Off topic - NYT article about not all Internet entrepreneurs getting rich.
July 20, 1999
Many Internet Entrepreneurs Are Not
Getting Really, Really Rich
By LESLIE KAUFMAN
As Barnesandnoble.com was preparing to go public in April,
employees talked giddily about their future wealth. Having
accepted stock options as a big chunk of their compensation -- a
common practice among Internet ventures -- many of them dreamed that
their shares would mimic those of companies like Theglobe.com, whose
stock shot up 500 percent on the first day of trading.
People were walking around with calculators trying to estimate what they
would be worth and discussing plans to repay student loans or buy new
apartments, one Barnesandnoble.com insider said. But after an early
jump, the venture's stock actually dove beneath its initial offering price.
Within a month of going public, a half dozen or so disillusioned staff
members had resigned. The stock has since bounced slightly above its
initial price.
Since the beginning of 1999, many an enterprising soul has founded an
Internet company, offered stock and created a fortune, sometimes
achieving a billion-dollar stock market valuation seemingly overnight.
Everyone from newly minted college graduates to established
professionals like Lou Dobbs, the CNN financial commentator, who quit
to run an outfit called Space.com, seems to be hurrying to get a piece of
the action.
But like any gold rush this
one has a lot of seekers who
never hit the mother lode.
While statistics are not
available for individuals or
even for companies that do
not get off the ground, the
venture capitalists that
finance start-up companies
have a rule of thumb. For
every 10 ventures that
receive financing (and plenty
do not), two will be stock
market successes, which
means spectacular gains for
early investors; three will become part of other concerns, which can
translate into a nice return, and the rest will fail. That means a lot of
Internet entrepreneurs and their employees who end up disappointed.
Even those Internet ventures that have glittering stock offerings may not
be able to sustain those stock prices long enough for people with stock
options to cash out.
Company officers are not allowed to sell their shares for several months
after the offering, and stock options granted employees may not vest for
years even if they can be exercised below current market price. Right
now the market for Web stocks is sizzling. Of the 126 initial public
offerings of Internet stocks priced this year, 73 are trading above the
price they closed on their first day of trading, according to CommScan, a
market research company in New York. And after 30 days the stocks
had gained an average of 126 percent. Still, 53 of the offerings have
failed to live up to their fabulous first-day billings, and 17 are below the
initial offering price.
Not getting really, really rich should not be news, but during these heady
times it is a violation of expectations. Clay Shirky, a professor of new
media at Hunter College in New York City who admits to occasional
bouts of jealousy about the new riches himself, argues that people both
inside and outside the industry have developed a distorted view of how
easy it is to get wealthy.
Shirky, who, by his own admission, spends numerous hours talking to
industry colleagues about the newest millionaires, said, "The perception
that about one person in six gets lucky is a fiction." It can't be more than
one in a thousand, he figures.
For those left behind, even if they have achieved modest success, it can
mean bitterness. What makes it even harder to take is the apparent
randomness of success. After all, nearly all Internet companies are losing
money. So why are a few doing so well while others languish?
Paul Cohen started a web site called Biztravel.com, for business people
who are always on the road. Thinking he needed big backers and
professional management to make the site into a booming business, in
1996 Cohen sold a majority stake for "less than a million" to a
consortium that included News Corp, Intel, Informix and Sir Bernard
Ashley of Laura Ashley.
The group then invested $20 million, but in Cohen's view, was not
focused on exactly which market it was aiming at. The company has been
through two chief executives since the acquisition and now the position is
vacant. A Biztravel spokeswoman, Mimi Bloom, confirmed that "our
investors are very open to the possibility of a sale," which is just what
agitates Cohen. "The majority of the investors are going to lose their
stake," predicts Cohen, who does not think the purchase price will equal
their investments. "It could have been an IPO, a big one," he observes.
