An I.P.O. has become a status symbol, its own raison d'etre. Forget the Gulfstream jet or naming rights to a skyscraper—an I.P.O. announces that you've arrived; it tells everyone you've made it.
It's The IPO, Stupid!
As investors scramble for stakes in the Internet gold rush, fledging entrepreneurs are getting filthy rich simply by taking their start-ups public, routinely doubling and tripling the paper worth of untried companies in 24 hours. At the NASDAQ Stock Market, Goldman Sachs, and the high-tech San Francisco madhouse where yet another money-losing dot-com races toward its I.P.O., Nina Munk explores the surreal, get-rich-quick terrain of what may be the greatest speculative craze since the 1630's tulip mania.
Being an entrepreneur used to be hard work, I'm told. Like mountain climbers, entrepreneurs took risks. They took out second mortgages and practiced frugality. They used credit cards to underwrite start-ups. But that was back in the days when business models had to work and companies were expected to make money. Today, losing money is a good thing; turning a profit suggests that the new economy may have eluded you. Which brings us to the subject of NetZero and to how, on a single day, the company came to be worth almost as much as United Airlines. You see, NetZero gives its main product away free; in its most recent—and only—year of business it lost $15.3 million.
And so, on the morning of September 24, 1999, just after nine, NetZero's CEO, Mark Goldston, and his family arrived at the Manhattan's Nasdaq Stock Market in a hired limo. They were all dressed up: Goldston sober gray suit; his wife, NancyJane, in a bouclé cocktail dress and a big diamond ring, eyes heavy with black liner. Their twelve-year-old twin boys were there, too, awkward in suits and red ties. The day marked what Goldston called an "incredible rite of passage"; though it was not a wedding he and his family were dressed for. Rather, the occasion was NetZero's I.P.O., or initial public offering, its first day as a company with publicly traded shares. "This is really really cool—what a heat," exclaimed Goldston, a smooth-talking 45-year-old saleman who had taken over as C.E.O. of NetZero only six months earlier. A waiter on the sixth floor of Nasdaq's offices offered him a flute of sparkling wine. "I'm kinda dazed, I really am. It's a surreal experience."
The rest of NetZero's senior management team and their wives were there as well, snapping pictures and sipping mimosas and waiting for the company's stock to start trading. A video camera recorded the event for posterity. "Let's just hope it opens at a big premium," said a Nasdaq representative, slapping Goldston on the back. One way or another, even if the stock didn't open at a premium, the four techies who actually founded NetZero, and who now work under Goldston, would be rich by the end of the day. Goldston would be richer: apart from a guaranteed first-year salary and bonus of $700,000, Goldston, hired to lend the company management experience, was given more than six million shares in NetZero, equal to about 6 percent of the company, post-I.P.O. No wonder he was full of himself, telling stale jokes and playing the room for all he was worth. "This is really cool," he repeated, flushed and grinning. "It's awesome."
NetZero, which is based in Westlake Village, California, and offers free Internet access and email, plans to make money someday by posting ads in a window that is permanently displayed on subscribers' computer screens. Not that anyone expects NetZero to produce a profit soon, or, as people on Wall Street like to say, in the "foreseeable future." NetZero's prospectus, the document distributed to potential investors, admitted that much: 18 of its 73 pages were devoted to "risk factors." Among these were: intense competition (anyone can offer free Internet access, and many companies do); too few subscribers (two million people have signed on so far; but only half of them in any given month actually use the service); a shortage of advertisers (in fact, NetZero sold an insignificant $4.6 million worth of ads and sponsorships in its first year); and the existence of sophisticated new software that allows users to disable NetZero's ad windows. "I've never seen a worse business model in my life," an Internet stock analyst told The Wall Street Journal.
Then there was the problem of Mark Goldston himself. A self-described expert in turning around troubled companies (he wrote a fairly well-reviewed book entitled The Turnaround Prescription), Goldston made his name as a marketing executive at Reebok, where in the late 1980s he developed the briefly popular Pump shoe. But Goldston's results at the two companies he had run before NetZero were mixed at best: at L.A. Gear he was unable to halt sliding sales of the company's once-trendy sneakers; at Einstein/Noah Bagel Corp. the stock price collapsed on his watch when the company overestimated the country's appetite for bagels. However, given the shortage of competent executives these days, Goldston may have been the best NetZero could do.
