FC: Did You Really Think You Were Worth $300 Million? by Dave Mandl

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From: eugene.leitl@lrz.uni-muenchen.de
Date: Sat Apr 15 2000 - 10:00:33 PDT

From: Declan McCullagh <declan@well.com>

Did You Really Think You Were Worth $300 Million?
by Dave Mandl
April 15, 2000


If you're so smart, how come you're not rich (any more)?

Sometimes a bad business plan is just a bad business plan. WebVan
(from 34 to 5 11/16 in four months)? TheGlobe.com (38 13/16 to 3 in a
year)? iVillage (130 to 10 5/16 in a year)? I'm sorry, but anyone
who thinks a company in the business of delivering groceries to
Manhattan residents in vans is worth ELEVEN BILLION DOLLARS deserved
to be separated from his money. Even the lucky few who got into these
stocks at IPO prices are deeply under water now; the far more numerous
cowboys who bought in at two, three, or twenty times those prices have
collectively lost billions, much of it borrowed to begin with.

And what about the dot-com entrepreneurs responsible? Apart from
those who got wise and set up option "collars" or other complex
transactions to protect their shares from these kinds of drops
(unbeknownst to their shareholders), most have lost even more--though,
of course, THEY were playing with the house's money. No doubt many of
them simply knew a good scam when they saw one (see, for example, the
Purdue University study that showed huge jumps in stock prices of
companies that simply added ".com" to their names), but apparently
most really thought they were business geniuses, and could hold up
their share prices as evidence.

That is (was?) the beauty of the "new" stock market: Just wish, hype
your site, and everything comes true--unlike, say, real shops, which
have to keep paying the rent or close their doors. In my
neighborhood, there are certain storefronts that have a new business
and a new owner every six months or so. My girlfriend and I play the
game of predicting how long it will take each of the dopier ones to go
out of business, and most do sooner rather than later. It's endlessly
amazing how stupid these "businesspeople" can be: opening a humdrum
women's boutique in the same spot where three boutiques have gone out
of business in as many years, opening yet another card shop on the
street where two other card shops are barely clinging to survival.
Seems to me that most of these people are just not very bright.

But along with the Web came an entirely new crop of entrepreneurial
geniuses, or so everyone thought--along with millions of greedy marks
eager to foot the bill. In truth, many of their business ideas were
as brilliant as "Let's put on a show!" or "I know: We'll sell, um,
BOWLING GEAR over the internet!" In much the same way that millions
of people once showed their belief by plunking down a quarter to see
Judy Garland and Mickey Rooney transform their barn into a theatre,
now hordes of people dropped their life savings or more to show their
belief in TheGlobe.com, an internet "community" not half as
interesting or easy to use as the thousands of newsgroups, chat rooms,
and mailing lists it attempted to replace. On the day of the
company's IPO, its shares shot up more than any other stock in IPO
history. The fashion/scenester magazine PAPER published a profile of
the two hip young geniuses behind the company, at the time worth
millions and millions.

Now, TheGlobe.com is fast approaching penny-stock territory. And
dozens of other "brilliant" dot-com ideas are also reeling from
90%-plus valuation drops. Did their shareholders really believe in
these concepts? Did their FOUNDERS believe in them?

Most of them probably did. With all bull markets come "bull-market
geniuses," self-proclaimed investing whizzes who are convinced that
their superior intelligence is earning them double- (or triple-) digit
returns, when in fact EVERYONE is making these returns just by owning
the stocks that everyone else owns. Presumably, the heads of the
companies whose stocks are skyrocketing also credit their superior
management skills and vision for their companies' soaring valuations.
When the companies driving a market like this have been founded by
entrepreneurs in their twenties with little or no business experience
and stock holdings worth hundreds of millions of dollars, their heads
get especially swelled. The hubris of these CEOs and their investors
is staggering: There have been any number of articles quoting dot-com
founders as claiming that they're worth this kind of money because
they "worked their ass off" for a few years. Yeah, right! I work 10
1/2 hours a day--where's my forty mil?

Can so many people really be so naive--or blindly greedy? The
economics history books are filled with "New Eras" that ended just as
badly as this one. There will never (can never) be a situation where
every jerk with a cobbled-together business plan and a domain name can
make himself half a billion dollars. When you see a situation like
that arise, rest assured there's a major "correction" ahead, in every
sense of the word. Certain billionaires will still be billionaires
after the great tech-stock crash--like the uncle of an acquaintance of
mine, a Master of the Universe whose name you probably wouldn't know;
he's too smart to put money into net startups, preferring to buy up
Japanese banks at knocked-down prices. A handful, maybe even a large
handful, of early dot-com entrepreneurs with decent business ideas
will make a bundle. The rest will fade away, probably very quickly
(like drkoop.com, now going down for the third time, though Dr. Koop
himself reportedly sold a big chunk of his stake at the top). Their
employees, mostly horribly ill-treated cyber-rabble who grin and bear
it because of the promise of Gatsby-level wealth, will have to go back
to the (gasp) five-figure salaries that they thought only Old Economy
scum earned.

Three weeks ago, Martha Lane-Fox (co-head of the much-hyped U.K. net
startup lastminute.com) was nearly as high in the British opinion
polls as Princess Di. She was reportedly being considered for an
important government commerce post. It took less than a month for her
to be transmogrified into the punch-line of a thousand jokes, due
mainly to lastminute.com's miserable stock performance, post-IPO. If
her company had gone public during the ascent of the bull market,
things might have been different, but the business she co-founded
would be no less dumb--it would just have taken a little longer for
her investors to lose all their money.

And she would have been a genius with a net worth of over 50 million
pounds for a few more months.


Dave Mandl

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