Perhaps the new windfall has been toughest on the industry's pioneers,
who simply arrived too soon. Howard Rheingold founded some of the
Internet's best-known and most highly regarded ventures over the past
two decades, including Electric Minds, which Time magazine named one
of the top 10 web sites in 1996. But all his businesses have since failed,
and Rheingold, though comfortable, is hardly swimming in Internet
money. It sometimes gets to him. "I've had to meditate on this a lot," he
admits. "My goal in life is not to be a jillionaire."
Not everyone is disconsolate, of course, but handling real-world bumps
after harboring Trump-sized ambitions can be humbling. Juno Online
Services Inc., a web access and e-mail service, went public at the end of
May at $13, and its stock almost immediately tanked. The price went as
low as $8.875 before rumors of a merger sent it to the mid-$20s, where
it has stayed. "It is human nature to feel better when fortunes are doing
better than poorly," concedes its president, Charles Ardai, who did not
return phone calls until his stock had climbed past the offering price. "But
we make sure to remind people it is a volatile industry."
One of the hardest lessons for would-be Midases to absorb has been the
incredible arbitrariness of the stock market. These days, starry-eyed
start-up owners are also discovering that the same forces that created
blow-out Internet offerings, namely the good will of the market and day
traders, can be very fickle. If the market suddenly goes cold and a
company has already set a date for going public, there is little it can do
but pray.
"Timing is everything," said David Cowan, a partner as Bessemer
Venture Partners, a Silicon Valley venture capital firm, who recently
watched as Flycast, an online advertising firm that he helped finance, got
off to a disappointing start. "It is absolutely the case that an IPO's
success has a lot more to do with the IPO market than with the
fundamentals of the business."
And when the market goes sour, even the most glittering success can lose
much of its shine. Two months ago, Dave Kansas, editor of
Thestreet.com, was the talk of the Internet world. When Thestreet.com,
in which the New York Times Co. has invested, went public in May, its
stock price quickly surged from $18 to $60. Kansas found himself the
subject of numerous articles, penned in amazement that a mere journalist
could suddenly be worth $9.1 million. As a company officer, however,
Kansas is prohibited from cashing out until November. In the meantime,
he has watched the value of his stock drop by more than half. "I joke
with friends, 'Hey, I lost a million bucks last week, what did you do?"'
Kansas can joke, of course, because he is still, in theory, worth millions,
but to employees lower down the totem poll a crash in the stock price
can be devastating to dreams. Managers who count on stock as a
motivator have had to learn to punt. Todd Krizelman, the 25-year-old
co-chief executive and co-founder of Theglobe.com, watched his
company's stock rocket from its offering price of 9 to almost 49 and then
settle back to the high teens. On paper he is worth many millions, but his
employees are working on much smaller margins. "It was great euphoria
when we were going public, the fact that it had turned us around so
quickly has been a challenge."
Krizelman says he does not want employees to be like day traders,
checking the stock price 40 to 50 times a day. "Ninety-five percent of
our employees have stock options," said Krizelman, who sold 5 percent
of his holdings in the second quarter. "We tell them it is the right bet in the
long run."
Marie Toulantis, the chief financial officer for Barnesandnoble.com, also
argues that most of her employees are too smart to focus on today's
stock price. "I don't think it was anyone's major reason for leaving," she
said of the staff departures. "Options can take four years to vest; it is not
like cash today."
Another Internet truism that entrepreneurs are coming to terms with is
that even good ideas with lots of backing do not always flower into
fortunes. Web Flow was one of the first software companies to offer
"multi-platform" applications -- programs compatible with numerous
computer types and operating systems -- making it an incredibly
promising company in 1995. Bob Arasmith, its vice president for
engineering, remembers that venture capitalists were vying to back them.
"It was no effort to get millions," he said. The company raised $4 million
in December 1995 and $10 million more six months later.
But the marketplace did not take to the concept as quickly as the venture
firms. By the spring of 1998, the company was out of business, and the
board sold it back to its software developers for pennies on the dollar.
Today, Arasmith is president of a company that makes a similar product
and seems circumspect about the future.
"We hope to be profitable, but I don't imagine that we will sell out for
$100 million," he said, "and we don't walk around looking at Ferrari
dealerships like we used to."
Copyright 1999 The New York Times Company |
