In the spring of 1996, my friend Chip Bayers, over whose shoulder I had first glimpsed the Internet in 1991, wrote a funny piece for Wired called “The Great Web Wipeout.” The piece, a send-up of the way Time magazine would write an Internet-crash story, was meant to satirize the backlash that was already beginning against the handful of no-profit Internet companies with soaring stock prices. But nobody laughed. Instead, the piece had a War of the Worlds impact. Its evil-ish humor – after all, who didn’t feel that it was a great joke and brilliant scam when these companies with hardly any revenue, and absolutely no profits, went public? – sparked a sudden, panicky turn in the market.
With some macabre irony, Wired itself, failing to price in its first and second attempts at a public offering, was one of the bellwether companies to get wiped out that summer. The bad mood shortly hit the infrastructure companies that had begun to go public in 1995 and the search-engine companies (Yahoo!, Excite, Lycos, Infoseek) that had all reached the public market before the summer of 1996. (Magellan, the last search-engine company scheduled to go public, didn’t get out in time, and was gobbled up after the market’s fall; companies like CompuServe, FreeLoader, iGuide, First Virtual Holdings, and the Spot fell shortly thereafter.) Then the private equity markets (i.e., venture-capital players and corporate investors like TCI and the baby Bells) declared an effective moratorium on Internet investments.
A company’s burn rate – that simple calculation of the money spent each month beyond the money it had in the bank – became a countdown to oblivion. If you exhausted your supply of money at a time when the market for new money was cold, you were out of business. Hundreds of companies, including my own, did not survive this first Great Web Wipeout, which lasted for slightly more than a year – as violent and as surreal a period as I have known.
The second Great Web Wipeout, which we have now entered, has also, arguably, been caused by a magazine article – last month’s story in Barron’s charting the burn rate of a long list of public Internet companies. By calculating the monthly cash burn against cash on hand, Barron’s identified a plausible moment of bankruptcy for each of these enterprises. The fact that Internet companies would have to continue to seek new investment capital, seemed, suddenly, like shocking news – like a hot knife through butter – and by the end of the week after the Barron’s article appeared, the current wipeout was well under way.
In fact, the Barron’s article, like the Wired article, was not so much about specific issues of Internet financing – and even less about the underlying rationality or irrationality of Internet business strategies – than about the way the media itself has covered the Internet business. Wired was ridiculing the media’s invariable satisfaction when the upstarts fall. Barron’s, being a journal of conventional investor attitudes, was thundering at the media’s failure to pay attention to the fundamentals – and was equally petulant that the new economy had upended the expertise of experts on the old economy. In fact, this was not so much thundering as harrumphing – a muttering recapitulation of what Barron’s has been saying for many years now. No one, probably, was more surprised than Barron’s that its analysis was suddenly taken so much to heart. After all, neither burn rates nor accountants’ “going concern” letters were anything new, as Barron’s could best appreciate. Internet companies, encouraged by the same capital markets that were about to turn coldly against them, spent more than they made. This cart-before-the-horse, brand-building, mind-share-garnering, audience-acceleration strategy, rather than being a dark side of the industry, had, in fact, been the entire basis of the Internet’s hypergrowth.
“This time is going to be so much uglier,” said my friend Chip. “Last time, people just needed a few million to survive. Now they need ten times more money, which means ten times more pain.”
So the more complex question is not why the markets had reacted so priggishly, but why now? Why did a circumstance that has been perfectly open and aboveboard throughout the time of the present NASDAQ boom (peaking little more than a month ago) all of a sudden become the equivalent of a career-killing political scandal?
To understand the undoing of mania, we should briefly revisit the roots of mania.
In my bedroom, in my bottom two dresser drawers, I maintain (to my wife’s annoyance) a fossil record of the Internet business in the form of 40 or so T-shirts carrying logos of Internet companies that have long since faded from the earth (my wife wants to sell them on eBay). The Internet, in other words, as my T-shirts remind me, far from being – or along with being – the most remarkable business story since the advent of the industrial age, the greatest wealth-creating machine in the history of the world (according to John Doerr, the greatest venture capitalist in the history of the world), is also the story of fairly unremitting business carnage. Vastly more companies over the course of the commercial Internet’s six-year life span have failed than have succeeded.
My T-shirt collection is also a good reminder of how difficult it is to keep two opposing ideas – the Internet is a great adventure; the Internet is a son-of-a-bitch business (of the work-you-to-death, eat-you-alive kind) – in your head at the same time.
Mania is always a pure play. It’s reality confusion. It’s blind devotion.
It’s a media thing.
