Twelve years ago, when I had just become editor of this magazine, my friend Walter Isaacson, who was then in charge of Time Warner’s embryonic Internet publishing strategy, advised me to “get the domain name ‘New York’—for the Web.”
He was right, of course, although at the time I asked, “What’s the Web?”
Eight years ago, I wrote a column in The New Yorker called “The Digital Bubble” in which I argued that Wall Street investors and journalists had gotten carried away about the Internet—that “euphoria is not a business strategy.” I turned out to be right, of course.
Nevertheless, six years ago, I helped to create the online news service Inside. One day, my partner Michael Hirschorn said, “We should have blogs on the site. Pretty soon the Web’s going to be all about blogs.”
He turned out to be right, of course, although at the time I asked, “What’s a blog?”
Four years ago, Inside (and our magazine partner, The Industry Standard) had gone kaput. Trillions of dollars of market value had vanished in 24 months. In a conversation with a friend about her little new-media business, I floated my retrospective fantasy about Inside—that by banking the capital we raised, we could’ve used the interest to employ our best dozen reporter-commentators as bloggers in endowed perpetuity. She mentioned that RSS, as a way of informing people of Inside’s breaking news, would have been a boon.
She was right, of course, although at the time I asked, “What’s RSS?”
In other words, I have a history with Internet euphoria and dysphoria that, among other things, confirms William Goldman’s truism about show business: Nobody knows anything. But it also illustrates the staggering speed with which the digital realm shape-shifts. While history may not repeat itself, it does indeed rhyme—and at this rate the rhyme scheme reveals itself quickly.
So here we are in a new techno-paloozaical moment. Once again, a critical mass of money guys and journalists and entrepreneurs are getting awfully excited, and the excitement is beginning to feed on itself. There are the new social-networking services like MySpace and Flickr, with enough millions of users that a real network effect has kicked in. Blogs attracting significant audiences and advertisers. Money flooding into Web start-ups, and blog-conglomerates acquired for tens and hundreds of millions. The nasdaq up 20 percent in the last year. Network TV migrating to podcasts, the collective Utopia of Wikipedia actually working, and follow-on “citizen media” entities (Digg, Newsvine) generating dreamy new visions of cultural transformation.
I phoned some of my bubble-mates from 1999–2001 to find out if this seems to them like déjà vu all over again. “It feels very similar,” said Fred Wilson. He was a founder of Flatiron Partners, the New York venture-capital firm that led the funding of Inside—at the moment the bubble started to deflate, in spring 2000—along with Chase, Lehman Brothers, and Goldman Sachs. He now runs a $125 million fund. He was on his cell phone, driving from San Francisco down to Mountain View. “The money flowing like water, VCs hypercompetitive, the entrepreneurs with grandiose visions. Everybody’s coming out of the woodwork. I’m a rock star again. It scares me a little bit.”
Jerry Colonna, Fred’s Flatiron co-founder, agreed. Although he’s out of the VC business and now a devoted Buddhist, he keeps a hand in the game as a member of the boards of five companies. “People are starting to hyperventilate,” he said.
John Battelle, the founder of The Industry Standard, spent his first post-bubble years teaching and writing. Now he’s started a company called Federated Media Publishing that sells ads for a curated portfolio of high-end blogs. He seems as excited about his new business as he was about the Standard and his aborning media empire at the turn of the century. “I have,” he told me, “the same tingly feeling I had with magazines.”Boo-ya? Or yikes?
The vocabulary and doctrine are different, of course. To call a Web business a “dot-com” in 2006 would be the equivalent of calling a black person “colored.” Rather, people thrill to ideas incorporating the “architecture of participation” and “collective intelligence” (like Wikipedia and Flickr), and companies with “lightweight business models” (Craigslist has eighteen employees).
Everyone wants to believe that things are different this time around, that lessons have been learned and real business paradigms established. If the nineties were a magical-realist gold rush, the ’00s are about the sober build-out of modern California. And there’s plenty of evidence for that view. Back in 1998, I suggested in my “Digital Bubble” article that the $2.7 billion market cap of Yahoo was “nutty,” yet Yahoo now earns almost $2 billion in profit to support its $44 billion market cap. Google, which increased its profits last quarter by 60 percent, is worth $123 billion.
