eBay's birth can be a start-up lesson

By Samuel Fromartz

WASHINGTON: Few would question that auction enterprise eBay has become one of the most important companies on the Internet. But what was it about eBay that not only allowed it to survive, but thrive in a nascent industry where success became the exception rather than the rule? Could its huge success have been predicted? "The Perfect Store: Inside eBay" (Little Brown), a recent book by Adam Cohen, tells the story of eBay from its earliest days in Pierre Omidyar's home office to its meteoric rise in Silicon Valley as a multibillion-dollar wonder.

While Cohen doesn't directly answer the questions about its success, the narrative he weaves holds some answers. So much of the company's success, it seems, was based on Omidyar's early decisions, which in turn reflected his own proclivities and beliefs. Many companies start with an idea for a business, an opportunity it wants to exploit, but eBay started with an ethos of what a perfect market should be and what it could provide the world.

A democratic vision

Omidyar, Cohen writes, was a technologist motivated by a "pure, democratic vision," where buyers and sellers could come together on equal terms. No one would be in a position of power or hold the keys to this market. It was open to all -- as long as the community didn't, in effect, vote out an individual for misconduct. This idea didn't lead Omidyar to start "a business" in the conventional sense, but rather an auction service that he set up over Labor Day weekend in 1995 on his personal home page on the Web.

Although it has been widely reported that Omidyar started the service to trade candy PEZ dispensers that his fiancee collected, Cohen makes clear this was actually a myth created by eBay's public relations manager to generate publicity. Actually, the real story is, Omidyar listed a broken laser pointer for sale on the site, and it was then that he realized its true potential. In the first week, he got no bids, then someone bid $3, then $4 and eventually the bidding reached $14 for an item he thought was worth nothing.

At that point, Omidyar listed the site on news groups to attract traffic. It grew on word of mouth. Still it wasn't a business, because he did not charge anything for the service. While entrepreneurs agonize about what to charge for a product or service, Omidyar faced that question only when his Internet service provider started charging him $250 a month to host the site.

To cover costs, he began charging 5 percent of the sales price for items less than $25 and 2.5 percent for items above. Soon, checks were arriving quicker than he could open the envelopes. eBay became profitable in its first month. Omidyar had to hire his first employee to open the envelopes and deposit the checks. Necessity drives a lot of decisions in start-ups, but the ones Omidyar made seemed to be prescient about the nature of the Net.

Flooded with e-mail from people complaining about one auction or another, he set up the feedback forum for users to rate buyers and sellers. The reason: he didn't want to deal with the complaints. Let the community decide. This became a distinguishing feature of the site. By the fourth month in business, when revenues hit $10,000, Omidyar figured he had a real business and went out and hired a business guy.

This was another astute decision, finding someone who could crunch numbers and complement his geekish skills. He landed Jeff Skoll, who had a Stanford MBA and had founded two companies. Even at this early stage, however, with the site growing month by month, the two didn't realize what they actually had.

Their earliest business plan, Cohen writes, predicted that eBay would grow by licensing its technology to others. But the author later points out that eBay made a major misstep by failing to patent the technology it had developed, clearing the way for others to enter the field. As it turned out, the real business -- the one that would make Omidyar worth billions -- was in fulfilling that early vision that he had: connecting buyers and sellers and giving them an equal footing.

Like a religion, or social movement

In this way, eBay became a market that could charge for every transaction. In effect, it built and owned the street corner where people mingled and traded, but not the goods that changed hands. The book offers everything you always wanted to know about eBay: portraits of the weird people who populate this diverse market, its considerable growth pains over the years, its various struggles to create a conventional business in an unconventional world.

If anything is missing, it's the context of this success in a sea of failure. Was Omidyar the only one to really get it when it came to the Net? Or was he just lucky, a man with the right idea and outlook at the right time?

Maybe the ultimate lesson here isn't really about the business that he created so much as the community eBay has become. All those people selling car parts, irons, figurines and used underwear (until eBay banned that unseemly item) made up the real enterprise. That's what Omidyar harnessed even if he didn't recognize it fully. As Cohen writes, "eBay exists, like a religion or a social movement, wherever its adherents happen to be."

What better assets can there be?

© Reuters