To me, the key constants of this manic phase have been the vast, astounding, messianic, mesmerizing certainty on the part of technology-industry people on the West Coast (together with their cursed, Orwellian language) side by side with the profound insecurity on the part of the media that has reported the Internet story. While stupid about technology, stupid about finance, stupid about the nature of the hype itself, these people (we people) have been absolutely willing to believe. (I was once talking with an intelligent and savvy reporter I know about something Jim Clark had said. I said I was disinclined to take Clark at his word. My acquaintance, with a weird look in his eyes, became very quiet and then replied that, frankly, he thought any man who had started three billion-dollar companies deserved to be trusted. Whoa, I thought.) There is no greater story, no more sought-after tale, no myth we would rather live by than the story of people like ourselves suddenly allowed to make extraordinary amounts of money.
But then conditions shift (and while everyone knew this would happen, no one quite believed it ever would happen).
If everyone begins to think they can and ought to go into the Internet business – and who has not had a perfectly brilliant e-commerce idea (of the innumerable business plans I have seen this past year, all could be read as either very smart dot-com business plans or as parodies of very smart dot-com business plans) – then, shortly, everyone begins to suspect that no one knows anything more than they themselves know, which is nothing. You create a viral sense of unease.
Then, too, while the spectacle of people just like you making money can be awfully inspiring, the fact of other people having money is inevitably less satisfying – often terribly painful. Even the rich began to feel a sense of their own unworthiness. At Esther Dyson’s PC Forum last month, coincident with the top of the NASDAQ, one of my former venture-capital investors passed out T-shirts with the legend NOT ALL INTERNET PEOPLE ARE ASSHOLES. What did it mean, if he, a demonstrable asshole, thought everyone else was an asshole? It was a perfect moment of self-loathing.
We come, then, to the emperor’s-no-clothes moment – an allegory about extremes as much as about delusion. One moment, everybody is content to deny the guy’s nakedness; the next, everybody’s an old lady.
Accordingly, Barron’s became the voice shouting the thing that everybody already knew, but which nobody thought to pay attention to until somebody started to scream about it so annoyingly.
The Barron’s article was first passed to me at lunch at Michael’s. The next day, it showed up in the New York Post – in true scandal typeface. By the third day, I (with numerous others) was pronouncing on this for the financial-news shows. By the fourth, it had passed into that stratum where people were talking about the facts of the article without knowing that it was an article they were talking about. Then, shortly, it wasn’t the article at all, but, as explained by market observers, market logic – inflation news, margin imbalances, tax bills, Microsoft – that punctured the bubble, killed the bull.
I haven’t read Charles Mackay’s nineteenth-century treatment of financial bubbles and investment mania Extraordinary Popular Delusions & the Madness of Crowds, but I’ve just ordered it from Amazon (rank: 2,687).
Speaking from horrible experience, I can tell you what happens now. The same bankers, VC-ers, angel investors, incubators, accelerators, and all-around financial types who have been directing the development of the Internet business, indeed, who have been saying spend, spend, build market share, mind share, total share, no time to waste, no time to worry about profitability, brand is what you live and die for (and bequeath your heirs), suddenly turn to the entrepreneur with his or her hopeful e-commerce company or gallant Internet content play, and say, “So, what are you going to do?”
You can’t do a secondary offering, or new VC round, or even get a bridge loan anymore (doing a “down round” – that is, taking money at a lower valuation than you’ve taken money before – is the business equivalent of cancer). So you better have a plan for getting your burn rate under control. But in many, perhaps most, instances it would take longer to dismantle infrastructure, dismiss staff, discontinue marketing commitments, than the time you have left. Therefore, commencing now, you’re going to scramble, and beg, and lie – and never once will you stop calculating your burn rate and counting the days.
“This time is going to be so much uglier than last time,” said my friend Chip when I called to reminisce about the last time this had happened and to gossip (with perhaps too much pleasure) about the people we knew who were going to get wiped out this time around. “Last time, people just needed a few million to survive. Now they need ten times more money, which means ten times more pain.”
But here is the thing.
The last time this happened, I remember how Halsey Minor, the dislikable founder of CNET, had said that it had been his fondest hope that as soon as practicable after he got his company public and put a war chest in the bank, the door would shut behind him, that the market would close down to everyone else. All of the newbies and pre-IPO competitors and annoying business distractions would then go away, or be his to buy – on the cheap.
It is not that the world goes out of business or even changes all that much. Just, part of the world goes out of business, and, for a time, the world stops changing so damn quickly.
The flip side of the Barron’s calculations is that a lot of companies actually do have enough money in the bank to survive and grow and hang in there to the next period of mania.
This isn’t finished yet. We’ll certainly crash again.