The reason for nearly all that new revenue is the birth of a real online advertising industry. The advertisers have followed the people, and the people have come because high-speed Internet access has turned the typical Web experience from clunky to lubricious. The huge financial difference between now and the nineties is the absence of IPO mania. If this were 1999, the unprofitable two-year-old student directory Facebook and the unprofitable year-old Web video portal YouTube would be filing IPOs.
“It doesn’t seem like really dumb things are getting funded,” Fred says. “You’re largely not seeing Webvans and Kozmos and Urban Box Offices.” The latter two really dumb companies were financed by Flatiron.
“The ethos in version 1.0,” says Battelle, who helped popularize the buzzphrase “Web 2.0,” “was to take as much money as you can when the money is being handed out.” No kidding: We took more than $30 million to start Inside.com and Inside magazine. “My view now is take as little as you can.”
In other words, people are still having sex with strangers, but now it’s safer sex. So far. For the most part. Half of this new generation of entrepreneurs are first-timers, by Fred’s estimate, people who watched the debacle from the sidelines. And when Rupert Murdoch pays $580 million for MySpace, and Google or Yahoo pays tens of millions for cool, money-losing little start-ups, it is difficult for other Internet entrepreneurs not to get … horny, which is to say greedy.
“I spend a lot of time as a consigliere to people starting businesses,” Jerry Colonna says. “I tell them, ‘Ignore the valuation stuff and just keep building the business.’ It puts us back in a 1997 time frame: What is the right price? In early ’97, we invested in GeoCities, $20 million, and a year later sold a third of it at a valuation of $200 million, took it public eight months later for $500 million, and less than a year later sold it [to Yahoo] for $5 billion.” If this is early-1997 redux, that means there’s still three more years for the money to get dumb. No wonder people are hyperventilating.
The absence of IPO hysteria means that there is no general civilian-investor hysteria. But if a hobby blog like Fred Wilson’s, allied with FM Publishing, can sell $3,000 a month in advertising, thousands of bloggers start imagining they can make real money (if not fortunes) at their keyboards. And as more journalists and quasi-journalists envision earning independent online livings, a giddy new wave of wishfulness builds.
The friend I mentioned earlier who told me about RSS was Dany Levy, and her Internet business is DailyCandy. (See “How Sweet Is It?”) I joined her board in 2002, and when Bob Pittman offered to buy DailyCandy a year later, I encouraged her to do the deal, even though I was dubious about his go-go forecasts. I was half-right and half-wrong. Pittman bought most of the company for $3.5 million (after which I left the board), and now, 29 months later, wants to sell it for 50 times that.
That sounds a bit bubbly, but it’s really not crazy. And what’s interesting is how fundamentally old-school DailyCandy’s editorial and business models are. There is no architecture of participation. Editors decide what’s cool, and tell the subscribers, period. Yet unlike any print magazine, DailyCandy costs little to produce beyond the writers’ salaries, because there’s no paper or printing or shipping, and no circulation middlemen—in other words, precisely the Web 1.0 dream of a blissful Internet future, before that vision was discredited in 2001.
Like I said, nobody knows anything.
DailyCandy—and Google and all the rest of the thriving survivors—came into existence during the last bubble. Euphorias are not entirely wasteful, or all bad. As Fred says, “It takes bubbles to make interesting things happen. There’s benefit to this kind of environment.”
But “when the amateurs get in,” Fred says, that’ll be a sign of the next beginning of the next end, that our latest bipolar swing has turned pathologically manic. “At the end of the last bubble, everyone was investing. And now you’re starting to see corporate investors make ‘strategic’ investments—like Publicis,” the big advertising company. “The shakeout’s going to happen. Oh, yeah.” Two weeks ago, a Silicon Valley investor reportedly spammed the Stanford computer-science department begging for ideas to fund—which certainly sounds to me like the day in 1999 when a cold-calling banker knocked on dot-com doors in the Starrett-Lehigh building, offering capital.
The first Internet business casualty I knew was Michael Wolff, who started publishing guides to the Net in 1993, started moving online in 1995, bailed in 1997, published Burn Rate, about his wretched entrepreneurial experience, in 1998, and has been a Web skeptic ever since. In 2001, he was asked about iVillage and TheStreet.com. “I think it’s over with; it’s gone. There is no long-term prognosis. The patient has died. There is no future.” NBC Universal just bought iVillage for $600 million, and TheStreet.com, now profitable, is worth $211 million.
I recently had lunch with Michael. We chatted about children and mutual friends. And then he said, with a wry expression, that he might “get back in the business.”
“What business?” I asked.
“The Internet,” he replied.