Never mind. In the I.P.O. frenzy of 1999 the past is forgotten. "I.P.O.'s trade in a vacuum; they're in their own world," is how Ben Holmes, president of ipoPros.com, a research firm, puts it. Once a tool for funding a company's operations, the I.P.O. is now thought to be one of the fastest, smoothest way for investors (mostly venture capitalists and company executives) to get rich quick. There has been a compression of the time and effort—and skill—required to become a multimillionaire. "There's now a cookie-cutter approach to getting rich," one of the money managers investing in NetZero's I.P.O. told me. "Quit your job; hole up for a weekend writing a business plan. Forge a strategic partnership with an Intel. Raise some prominent venture-capital money. Get Goldman to take you public." Easy. No wonder that, more and more, clever twenty- and thirty-somethings are turning down the chance to be bankers, lawyers, and management consultants in order to strike out on their own. Barron's calls the I.P.O. craze "one of the greatest gold rushes of American capitalism," and it is. A recent issue of the financial weekly lists 77 people, each of whom, in the twelve months leading up to June 30, 1999, had made at least $100 million in the I.P.O. of the company he or she worked for. So much new wealth has been created that one-fifth of the people on the latest Forbes Four Hundred ranking of the richest Americans were included for the first time; in normal years, the turnover is more like one-tenth.
The night before NetZero went public, Ben Holmes had no doubt at all that the offering would be a hit: "It's just on fire, it really is." Earlier that same week, all over Internet chat boards, speculators had been placing bets on just how hot NetZero's IPO would be. In response to intense demand for the stock, Goldman, Sachs & Co., NetZero's lead underwriter, had already increased the expected initial price range: starting at $9 to $11 a share, it was moved to $14 to $16. However, only a few lucky buyers—big institutional firms, mostly—would get in at the initial price. What mattered to individual investors, the guys on the chat boards, for example, was how NetZero would behave once it opened for trading. How high would it climb on its first day? How would the daytraders handle it? How many shares would be "flipped"—that is, bought and sold immediately? Thirty-nine hours before the I.P.O., on the Raging Bull message board, someone named "makemoneyquick" placed his or her bet: "Prices at $14. Opens at $65." Another gambler wrote: "Have no fear, this one is gonna be gggggreat, guaranteed at least a 100% return first day, at a minimum."
I called up a friend who runs a hedge fund. Was he going to buy stock in the NetZero IPO? "NetZero?" He'd never even heard of it, and so he checked with a colleague before answering. "We're in on it," he said. "But I don't know anything about it—which says something about this market." Another money manager I spoke to knew almost nothing about NetZero other than this: the IPO was hot, and, to thank him for his continued loyalty, Goldman Sachs had allocated him a few of the coveted shares. Of course he would flip his shares. Said he: "If someone tells you there's demand for 50 million shares and only 10 million are being offered, that's all you need to know. You don't need to know anything else."
Back at Nasdaq, still waiting for trading to open, Goldston turned to reminiscing: "This is a great day for us, man. It's a once-in-a-lifetime opportunity. When you think that six months ago we were in that office, packed in one room, with mice running around with Fritos in their mouths! Three guys sharing a desk! Trash cans turned upside down as chairs! It's hard to believe! Only in the digital age would this be possible...."
Or, to put it another way, only in an age when profit is irrelevant to the success of an I.P.O. would this be possible. Until very recently, there were hurdles to going public: the rule of thumb was that a company had to have been in business for at least three years and needed to show four consecutive quarters of rising profits. By the time Microsoft went public in 1986, it had been in business for 11 years, it was (very) profitable, and C.E.O. Bill Gates was widely known as a computer genius. In other words, Microsoft did not sells shares in itself until it had a track record. Not only that, Gates took Microsoft public reluctantly. "The whole process looked like a pain," he told Fortune at the time. (Gates had little choice: the company had given equity to so many employees that S.E.C. regulations would have in effect forced it to go public.)
