A year ago, Tom Graham and Paula Jagemann both wanted to become the Amazon.com of the office supply business.
Hoping to catch industry giants Office Depot, Staples and OfficeMax flat-footed in the stampede to electronic commerce, Graham and Jagemann last summer each set up an Internet site devoted to selling copy paper, file folders, paper clips and thousands of other products. Graham, a former software salesman who lives in the District, and Jagemann, a former secretary at Fairfax-based UUNet Technologies Inc. who made millions from stock options, wanted to grab a big chunk of the $60 billion annual market for office supplies.
Each began as so many Internet entrepreneurs do, with a handful of employees, modest initial investments and ambitious dreams. Their first steps into the rough-and-tumble world of e-commerce were chronicled in a Washington Business cover story last summer.
Today, Graham and Jagemann can't claim Amazon-like success. Their businesses have grown markedly in the past year -- she has 25 employees, he has 10. Jagemann said her site does $300,000 a month in revenue; Graham refused to give revenue figures. But the two sites haven't been able to overshadow the brick-and-mortar giants, which have moved aggressively to expand their online offerings.
Staples, for instance, promotes itself through the popular Yahoo search service, while Office Depot has redesigned its Internet site three times in the past year, making it more comprehensive and easier to use.
As a result, the two entrepreneurs have learned that in the Internet world, you can't be sentimental about your original plan. Both have shifted their business strategies in recent months.
Graham has resorted to what he calls "guerrilla marketing tactics," enticing people with free calculators, staplers and file folders if they peruse his site, at atyouroffice.com. He has also forged deals with America Online Inc. and Microsoft Corp. to promote his site in their directories of small-business services.
Jagemann, on the other hand, has decided to put less emphasis on actually selling products through her site, at onlineofficesupplies.com. Instead, she's using the technological expertise developed in setting up her business to create Internet sites for independent stationers who want to jump into e-commerce.
"We barely sell pencils and pens anymore," she said. "We sell our technology." She calls her new strategy "a complete shift from where we were at this time last year."
For Jagemann, the shift began late last year when one of the biggest players in the online office products market asked to license her technology. She was intrigued, but scared: "It would have meant a lot of money, but it would have meant enabling a competitor."
So Jagemann went to her mentor and former boss, UUNet chief executive John Sidgmore, for advice. "In 40 minutes, John had spun us into a technology play," Jagemann said.
Jagemann and Sidgmore then set out to strike a deal with United Stationers Inc., the country's largest office products distributor. They offered to create and operate Internet sites for the thousands of mom-and-pop stationery stores that buy from United, in exchange for a cut of their online sales. After several months of negotiations, they had a deal.
Now, Jagemann's company will custom-build sites for any of United's customers. "If they are in Vermont and they want the mountains of Vermont in the background, that's what they'll get," she said. "Rather than compete with all these other stationers, I will enable them and win with them."
For Graham, the strategy shift began earlier this year when he was talking to Robert Haft, the local businessman who ran Crown Books and now heads an online venture called Vitamins.com. "He suggested I offer up free stuff to increase the number of people visiting the site," Graham said. "That's the sort of stuff the big guys aren't doing."
He said the free-sample approach is helping to build traffic on his site. People who get a free product -- to do so they must divulge their name and address -- "are coming back to buy more things," he said.
But he acknowledges that he still faces a tough fight with the big three retailers. "This is really war," Graham said. "None of the big guys want to be `Amazonized.' "
Office Depot's Internet czar, Keith Butler, said he understands how upstart rivals perceived a juicy opening in the market last year as his firm and others were just beginning to grasp e-commerce. But now, he said, Office Depot, Staples and OfficeMax are moving to prevent the start-ups from "rising up to be an Amazon in this market." Office Depot's sales from its Internet site increased 474 percent to $70 million in the second quarter compared with the same period last year, the company said.
"They thought there was a window of opportunity," Butler said. "Our job was to slam that window shut, and I think we've done that."
Graham and Jagemann disagree. They believe that the brick-and-mortar office supply business is so diffuse -- the big three have less than 25 percent of the market -- that the online world will provide plenty of opportunities for new entrants and existing mom-and-pop stores.
"To be successful, we just need a small piece of this huge market," said Graham, who recently moved his office from the District to Rosslyn, where his staff works in a large, unpartitioned room on desks fashioned from wooden doors. (He got the specifications from Amazon after a visit to the online bookseller's Seattle headquarters.)
Thus far, investors and industry analysts share Graham and Jagemann's optimistic predictions. Jagemann is close to wrapping up a $15 million round of venture-capital funding. Graham raised $1.25 million in the spring -- largely through private investments made by Haft, John Hechinger Jr. and The Washington Post Co. -- and he plans to attract $10 million in the fall.
Both have been approached with offers to sell their businesses. Thus far, both have refused.
"I'm not going to sell out," Jagemann said. "When UUNet went public" -- which made her an overnight millionaire -- "it was the greatest feeling in the world. I'm not going to cash in my chips early."