The absolute truth as Mssr. Goldfinger sees it: "How green was my Silicon Valley: Internet millionaire Charles Ferguson takes a lighter look at what went wrong with the technology revolution
Financial Times; Mar 17, 2001
By CHARLES FERGUSON
Looking backward from the internet revolution's nuclear winter, it seems
ever more stunning that the US technology sector and financial system
were able to construct a house of cards even faster than the phenomenon
itself could progress.
Of course, the financial industry didn't do it alone - it took a whole nation.
And the internet phenomenon was uniquely self-reinforcing.
Nonetheless, it was still an impressive achievement. Only 10 years ago
Silicon Valley remained a world apart, fuelled by nerds and financed by a
small cadre of tough, street-smart dead white males. It was a pain to get
there, and the Valley was, well, different. There were no good restaurants.
Huge fortunes and catastrophic reversals depended on arcane technologies.
And then there were the people. The technologists were brilliant, quirky,
unmanageable and wildly funny; the business types calculating, and driven,
but with no apparent fear of consequences. Nobody wore ties, and you
couldn't predict what they might do.
Take Larry Ellison, the founder and CEO of Oracle. He has had the usual
trappings, but he also has supersonic combat aircraft - admittedly, only an
F86, because the Defense Department, being small-minded, turned him
down when he tried to buy an F16.
Although nobody in New York realised it, these people made serious
money - far more than pitiful wage slaves such as George Soros. Venture
capital was small, clubby, informal and stunningly profitable.
Before the internet, venture technology investment rarely exceeded Dollars
3bn a year. Yet those investments turned into Intel, Microsoft, Cisco,
Oracle, Compaq, Sun and 1,000 others now worth - even during nuclear
winter - more than a trillion dollars.
For 30 years, the industry lived in charmed seclusion. When I started my
first company with Randy Forgaard in 1994, we had trouble raising Dollars
4m, mainly because nobody knew what the internet was.
But then, virtually over night, the web was growing by 25 per cent a month
and Netscape, Yahoo! and Amazon were worth billions. The investment
bankers awoke, and the world followed.
In January 1996, I sold my company to Microsoft, and became an "angel"
investor. As I wandered the industry, I realised that we had entered a
strange new universe.
The most obvious signs, of course, were valuations. Yahoo!, then with
Dollars 100m in revenue, was valued at Dollars 70bn; Amazon, still losing
money on every book, at Dollars 30bn.
Equally telling, however, was what happened within the industry itself. The
strangest people were launching companies, raising astounding sums and
spending wildly. People from Harvard, Yale and even Princeton. People with
blow-dried hair, backwards baseball caps, driving sport utility vehicles. Tall,
slender, gorgeous people dressed in black Armani. People who wouldn't
know good technology if it hit them in the eye.
In early 1996, I went to check out a web start-up. They had remodelled an
entire floor, at enormous cost, in something I might describe as
high-technology bondage - huge chains hung where more parochial people
would have put walls. These people had serious attitude, great clothes and
cool music.
When I was so indelicate as to interview them, however, I realised they
didn't have the faintest idea how to build commercial software. What kind of
moron would invest in these people, and what kind of customers would give
them business?
We have a problem here, I thought.
Once the explosion began, it was in virtually everyone's interest to
perpetuate it. The silliest start-ups could raise money at astronomical
valuations; venture capitalists could raise enormous funds and pay
themselves 2 per cent a year; any company at all could go public; the
public companies could make billion-dollar acquisitions with cheap stock;
investment banks handled initial public offerings and mergers; day traders,
and then everyone else, made fortunes on the stock market.
The losers would be those who remained standing when the music stopped.
And so everyone pitched in marvellously - start-ups, the media, VCs,
investment banks, mutual funds, PR companies, business schools,
headhunters, property developers and, of course, the general public.
Venture capital flows went from Dollars 5bn in 1994 to Dollars 50bn last
year. Start-ups threw half-million-dollar parties in museums; analysts
recommended stocks without great discernment; even the sill-iest IPOs
received multi-billion-dollar valuations.
All this drew the greedy, the cool and the merely naive in vast numbers.
Launching real companies grew difficult, because you were in a financial
arms race, and people couldn't tell the junk from the jewels - or didn't care.
In these regards, the internet bubble was like most others. However, several
unique factors contributed to the suddenness of this one.
First, people finally realised that this peculiar industry in California was
making a huge amount of money. Second, the internet revolution was real,
and US productivity growth rapidly tripled to more than 3 per cent a year.
The US economy boomed, corporate profits grew even faster, and
technology came to dominate capital spending. Thus the development
spread to the entire technology sector, and the bubble followed.
But third, the internet bubble was uniquely propagated by the internet itself.
The revolution was not merely real - it was also self-advertising because it
was universal.
Suddenly, anyone could trade stocks virtually for free - via the internet; you
could see financial reports and stock research about internet companies -
on the internet; every company could prove that it had an internet strategy -
on the internet; you could tell your friends about your marvellous adventures
- through the internet.
To be cool, you needed to get an internet account so you could send
e-mails to your cooler friends who already had one. Very quickly, you could
experience the joys of free international telephone calls, massive copyright
infringement, instant messaging and buying things below cost on great
websites.
Well, it was a wild party. If oil prices, Alan Greenspan and dawning
realisations hadn't spoiled it, maybe we could have steered ourselves into a
true disaster.
I confess that I prefer the quirky, witty, socially inept, brilliant,
unmanageable technologists of yesteryear. However, the Silicon Valley
restaurants are much better now, so it wasn't a total loss.
* Charles Ferguson co-founded Vermeer Technologies in 1994 and sold it to
Microsoft two years later for Pounds 133m. His book, High Stakes, No
Prisoners, is published in the UK by Texere, Pounds 12.99.
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