Today just about anyone can have an IPO, and almost everyone does. "In the old days, you had to prove your business model first," says Joe Graziano, a former C.F.O. of Apple Computer, who left the company in 1995 and currently invests in start-ups. "Now you go public to get the money to prove your business model." I.P.O.'s are also great "branding events," which is to say that all the hype that comes with having the price of your stock triple on its first trading day is a more persuasive statement than any 30-second advertisement during the Super Bowl. "The stock price broadcasts to the world that you're a hot company," notes Jon Bond, of the New York ad agency Kirshenbaum Bond & Partners. "That becomes a self-fulfilling prophecy. And that's the whole point." No wonder the number of I.P.O.'s has soared: in 1989 there were 113; in 1998 there were 319; and in the first ten months of 1999 alone, there were 428, most of them technology-related.
An I.P.O. has become a status symbol, its own raison d'etre. Forget the Gulfstream jet or naming rights to a skyscraper—an I.P.O. announces that you've arrived; it tells everyone you've made it. Founders and C.E.O.'s of companies with astounding I.P.O.'s are becoming minor celebrities—for instance, Todd Krizelman, 26, and Stephan Paternot, 25. Their money-losing company, theglobe.com, is an on-line community of chat rooms, stock quotes, news, shops and personalized web pages. When theglobe.com went public in November 1998, its shares climbed from $9 to $97 before closing the day at $63.50—the largest first-day gain ever (606 percent). Since then, the two young men, whose combined paper worth was briefly $151.5 million, have made hundreds of media appearances, including an interview on The Montel Williams Show and profiles in such un-Forbes-like publications as Bikini, Jane, and Harpers & Queen (which included the duo in its list of "the world's sexiest men"). But in the year since their I.P.O., Krizelman's and Paternot's stock and their net worths have shrunk significantly: as of November, theglobe.com stock is off 72 percent from its high last April). Their "on-line community concept" was last year's fad; now it's considered hopelessly passe as a business model. (The new vogue is for business-to-business e-commerce and computer networking.) Still, to adolescent girls and some boys, Krizelman and Paternot are gods. "Todd and I are good material to be shown around," Paternot, who is not blind to the allure of his glossy black hair and pool-blue eyes, boasted to me one day when we met at theglobe.com's stereotypically groovy offices near Wall Street. "The downside," he added, "is you get stalkers, proposals, love letters." Reaching over to his desk, he picked up a stack of mail and opened one envelope at random, which contained a handwritten note and a photo of a admirer from Queens wearing a peach-colored satin negligee cut on the bias.
Hot I.P.O.'s are not new. In 1980 the I.P.O. for Genentech, a pioneering biotech firm, climbed from $35 to $71.25 on its first day. In 1986, the Home Shopping Network moved up 165 percent on day one, and, in 1993, Boston Chicken, a "homestyle" restaurant chain, went up 142 percent. (A note of caution for I.P.O. investors: Genetech, like the biotech industry in general, never lived up to its hype. Two years after its I.P.O., the Home Shopping Network's stock had dropped by half; the company is now a minor part of Barry Dillar's USA Networks. Boston Chicken, meanwhile, is now in Chapter 11 bankruptcy.) Then there was Netscape's I.P.O. in August 1995, which marked the beginning of the current Internet-driven I.P.O. frenzy. Netscape had no profit, had been in business only 16 months, and gave away its main product. Nevertheless, on its first day as a public company, the stock, priced at $28, shot up to $74.75, then ended the day at $58.25. At its height, Netscape's market capitalization (the number of shares outstanding multiplied by the share price) was $2.8 billion. This, in a single day, Netscape was worth as much as General Dynamics Corp., the giant defense contractor (sales that year: $3 billion) founded in 1952.
