Once the star of Buffalo's fledgling high-tech sector, Reciprocal Inc. has run out of money and time, leaving its original backers disappointed - and less wealthy than they were.
Microsoft Corp. has foreclosed on a $10 million loan it made to the e-commerce company in March. The foreclosure erases a multimillion-dollar investment from Reciprocal founder Ronald Schreiber and about 30 Buffalo investors who believed the Buffalo company could become a giant of online commerce.
"We were too early," Schreiber said Wednesday. "We attempted to push the market aggressively, and that was expensive."
Reciprocal provides transaction services for download sales of music and text, a business still in its infancy.
Founded in Buffalo, the company has only a handful of employees left at its office on Main Street, after downsizings played out over the past year. Microsoft foreclosed on Reciprocal's assets on Sunday, four days after the deadline for repayment of its $10 million loan, according to a company document. The loan was intended as a bridge to long-term financing, which didn't materialize.
Reciprocal continues processing online transactions for clients while its finances are restructured, company officer Howard Singer said. Whether it will maintain a Buffalo presence is undecided.
The foreclosure sets the stage for Microsoft to spin off the business as a new entity, with fresh investors and perhaps a new name, Schreiber said.
Microsoft spokeswoman Rachel Wayne said the company had no comment.
When it was founded in 1997 by Softbank entrepreneurs Schreiber and Jordan Levy, Reciprocal was Buffalo's brightest hope for a piece of the Internet economy. In 1999, Mayor Anthony M. Masiello chose its futuristic computer room as the setting to launch his "Byte Belt" initiative for a high-tech downtown.
The company once had more than 60 workers in Buffalo, but gradually shifted operations to New York and Raleigh, N.C., site of its software-development unit. Last month it moved its data-intensive transaction processing to a contractor's site, leaving a half dozen employees here.
Despite its high profile, Reciprocal's demise won't deter other Buffalo tech start-ups, said Cian Robinson, executive director of InfoTech Niagara. Local tech companies continue to open their doors, relying on sales to fund their operations instead of scarce venture capital.
"We're bootstrappers around here - we continue to grow our companies," Robinson said. The tech industry group has 230 members and continues to grow, he said.
Formerly called Rights Exchange and before that Softbank Net Solutions, Reciprocal handles download sales of digital products such as books, music and software. It collects payment from buyers over the Internet and provides them with digital keys to unlock anti-copying codes.
Such "digital rights management" services were supposed to support a flourishing market for downloaded products, Reciprocal's backers hoped. But so far, music publishers are still struggling with how to collect payment for songs downloaded from the Internet.
"If I could make some decisions over again, I would set a different tempo . . . we could have slowed down (and) drastically reduced our costs," Schreiber said. "I feel bad these decisions weren't made."
But in the Internet's boom days, investors were willing to pour money into the construction of online businesses, and online companies raced for market position.
"Everybody was moving in almost a fanatical way to ready their company for the Internet age," he said. "That fanatical movement not only slowed down, but came to a screeching halt for a period of time."
In addition to Schreiber and Levy, investors in the original group included former company president Paul Bandrowski; Gerald Lippes, a lawyer and Mark IV Industries backer, and other area business people, according to one investor.
After receiving seed money from the local group, Reciprocal's main financing came from larger capital soures like Japan-based Softbank Group, New York venture funds and from Microsoft, whose software business could benefit from the development of online markets.
In all, something over $50 million was invested in Reciprocal since its inception, Schreiber said. For the past year, Microsoft supplied nearly all the cash to keep the company going.
When the foreclosure came, "they didn't come in here wearing black hats saying "We're taking your home and your kids,' " Schreiber said. "This is a working relationship."
The original investors narrowly missed an opportunity to cash in their holdings with an initial stock offering in 2000. Documents for a stock offering were being drawn up when the market for tech stocks withered, Schreiber said. This summer, another deal fell through to be acquired by Bertelsmann, the German record company that owns a controlling stake in Napster, according to an investor.
Reciprocal's financial failure doesn't invalidate its idea of providing copy-protection services for downloaded products, Schreiber said.
"This company will be a very interesting company at one point or another," he said. "Is there any doubt that valuable content is going to move over digital pipes?"