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Dot-Com Back: Varsity Group Turns the Corner

By Ellen McCarthy
Thursday, November 11, 2004; Page E01

Inside Varsity Group Inc.'s 11th-floor headquarters in the District, clutter serves as the decor and twentysomethings in jeans are doubled and tripled up in small offices. A rear wall is about to be knocked down to make more room. For the first time in four years, the e-commerce company is bursting at the seams.

It's an enviable situation, considering how many of its dot-com peers are long dead -- and how close it came to suffering the same fate.

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In true Internet-boom form, Eric J. Kuhn created the company in 1997 at the age of 26. His goals were twofold: to escape from a career in law that wasn't to his liking and to revolutionize the college textbook industry, freeing students everywhere from campus bookstore monopolies.

So off he went, banging on doors of venture capitalists and book distributors. A chance golf course meeting led to an introduction to one of billionaire Warren Buffett's wealthy kin, who agreed to listen to Kuhn's pitch. "Next thing I knew we were on a plane to Omaha . . . and he wrote us a check for $1 million," Kuhn said of the Buffett relative. "That was our angel money."

Within three years, the company, then called VarsityBooks.com, had raised $40 million in venture funding. Kuhn was in and out of meetings with top executives from the Internet and publishing industries, earning what he calls an "MBA on the fly." Selling books through the Internet at a discount was the big idea, but the company's primary focus became something quite different and more grandiose -- building a national brand.

VarsityBooks.com ran ads regularly on MTV and in college newspapers. The company built a network of thousands of student representatives on campuses across the country and bulked up to a staff of more than 250 employees, many of whom worked in marketing.

In February 2000, the company hit what seemed then to be the ultimate mark of success: It went public. VarsityBooks' stock debuted at $10 a share on the Nasdaq Stock Market and, at its peak, the company was worth $207 million. "That was sort of instilled on the forehead of every young CEO," Kuhn said of the euphoria of the moment, "and I did it."

The giddy moment was over all too soon for most dot-com companies, and it proved especially brief for Varsity Group. The Internet bubble burst a month after its IPO, and Kuhn had to get on the phone every quarter to tell analysts and investors about the multimillion-dollar losses his company was racking up. For every $100 in books the company sold, he said, it was spending $100 on marketing.

"All of a sudden people were telling us we were ugly, that they didn't like us anymore," Kuhn recalled. "When you're a public company everything becomes magnified . . . and it was a company I started. It was a self-reflection."

In April 2000, Kuhn went to a company board meeting bearing charts and graphs that showed the company would go under within a couple of months at the rate it was burning cash. Area dot-coms such as LifeMinders Inc. and Musicmaker.com Inc., both of Reston, and Value America Inc. of Charlottesville were struggling publicly by then. Big e-commerce firms such as Pets.com Inc. and WebVan Group Inc. were fast becoming the bane of investors everywhere.

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