Those I.P.O.'s were ahead of the curve; they were freaks. In 1999, twice as many I.P.O.'s doubled on their first day as in the 25 previous years combined. That's an amazing statistic. Years ago—that is, between 1990 and 1998—the average IPO climbed 15 percent on its first day, according to Jay Ritter, a finance professor at the University of Florida who studies I.P.O.'s. If a stock climbed more than that, the underwriter was accused of selling the company short, of "leaving money on the table." Now, if a stock doesn't double on its first day, it's considered a loser. So far this year, the average I.P.O. has soared 57 percent on its first day, but many I,P.O,'s did far better than that. Take this fall, when an unusually large number of companies, even by current standards, were rushing to market to beat the hypothetical Y2K crash. Among the most successful I.P.O.'s: Foundry Networks (up 525 percent its first day), Cobalt Networks (up 582 percent); Akamai Technologies (458 percent); Sycamore Networks (386 percent); Crossroads Systems (337 percent), Calico Commerce (300 percent), Altheon WebSystems (294 pecent), Kana Communications (243 percent), Breakaway Solutions (202 percent), and E.piphany (182 percent). Investors may have little or no idea what these cleverly named companies do, or intend to do—those mentioned above are all in technology—but that's all part of the rush.
The frenzy isn't restricted to Wall Street or Palo Alto anymore. The October issue of Elle gives its readers practical advice on investing in I.P.O.'s: "Although many firms have antiflipping rules," the article states knowingly, "they aren't enforced." As everyone is well aware, Martha Stewart took her company public on October 19, the same day as the World Wrestling Federation. (Martha's shares doubled, the WWF's rose 48.5 percent) The United Parcel Service I.P.O. in early November raised an astonishing $5.5 billion, a record amount; at the end of its first trading day, UPS was worth twice as much as General Motors. The Krispy Kreme Doughnut Corporation intends to go public, too. There is a mutual fund devoted to I.P.O.'s, Renaissance Capital's IPO plus Aftermarket Fund ("It sounds contradictory," one of the fund's managers assured me, "but we are a conservatively run I.P.O. fund"). And making the rounds is the story that Barbra Streisand, who, in exchange getting in on TheStreet.com's I.P.O., is said to have offered the company's then C.E.O., Kevin English, four tickets to one of her concerts. She reportedly got the shares in the financial-advice Web site at the offering price, and the stock climbed 216 percent on its first day; since then, English told The New York Observer, he hasn't heard from her.
"This is one of the greatest speculative mania in history. There is simply no doubt about that," says Edward Chancellor, author of Devil Take The Hindmost: A History of Financial Speculation (published in May 1999 by Farrar, Straus and Giroux). Which is to say that I.P.O. mania, in Chancellor's view, is bigger even than the legendary mania for tulip bulbs in 17th-century Holland, bigger than the British South Sea Company bubble in 1720, bigger than the British and American railroad-stock speculation of the late 1800s. What all speculative manias have in common is this: relative worth becomes meaningless. At the height of tulip-bulb mania in the 1630s, for instance, the money paid for a desirable tulip bulb would have bought, as Chancellor's book relates, "twenty-seven tons of wheat, fifty tons of rye, four fat oxen, eight fat pigs, twelve fat sheep, two hogsheads of wine, four tuns of beer, two tons of butter, three tons of cheese, a bed with linen, a wardrobe of clothes, and a silver beaker." Writes Chancellor: "There was little attempt to justify these prices—most speculators entered into contracts with the intention of selling quickly at a higher price."
Some Internet companies, namely those that actually make money, such as Yahoo! and America Online, may be the Semper Augustus bulbs of our time. Their remarkable success has set off a frenzy for all dot-coms, good and bad. Combine that frenzy with the ongoing 10-year bull market and you have a bubble on a bubble—even the recent findings against Microsoft at its anti-trust trial haven't dampened investor enthusiasm for tech stocks. "It's nuts," conceded one stock trader I spoke to. "Everyone knows it, even the believers. But no one seems to care." We're in the middle of a technological revolution, the thinking goes. The world is upside down, old models don't apply, it's a whole new game. Either get it or you don't. Which is more or less what speculators claimed during the stock-market boom of the 1920s. America had entered a brand-new era of unlimited prosperity, unequaled opportunity, grand vistas, and so on. The automobile and the radio had revolutionized the world. Productivity was soaring. Barron's wrote optimistically about a "new era without depressions." Everyone wanted a piece of utopia. Celebrities like Irving Berlin and Groucho Marx turned into speculators, buying thousands of shares on margin. The old ways of valuing companies were out-of-date, it was said. Between 1921 and 1929, the value of Radio Corporation of America's stock climbed from 11/2 to 114. In 1927, after Charles Lindbergh's solo flight across the Atlantic, shares in new speculative aircraft companies went wild. You know what happened next.
