By Daniel Walker Guido The dawning of the technology age has done much for builder Shane Dillenburg. It's taught him how to handwrite checks and lick stamps, how to zealously keep triplicate files for backup purposes, and how to distrust anyone who breathes the phrase "Internet-enabled" within his earshot.
Dillenburg, vice president of Creative Custom Homes of Green Bay, Wis., is one of the many victims of the spectacular failure of the home building industry's most promising Internet solution. BuildNet.com was once the darling of Wall Street, the housing industry's own Amazon.com--a sure winner that would set the pace for all other home building Internet solutions.
But that didn't pan out. After raising a whopping $143 million and preparing the first public offering of any home building dot-com, BuildNet failed to get its offering to market before the Internet-related securities industry tanked in spring 2000. Had it been ready to go public as little as a month before it did, BuildNet would have raised millions and had at least another quarter million dollars in the bank to keep developing its e-commerce and back-office solutions.
Instead, it crashed and burned, filing Chapter 11 bankruptcy reorganization in early August. Its flamboyant, self-described visionary founder, Keith Brown, resigned and announced he would pick up his hammer and return to custom home building. The company's board and its treasure trove of highly skilled technicians scattered. A tiny five-person skeleton crew now struggles to keep up with customer service requests for its back-office software.
The demise of BuildNet has left an industry highly dependent on the seven back-office software companies that it bought during its meteoric rise. Five of these companies went down with the ship when BuildNet filed bankruptcy. The original owners of the other two, Lloyd's and J.D. Edwards, nimbly pulled their companies back just before the collapse.
Thousands of home builders use these companies' software programs to run back-office accounting and payroll division--BuildSoft alone is used by 2,300 builders. Many builders say they have called BuildNet for support only to find lines disconnected, or their calls have never been answered. By early September, an entire industry was paralyzed with fear that it will be left with software rendered useless by the lack of qualified support.
"What BuildNet did was a huge disservice to the entire home building industry," says Paul Schumacher, of Schumacher Homes in Canton, Ohio, which builds about 300 homes a year in the $175,000 to $300,000 price range.
"They spent tens of millions chasing this e-commerce dream that no one wanted, while they had all sorts of glitches and problems with their back-office software that went uncorrected," Schumacher explains. "The industry needs good, solid, back-office software and first-rate service. Instead, we've been abandoned."
"We are getting calls every day from panicked builders who can't get any support and don't know what to do," says Greg Holsonback, director of information technology at Brookfield Homes in Costa Mesa, Calif. Brookfield, which builds about 800 homes a year priced from $400,000 to $1.5 million, installed Fast two years ago. Most of the calls come from smaller builders, who seek advice from Brookfield because they know the company has its own information technology department with computer technicians on staff.
Dillenburg, whose company builds about 160 homes annually in the $120,000 to $160,000 price range, is one of those smaller builders who is up the proverbial creek without a paddle. "BuildNet sold us a bill of goods, then left us dangling," he says. In May, Creative spent thousands to buy all the modules of BuildNet's Fast back- office program and allocated several thousand more for on-site training by BuildNet personnel.
Then, in late June, after spending a lot of time and paying a lot of overtime, Creative completed the switch from Quickbooks. "We were on the line with the BuildNet sales and support team through late July," Dillenburg laments. "At no time did anyone ever hint that BuildNet was going under. All we knew is suddenly in early August they quit answering the phones. They haven't even given us an owner's manual."
With about $1.8 million a month in accounts payable, Creative is hampered by having to use BuildNet's check forms on its printers to pay bills. No other check format will print correctly. "We can't get anyone at BuildNet to send us more forms," Dillenburg says. "We can't just take a three-week holiday on writing checks. Some of these are for $300,000 or more. We're going to have to handwrite everything until we either get some service from BuildNet or dump this and install another system."
While Dillenburg isn't averse to dusting off the abacus and writing checks, by doing so, he loses the BuildNet accounting system that keeps track of who has been paid for what. "We could end up paying subs two or three times for the same job. Many subs don't keep the best records, so they will bill for a house we've already paid them for, when they mean to bill for the same job on a different house. It happens all the time."
