Zuckerberg almost never gives interviews. Savvy or pretentious?

A: I actually think he’s smart to keep a lower profile. The thing is, people have accepted the Internet and the value of social networking — if not fiscally quite yet, then in that intangible way that we experience it every day. Entrepreneurs can just focus on their products; they don’t have to evangelize the concepts they’re based on. Back [in the ‘90s], you sort of had to hold the torch, and explain the community and get out there and capture people’s imagination.

Q: Facebook and its ilk are being rewarded for their focus on user growth instead of revenues. Isn’t that the same strategy that bit theGlobe.com in the rear?

A: I definitely see some repetition. I certainly thought that a hyperinflationary valuation was happening when eBay acquired Skype [for $2.6 billion]. A lot of people argue that the potential of community and of being the first experience people have when they go online is so powerful that [Facebook] could be another Google scenario. And I agree that the revenue Facebook is generating—$250 million a year, last I read—is just the tip of the iceberg. That said, a $15 billion valuation based on that potential is a little steep by anybody’s standard.

Q: Does your experience suggest anything about where Facebook is heading?

A: The Internet goes through evolutions. People couldn’t see beyond Yahoo for a long time, and suddenly there was Google. I couldn’t see what was beyond the tools that were available to me [at theGlobe.com] at the time. But as markets get bigger, they fragment, then gel around more specific ideas. It will re-fragment again. I’m an active Facebook user and have loved it since using it a few years ago. But Facebook has something like 80 million users. Not everyone wants this one homogeneous experience.

Q: But you’ve backed a Spanish-language social networking site, Sonico, that’s very similar.

A: Sonico has a different approach. It’s focusing on Latin America specifically and on local culture relevancy. The idea is to draw out the value of the local communities and demographics.

Q: Let’s talk about another investment: the online invitation startup Pingg. Its invitations are gorgeous, but how can it compete against Evite when so many others have tried and failed?

A: I think competitors haven’t hit it yet because they’ve come up with these really technical solutions. The guys at Pingg came up with this really elegant solution and with less than a million dollars, they’ve built this product that plugs into OpenSocial and FaceBook and MySpace and it’s rocketing right now. It’s especially useful for political fund-raisers and charity events, which don’t use Evite because its invitations are silly are way too college-y.

Q: Many startups in your portfolio, like Pingg and Sonico, look like me-too companies.

A: Actually, in many cases, the companies I’ve invested in are replicating a successful business in a new geography. It’s proven somewhere and then imported to where you are. PayPal hasn’t set up localized offices in Latin America, so you have DineroMail, which does person-to-person payments. My first investment as a seed investor was in a ring tone company called Zingy that sold to a Japanese company [For-Side] for $80 million. Ring tones were already very big in Europe. When my friend Fabrice Grinda started the company here [in the United States], the market barely existed.

Q: Grinda is also an investor in Sonico. Do you tend to invest with the same people?

A: I co-invest a lot with Fabrice. We’re both backers of DineroMail and [Craigslist competitor] OLX. I like to share the risk and to do that with other entrepreneur angels, who I also like brainstorming with. [Former PayPal CEO] Peter Thiel and I are both investors in [free file hosting site] Badongo.

Q: Are you friendly with Thiel and other Silicon Valley angels? Where do you get your deal flow?

A: You know, after theGlobe.com, I ran as far from the Internet as I could go for a while. Todd [Krizelman] and I have never been in the inner cliques of Silicon Valley. I think in New York there was a lot of rivalry between the Alley and the Valley. A close contact is Dan Miller, the former president of AskJeeves. He’s now an investor in Berkeley with the Roda Group. But most of my contacts are in New York or the U.K.

Q: Among your investments is Krizelman’s new publishing data startup, MagazineRadar. So you stayed close after the roller coaster ride together?

A: Oh, yeah. We still hang out. We’re great friends. I’m going to his wedding at the end of the year. We often reminisce about the old days.

Q: Last question: What did you learn about personal money management that you could share with young entrepreneurs today?

A: Wow. I had zero money management experience at the time. I was 24 when theGlobe.com went public. I didn’t think to put anything in a bank account and diversify. My advice would be that if you’re company is worth anything, $5 million or $15 million, and you have the chance to take some money off the table, do it!





Place of birth: Palo Alto, Calif. (Paternot moved to Switzerland when he was 4 and was raised there.)

Education: B.S., Cornell University

Work history: Co-founder and co-CEO of TheGlobe.com, 1994-2000; general partner of the Actarus Funds, 2002-present.

Investment focus: Internet startups, seed stage only. Maximum investment is $500K.

Biggest hit: Mobile phone ringtones startup Zingy was a “900%” return, says Paternot.

Board seats: The Heineman Foundation for Research, Education, Charitable and Scientific Purposes

Last book read: Snow Crash, a 2000 cyberpunk novel by Neal Stephenson. (Paternot recently re-read it.)

Did you know? Paternot produced and starred in two independent films: 2001’s “Shutter” and 2003’s “Wholey Moses,” acting alongside “Terminator” star Linda Hamilton in “Wholey Moses.”