Some present-day investors may not know what happened next. Or, rather, they don't believe it will happen this time, to them. Richard Rhoades may not be a typical investor, but he illustrates the obsessive behavior that can occur when stock prices triple in a single day. He started buying into I.P.O.'s about four years ago; now it's "an all-consuming hobby" (he also dabbles in real estate and venture investing). "Money has never been as easily made in my lifetime," says Rhoades, whom I came across when the head of an I.P.O. research firm names Rhoades as his best customer. So far, the 33-year-old has slid in and out of 260 I.P.O.'s, usually flipping his shares on the first day of trading. One of his most memorable deals was the recent I.P.O. of Quest Software. "It was a wonderful, wonderful deal," he enthuses. "It priced at 14, opened at 201/2. I got 3,000 at 23; they went up to 52; I sold at 50. My total gain was $81,000 for the day." According to Rhoades, his 1999 pre-tax profit on I.P.O.'s will be $5 million dollars.
"I've never been a gambler," he confides, speaking by phone from his home in Westchester County, New York. "I've never been a better. But this is like betting on a horse—you sit there and, say, 'Come on seven! Come on Quest!'... It's an addiction. I've walked away from deals where I've made $60,000 and I'm miserable because I could have made $100,000." I.P.O. mania takes its toll: since he began trading in I.P.O.'s, the already corpulent Rhoades has gained 30 pounds. "I'm a nervous wreck," he says. "I run right to the refrigerator." And because he trades on margin (in other words, he buys shares with money borrowed from his brokerage firm), Rhoades's potential losses are huge. "I had to put glass on my table because I was digging my nails deep in the wood." Still, there is an upside. "Aside from the stress, this is probably the easiest money I could make within the parameters of the law." He adds: "I feel like a drug lord."
Making $5 million a year sounds tempting, but it's peanuts compared to what can be had by starting your own dot-com company and taking it public. One 35-year-old hedge-fund manager I spoke with has taken to starting Internet companies as a side venture; he figures it's quicker and easier to make money by starting them than by investing in them. Asking that I not use his name, he walked me through what such people call the whole nine yards. First, his hedge fund put up $300,000 earlier this year to get one dot-com company going. Then he raised another $13 million, giving away 30 percent of the company in the process; that meant that the far-from-profitable company, which rates Web sites, was valued at just over $40 million. Hence, the 70 percent he still retains is worth $28 million, at least on paper. And that's before the I.P.O., which he's considering doing early next year. "It's the best investment I've ever made," he said matter-of-factly.
Doing the math (the nine yards) may explain why, more and more, people with no special talents—other than the talent for self-promotion&—are now entrepreneurs. Joseph Preston incorporated his Bethesda, Maryland, company, eFox.net, on January 23, 1999; he launched his web site on February 27; and he filed to go public on March 1. So what exactly does eFox.net do? "It's Victoria Secret meets Playboy meets Car and Driver meets Sports Illustrated meets Fortune," explained Preston, a 29-year-old college dropout who has worked in P.R., done some "consulting," and whose last venture, a company that made a cigar-vending machine called CIGARSir, folded in less than a year. Regarding eFox.net, he told me, "We offer what I like to call the LASS factor: Ladies, Automobiles, Sports and Stocks." Which is a delicate way of saying that eFox.net is a porn site with extras—bare-naked ladies plus a ticker tape, sports scores and a news feed from the wires. In fact, lots of Web sites offer what Preston&'s offers, and like most porn sites, eFox.net plans to make its money through subscriptions. What is unusual, though, is the nature of his pending I.P.O.—a do-it-yourself affair known officially as a direct public offering. By selling shares to investors directly, in this case over the Internet, Preston saves the standard 7 percent cut taken by investment banks. At the same time he avoids Wall Street's distaste for public companies that sell "adult entertainment." (Curiously, hard-core pornography is the one Internet business that is both consistently profitable and not publicly traded.)
