Harvesting an E-Commerce Solution

B.E. 100s CEO Chuck James hangs out an e-shingle and brings new technology to the produce business

former president of Ready Pac; Phil Adrian, a former vice president of Driscoll Strawberries; and Claude Moldenhauer, a former produce vice president of The Kroger Co.

James chose to make the distinction between directors and advisors due to legal concerns: boards of directors have legal obligations to shareholders and can be sued in the event that shareholders don’t believe the board acted in their best interest. Thus, an advisory board without any legal obligation is a viable alternative for budding businesses, he says.

FINANCING THE VENTURE
As with any business start-up, venture capitalists (VCs) can play a principal role in funding the project’s operations. According to James, a standard rule of thumb for VCs is to provide projects they deem promising with at least $500,000 in the initial round of financing.

James chose to finance the seed round for ProduceOnline.com-an amount in the mid-six-figure range-from a portion of the proceeds from the sale of North American. Last November, he secured the first round of financing involving professional money managers, or Series A financing. For this round, California-based Altos Ventures, a firm started in 1996 that invests in early-stage technology companies, led a syndicate of investors that put up $3.3 million for the site. The funds helped the company move from its first office-James’ garage-to facilities in Pasadena, California. The
y also helped to expand the company’s Web-based technology infrastructure and add sales, marketing, technical and administrative staffs. ProduceOnline.com has since opened an additional office in Salinas, California-the heart of produce country-and now employs a staff of 24.

James says he secured the first round of funds through some fortuitous networking. He was aided by Langston Jones, then of the consulting firm Bain & Co. in San Francisco. Jones, who has since joined ProduceOnline.com as senior vice president, coordinated relations with the VC community. James was introduced to Altos’ Kim by del Santo and by John Lilly, former CEO of the Lucky Stores chain.

According to Kim, Altos considers about 1,000 investment proposals per month, with the goal of investing in approximately six to eight companies per year, although, in 1999 the fund actually invested in 10 companies. Current Altos holdings include nonstop.com and egreetings.com; the latter made a $60 million initial public offering last year.

When asked what primary criteria his firm uses to evaluate a start-up, Kim says, “Because venture capitalists take no collateral of any kind, they are essentially banking on the credibility of the entrepreneur. That was the deciding factor [with ProduceOnline.com].” He adds that an assessment of the potential size of a market and the company’s competitive advantage-which can lay the groundwork for a profitable IPO later on-are also important.

Within the company’s current ownership structure, employees hold about 70% of the equity; Altos, 20%; and other partners (including James), 10%. Over the next six months, plans are to raise an additional $10 million to $20 million to expand the site’s technical capabilities and to recruit top-quality management and staff. James says that after the next round of financing, the company structure is likely

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