With BuildNet, Brown promised the equivalent of changing water to wine, and thousands believed. His book, The Interactive Marketplace: Business-to-Business Strategies for Delivering Just-in-Time, Mass-Customized Products, sold several thousand copies. Readers included small business owners and Wall Street investment bankers. In it, Brown took on the role as the industry's wise sage, as if he had already successfully launched BuildNet and built it into one of the largest Internet firms worldwide.
His self-confidence had no apparent bounds. Even as BuildNet was running out of cash and was about a month away from filing bankruptcy, Brown audaciously described BuildNet as "the Microsoft of the home building industry" at an industry conference in Washington.
Within a year after deciding his home building software company would become a B2B e-commerce marketplace, he raised $143 million from scores of eager investors. He was going to make himself, and them, rich--and he nearly pulled it off.
"Brown was a day late and a dollar short," says Paul Pittman, president of HomeSphere, a home building related Internet solution. Pittman made an unsuccessful, last-ditch effort to buy BuildNet for $30 million. "Keith had a good vision, but the company failed miserably in the execution of that vision. BuildNet received a huge amount of financing and never produced significant results."
Beginning of the end
It all began in 1987, when Brown, then a custom home builder who built a few homes a year in North Carolina, developed a back-office accounting and payroll software system. BuildSoft became the first back-office company to be owned by BuildNet. Wanting to expand, Brown created BuildNet in 1995 and tried talking to Wall Street investment bankers, who barely gave him the time of day. No one wanted to fund another software company, as the return against investment is historically low.
At that time, even Bill Gates was saying the Internet would only be useful to hobbyists, universities, and the military. Nonetheless, Brown began developing a plan to use the Net as the delivery tool not only for back-office accounting systems, but also for ordering home building supplies online. Learning the emerging lingo, Brown says he began calling BuildNet a B2B e-commerce solution. Suddenly, Wall Street investment bankers and seasoned venture capitalists were beating down his door, eager to fund his plan to develop the home building industry's first e-commerce marketplace.
To quickly capture the market share Wall Street insisted BuildNet have, the company bought the seven competing back-office systems. "That got them onto the desktops of many in the industry," says Martin Freedland of Organizational Development Associates of Atlanta, a home building consulting company. "But once there, they did nothing with those companies. They only wanted to show Wall Street they had the market share they needed."
"Up until the dot-com crash, the word from the Street was all go-go-go," says Nathan Morton, BuildNet's CEO. "I had one Wall Street analyst from a major investment bank tell me our problem was that we were not losing money fast enough, that we had to dig in and spend much more for research and development. All the Street cared about was market share."
And all BuildNet's owners cared about was Wall Street. "This is what happens when you create a company just for the purpose of getting rich," says one home building dot-com owner who requested anonymity. "Think of all the lives that have been damaged by the greed of those who wanted to get rich quick while the market was roaring upward."
After buying the back-office systems, BuildNet hired a few more technical support people and talked about updating the aging Legacy systems the acquired companies used. But instead, BuildNet spent millions each month trying to develop the industry's first true e-commerce provider. It didn't release any major software updates, nor did it earmark development dollars for software overhaul.
When Peter Hill, director of service industry for J.D. Edwards, met with BuildNet's top management to discuss the promised updates of his system, he found that "BuildNet was a pure dot-com, get-rich play--nothing more." He adds, "We'd go to meetings at their offices to talk about offering updated systems that were inexpensive and reliable. Instead, they wanted to talk about how much money they were going to make and proposed that our company provide them with more cash for the e-commerce development. Fixing the many, many glitches in the software of the back-office systems was never, ever a goal of theirs."
By investing everything in e-commerce, BuildNet set back the development of the home building industry's back-office software solutions by years, says Chuck Shinn, of Littleton, Colo. based Lee Evans Group, a management consulting firm for the home building industry.
"The industry needed three systems to be created out of the ones they owned. One for small builders, another for medium-sized, and a third for the largest," Shinn says. "The industry needed those three systems upgraded to the best and most modern technology. Instead, BuildNet kept all seven on life support and made promises it probably never intended to keep."
"Now, the industry is in an uproar," Shinn continues. "Some builders who need service can't get any. They're worried and upset."