Preston, who wears monogrammed shorts and smoke a pipe, regards his I.P.O. as an opportunity to "empower" porn models. Their empowerment is to come in the form of equity. "One of the things that really makes us unique is that all these [other porn] guys are profiteering on the backs of these women—Hugh Hefner hasn't given one share of stock to any of his models. My goal is to give 500 shares per photo shoot to each of our models; that's equal to about $3,000 each. We're letting our models participate in the upside." They're in an enviable position.
Preston planned to go public last May or June, but various regulatory issues have been holding him up. Among other issues, he's been accused of "gun jumping" by the Maryland attorney general's office for hyping his stock during the traditional "quiet period" in the months surrounding an I.P.O. Nevertheless, Preston is absolutely certain his I.P.O. will take place very soon. If and when it does fly, eFox.net will have 15 million shares outstanding, each initially worth $6 at the public offering, giving it a market capitalization of $90 million. Consider: Preston's company that has almost no revenues (let alone profits) and only one full-time employee (Efox.net's prospectus notes that one of the main uses of the proceeds from the I.P.O. will be to hire a management team). Hypothetically, after eFox.net goes public, Preston himself will be worth $78 million.
Even experienced investment bankers have a hard time putting a value on new Internet stock offerings. In the old days, an average company's market capitalization would be somewhere around 15 times profits. But now that companies without profits can go public, assessing a company's value is far more difficult. So I was curious: how did Preston figure out that eFox.net was worth $90 million? "It's arbitrary; that's the plain and simple answer," he responded. "There's really no rhyme or reason."
These days it seems that everyone and his uncle have started, or want to start a business. And why not? There's nothing to lose. "[Entrepreneurship] is not about taking a leap of faith anymore—unless you consider a leap of faith to be some idea you work on for seven days before someone gives you $20 million to develop," remarks Seth Goldstein of Flatiron Partners, a venture capital firm.
Thus, when Joseph Park had a bright idea for a business, he went for it. Leaving his six-figure job as an analyst for Goldman Sachs, Park and his college roommate Yong Kang started Kozmo.com, a company that delivers rental videos, DVDs, CDs, magazines and snacks (Ben & Jerry's ice cream, Twizzlers, Krispy Kreme doughnuts) to your door in less than an hour. It's like ordering from Domino's Pizza, except customers use the Internet instead of the telephone. Last September, in the big, raw, empty space near Wall Street where Kozmo.com's new offices were about to be built, Park, a graduate of N.Y.U. who is 28 but looks more like 14, explained how he'd weighed the pros and the cons of entrepreneurship: "I said, the pros are: I'm going to start my own company, which is incredibly exciting. I'm going to get into the Internet, which is probably the most fascinating thing that has ever happened to people in history, a revolution in its making. And third, the upside reward is just unfathomable, it's just incredible, financially."
And the cons? Park leaned forward, ignoring the incessant beeping of his Sprint PCS: "Listen," he began, "the bottom line for me—worst-case scenario—is I fail, like, let's say six months after I launch the company I just absolutely fail. So what's going to happen? I'm going to apply to business school and have an incredible application.... The downside is very limited. The status thing—I mean, I don't do things, personally, for status—but I really felt that, hey, listen, if I care about status, then by failing I could probably have an easier time getting into the top business schools anyway, whether Stanford or Harvard, and then I'm back with the same people I left."
