Having missed out on the first e-Christmas shopping boom at the end of last year, Toys "R" Us (TOY) CEO Robert Nakasone knew he had to get cracking early in 1999. Still sore about losing the title of top offline toy retailer to Wal-Mart, Nakasone went on the offensive. Between January and April, he talked with anyone he could - inside and outside of Toys - about jump-starting a Web business to thwart the dot-com upstarts.
After aborted attempts to team up with rivals - namely Toysmart.com and Brainplay.com - in April Nakasone hit paydirt: a deal with Benchmark Capital to help fund and build its new online business operation. In announcing the deal, Nakasone called it a major step in the company's strategy "to be the clear leader in the online retail market for toys and children's products by fourth quarter 1999."
But what was heralded in early spring as a precedent-setting arrangement - matching retailing's old guard with the e-commerce-savvy venture community - unraveled last week. In the postmortem, both sides are pointing fingers. People close to Toys allege Benchmark wanted too large a stake in the Toysrus.com business. Those on the VC side maintain Toys management was naive to think it wouldn't have to relinquish part of the business in exchange for Benchmark money and connections.
The partnership fell apart because the two sides couldn't agree on who would own the Internet venture, confirms Benchmark general partner Robert Kagle. "We imagined that it would be an independent company that could be capitalized independently," he says. "At some level, that was inconsistent with Toys "R" Us shareholders' interests."
The breakdown of the relationship is a costly one for both parties involved. Benchmark, which has enjoyed a string of successful e-commerce ventures from eBay (EBAY) to Ariba, is now saddled with a high-profile failure. When the two companies announced the partnership in April, Benchmark hailed it as the first in a new type of alliance that would enable traditional corporations to tap into the magic of Silicon Valley's entrepreneurialism. But Kagle now says that for such partnerships to work, companies need to be willing to relinquish some control and give venture capitalists a shot at "unlimited potential returns." He adds that Benchmark is evaluating several such ventures.
"What we can't afford as VCs is be a consultant to large corporations," Kagle notes. "If you look at returns in the venture business, you'll see that results of VCs really rely on the balls that not only go out of the park, but also roll down the street for a while."
The perception of failure may not linger long for Benchmark. However, the same can't be said for Toys. The company's stumbles may have already cost it another e-Christmas.
Toys' problems are as systemic as they are cultural. What may have brought on the demise of the Benchmark partnership - and potentially its 1999 holiday season - is a clash between the freewheeling Silicon Valley spirit and the controlling bureaucracy of corporate America.
"The key lesson, as we see a lot of companies forging partnerships together, is the cultural fit," says Lauren Cooks Levitan, an analyst with BancBoston Robertson Stephens. "At the end of the day, it is really critical to have a sense of whether they can work together. Toys "R" Us is not the most nimble of companies."
The first sign that the deal wasn't working out came just before Independence Day, when Robert Moog, Toys' first choice to head up its online operation, backed out. Moog, who introduced Nakasone and Toys Chairman Michael Goldstein to Benchmark in April, says he left because he didn't think Toys was committed to pouring more than money into the division. He says it became clear that Toys had no intention of competing directly with its retail stores. "That was the naive part," he adds.
"Toys "R" Us really wants to be successful, but sometimes it's just too difficult to change the