Builders are calling Shinn because he was involved in the creation of Fast and TOMSystems. "We made the mistake of not keeping control of the software, and now people are stranded." His company has tracked down several former BuildNet technicians and are steering consulting work to them in hopes of keeping them available to builders for as long as possible. "But eventually, sooner than later, the few technicians who are still around are going to have to find other jobs. We can't keep this up forever."
Seeking to capitalize by filling the void left by BuildNet's demise, Shinn is once again working to create a new back-office system that already is being tested. "There are no good back-ends out there right now with five systems gone."
Robert Rockwell agrees. As information director at Denver-based Village Homes, he has used Fast for 15 years. Building about 800 homes a year in the $200,000 to $500,000 range requires a well-functioning, stable back-office system, and Fast has proven reliable. But now, with a skeleton staff of three support personnel, one programmer, and an administrator, Fast is doing all it can to just provide basic service, Rockwell says. "That means that the developmental support I need isn't available. The new products and bug fixes and all that just isn't happening."
The same problem has enveloped J.R. Walz, chief operating officer of Colorado Springs, Colo. based Keller Homes, which will build 250 homes this year in the $180,000 to $500,000 price range. Keller was caught in the midst of moving from SuperFast, a system that could be used on-site with handhelds, to PocketFast, a system that could be used with the even smaller Palm Pilots and Rim Blackberries and other similar Web-enabled personal digital assistants.
"All of a sudden, we can't get any technical help to complete the conversion," Walz complains. "So I've had to change everybody back to the handheld systems. The thing is, because they're larger and heavier and clumsier than the Palm Pilots, no one is making them any more. So now, I'm patching together what I've got. I've got one new supervisor I can't even get online because I can't find another handheld."
How BuildNet went from king of the hill to bankruptcy is a case study in bad timing.
BuildNet was just finishing the final preparations on its public offering in spring 2000 when the NASDAQ high-tech stock market collapsed. "BuildNet went from having people lined up, drooling to buy its stock, to having no one remotely interested--all in less than a month," recalls Michael Holigan, who tried to buy BuildNet before it collapsed to merge it into his successful home building Internet solution, MH2.
To survive the Internet stock crash BuildNet should have slashed payrolls and abandoned its expansion plans. Instead, BuildNet went from around 60 employees in May 1999 to 1,050 employees in October 2000--more than half a year after the market collapsed.
"This will help continue to keep the investment tap tightly closed off for a long time," says Steve Porten, founder of BuildTopia, a home building Internet solution. "Investors will say, 'If BuildNet couldn't make it, why should we invest in you?' "
Not that BuildNet's fall is surprising anyone, least among them venture capitalists, says Ian Jacobs, home building analyst with Wall Street investment bank Goldman Sachs. Instead, the collapse has solidified investors unease with the entire dot-com industry, giving them another reason to sit on their cash. And even though the entire company could be bought for pennies on the dollar, as of early this September, few were interested.
Picking up the pieces
So what's left of BuildNet besides $100 million worth of debt and sixty pages of creditors? Not much.
J.D. Edwards took a good hard look at buying the other software companies. "We passed," says Hill. "We thought, 'Why lay down good money to buy headaches?' The only value in these old, Legacy-based systems is in their customer base."
But others thought differently. On Sept. 23, BuildNet's assets were sold at auction. Advantage Acquisitions Co., a wholly owned subsidiary of HomeSphere, paid $1.2 million for BuildSoft's software, customer lists, receivables, and its physical assets such as computers, desks, and office cubicles.
For $102,000, J. Knutson and Associates purchased BuildNet Advantage, which has about 400 users and is geared toward small builders. TSC Inc., purchased True- line, another back-office accounting system, for $200,000.
And not discouraged by the results of its previous buy out attempt, Michael Holigan's MH2 paid $2.9 million for Fast and $100,000 for BuildNet's Rim Data, an options tracking software company. Holigan says all the intellectual property related to BuildNet, including the BuildNet name, its trademark, and logo, were included in the Fast sale and now belong to him. Holigan has not decided whether or not to use the BuildNet name in the future.
All other BuildNet subsidiaries were spun back to their original owners because BuildNet was unable to complete their purchase by an agreed upon date.