Since launching Kozmo.com in Manhattan in March of 1998, Park has moved into Seattle, San Francisco, and Boston. He plans to be in 30 cities, with one or two warehouses in each, by the end of the 2000. He won't reveal his revenues, but based on previous interviews he's given, it's reasonable to assume he will take in less than $5 million for 1999 (the average Kozmo.com order is $10). How long before he's profitable? That's unclear, but in the meantime a glowing profile of Kozmo.com has just appeared in Forbes; Park is already talking about going public; and a venture capital firm has given him $28 million. Twenty-eight million dollars? Isn't that a lot for a first round of venture capital? "It definitely is," Park conceded. "We were actually only looking to raise $10 million, but then during the fund-raising process we got a flood of interest and we just said, Listen, we have to strike while the iron's hot here and raise more money."
But $28 million? A year or so ago, a typical first round of venture capital for a dot.com company ranged from $3 million to $6 million. Now venture capitalists are throwing money at start-ups: all that cash streaming into their funds has to be invested somewhere, fast. And so, more and more, venture capitalists are investing in unformed schemes. Or they're giving start-ups two or three times as much money as they have asked for. The fear of missing out on something big is far greater than the fear of investing in a failure—after all, one successful I.P.O. can cover the cost of a few dozen flops. "What's worse: being caught when it collapses, or never having participated at all?" asks Guy Kawasaki, whose Garage.com acts as a broker for start-ups in need of capital. "I think most people's attitude is: It's going to collapse eventually, so let's take it while we can."
In the first nine months of 1999, venture capitalists pumped a staggering $21 billion into start-ups. According to VentureOne, a research firm, $21 billion is almost double the amount invested by venture capitalists in all of 1997, and is 60 percent more than the total sum for 1998. "Venture capitalists used to pride themselves on building great companies," remarks longtime tech-stock investor Roger McNamee of Integral Capital Partners. "Increasingly, the venture-capital industry focuses on building market cap, not great companies."
So accelerated has the process of starting a company become that even people who would like to build a business the old-fashioned way are forced to rush things. Given the competition, they have no choice. Early in 1999, less than two years after earnign her M.B.A. from Harvard, Andrea Reisman, 30, co-founded Petopia.com, an e-commerce site for pet food and supplies. By July, even before she'd launched her Web site, Reisman, who's a old friend of mine, had raised $79 million from a group of backers that includes Petco (the bricks-and-mortar pet-supply chain) and Groupe Arnault, an affiliate of L.V.M.H. Moët Hennessey Louis Vuitton S.A. A no-nonsense type who has run the Boston Marathon twice, Reisman would dearly like to get things right, to fine-tune her business plan, but there's outside pressure: rumor has it that her main competitor, a company called Pets.com, which is backed by the powerful Amazon.com, is just about to go public. If Pets.com has its I.P.O. before Reisman's Petopia.com does, it's all over for the laggard company. This is known in the dot-com world as first-mover advantage: no matter how talented you are, no matter how promising your idea may be, if you're not the first one to market in your particular niche, you're thought to be doomed to also-ran status—you'll be barnesandnoble.com to Amazon.com, or, to recall gentler times, Avis to Hertz.
And so Petopia.com is moving at Internet speed. Between May and October of last year, the number of employees grew from 10 to more than 100. Petopia's office, two floors in San Francisco's industrial-hip SoMa (for South of Market) district, was a kind of high-tech madhouse when I visited in early October. Cables hung from the ceiling, and plastic sheets were draped everywhere, over everything. Workmen were gluing carpet, drilling holes, erecting walls. And, all the while, groups of programmers were tap-tap-tapping away furiously to build upcoming versions of Petopia.com’s Web site. Version 1.3 had just launched, and Versions 1.4, 1.5, and 2.0 were being developed simultaneously—there just wasn't time to stagger them. "Imagine a family where three generations are simultaneously being born," said Reisman as a huge shipment of Dell computers rolled in. "It's complicated," she understated as yet another delivery guy, this time from Costco, arrived with a truckload of nourishment (Famous Amos chocolate-chip cookies, Planter's honey-roasted peanuts, Tootsie Rolls, Gatorade). Way at the other end of the office, someone announced that his gerbil was missing. Meanwhile, Reisman's wheaten terrier, Jack, was running around and around and around in circles. And every few seconds, on the computer screen behind her, another email popped up; by the time I left, she had 122 unread E-mails.
For the past 10 months, Reisman has been working nonstop. She looked exhausted, she was exhausted. Her parents wonder why she never calls. Based on the round of venture capital she was just about to close, Reisman's far-from-profitable Petopia.com is worth slightly under $300 million. The IPO is forthcoming: both Petopia.com and Pets.com are expected to go public in the first quarter of 2000.
On my ride from downtown San Francisco to the airport, the cab driver told me he had recently moved out here from New York. You like it better here?, I asked "Better money," he replied. "Here the streets are lined with money." At the exit ramp to the airport was a big orange billboard advertising Forbes.com—a black-and-white photo of a twenty-something guy with attitude, unshaven and smirking. "No salary earning, old underpants wearing, billionaire on paper ceo," read the self-consciously ironic text over his head. "It's a new game." Or an illusion.
This story started with Mark Goldston's rite of passage, the I.P.O. of NetZero on September 24. Remember? We were at the Nasdaq Stock Market. The market opened, as it does every weekday, at 9:30 a.m. Right away, technology stocks started tumbling. On the electronic ticker tape overhead was Cisco Systems's stock symbol, down 3 percent; Microsoft, down 1 percent. For the second day in a row, the market was tanking—and it was all the fault of Steve Ballmer, president of Microsoft. The previous day Ballmer had dared to speak the unspoken: "There's such an overvaluation of tech stocks, it's absurd." People were outraged—especially people trying to take their companies public. "It was just a stupid remark," said one NetZero executive. "He was just listed No. 4 on the Forbes list of richest people—so what does he care?" said another. Ballmer was ruining it for everyone. "I can't understand what he was thinking," added Goldston. "Why did he say that?"
It was time to go to Goldman Sachs; NetZero's stock would start trading any moment. We were in the elevator, going to the 50th floor, one of Goldman's trading floors. "Just like the stock, we're going to 50!" said Goldston. The previous night, bankers at Goldman Sachs had priced NetZero at 16; now, based on pre-trading bids from institutions, they were trying to establish the price of its first trade. "We're doing 281/3 now," a Goldman banker informed the NetZero team. "It looks like it'll be 29 or 30 in the opening." Dozens of traders with telephone headsets were shouting out orders from their clients.
The Nasdaq Composite was down 65 points. Mark Goldston wasn't worried: "If this thing trades at 29 1/2, this company's worth $3 billion dollars! Three billion dollars!" he shouted. Pumping his fist into his palm, he added: "Go, baby, go!" The traders were yelling. "Just a few minutes to go," said the banker. "We're preparing to receive the kick-off," said Goldston, "These guys at Goldman are the best; the creme de la creme, the top." The Goldman banker instructed everyone to watch the electronic ticker overhead. "Ten seconds," she said. "Twenty-seven and three-fourths will be the first tick." And sure enough, NZRO 27 3/4 flashed across the top of the room. "There it is! Yes! Wahoooo!" yelled Goldston. "Hold on to your hat!" NZRO 27 1/4 ... NZRO 26 3/4 ... NZRO 26 7/8 ... NZRO 26 1/8 ... NZRO 26 ... "Gotta have a strong stomach for this," said a suddenly subdued Goldston. ... NZRO 25 1/8 ... NZRO 25 1/4 ... NZRO 24 7/8 ... NZRO 24 3/8 ... "This is, like, stressful," said one of the NetZero wives as the stock price kept dropping, fraction by fraction.
By the end of the day, NetZero had come back, closing at 28 1/8, giving the company a value of $3 billion. (As of November 18, the stock was at 27.) Goldston's own net worth, on paper, was $175 million—an impressive showing for only six months of work. Nevertheless, in an age where I.P.O.'s are expected to at least double on day one, this rite of passage had proved disappointing. From the offering price of 16, NetZero's shares had inflated a mere 82 percent. Putting a good face on things, Goldston began philosophizing: "As long as you close above what you went out at—that's the goal." Now we were back in the elevator, riding down to the ground floor. "It's O.K.," Goldston continued. "We didn't want to be some flare going to 70 the first day, then spending the rest of our lives trying to explain what's happened since."