October 25, 1999
DIGITAL COMMERCE
Internet Economy Grows on Plans, Not Products
By DENISE CARUSO
he desire to cash out big is not a new motivating force in the technology industry. But what is striking about today's Internet economy is how much of that money lust is focused on selling business plans for their own sake, rather than planning viable businesses.
This trend may have already sown the seeds of its own demise.
"I call it 'the millennial pause,"' said Richard Miller, a veteran Silicon Valley strategist and investor who is distressed at the frenetic coupling of people with half-baked ideas and those with an overabundance of money to finance them. "It's the industry's saturnalia."
Tom Bloom
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In ancient Rome, the seven-day festival honoring the god Saturn took place at the end of each year. Its ostensible purpose was to pause long enough to resynchronize the lunar and solar calendars. But in fact, it was a lengthy debauch during which Romans enthusiastically engaged in all manner of licentious and excessive behavior.
What one considers licentious in the networked economy is a matter of personal taste, of course. But excessive -- that is something everyone apparently agrees on these days.
"MBAs aren't going to class anymore; they're taking two-year sabbaticals to write business plans," said Ann Winblad of Hummer Winblad Venture Partners in San Francisco.
Her firm has reviewed as many as 1,000 business plans in a single month, and looks at 5,000 to 7,000 of them a year. "Business school has become business-plan school," she said. "Students go there, find a team and start creating a company."
Unfortunately, precious few are the next Amazon.com.
The overwhelming flood of plans are "products for Wall Street, not real businesses," said Yogen Dalal, a general partner with the Mayfield Fund venture firm in Menlo Park, Calif.
"The opportunities we're seeing today are a real disappointment," agreed William Davidow, a 20-year veteran of the venture game and a general partner at Mohr, Davidow Ventures in Menlo Park.
"Many companies being founded today don't even have a single product," Davidow added. "I know a guy on the board of a company where the engineering manager was quitting. The company was public, but the product hadn't shipped yet. The engineer had already vested 1 percent of his stock, and had done the same thing at four companies in a row. He never completed a single project in any of them."
Yeah, yeah, so one company hired the wrong guy. OK, so maybe four companies hired the wrong guy. Cry me a river, right? Who is really hurt?
In a market flooded with easy money and profit taking, victims are hard to find. But as Wall Street and individual investors continue their process of reality checking the true worth of Internet companies, some industry executives believe that the flakiness of the work force is only one reason to believe that the entire Internet economy is becoming a giant Ponzi scheme.
Certainly the description appears to fit. In today's well-known Internet "business" model, the equation is that some venture capitalists are willing to give, say, $1 for a dot-com's 75 cents of value.
A dot-com's first round of venture money might be $1 million. A second round could be $10 million. The final, pre-IPO investment might be $30 million -- then it goes to the public market to be valued at $100 million.
A remarkable example of overvaluation is Blue Mountain Arts, the greeting-card Web site with a $1 billion valuation, 10 million users and virtually no revenue.
Just as "every success sows the seeds of its own destruction," said Davidow, the very interconnectedness of the Internet, which created such incredible opportunity, has also created the massive instability in the economy that it has spawned.
"The Internet creates vast amounts of 'near-money,"' he said. "Near-money tends to be things that can be translated into money very quickly. Where it used to be that it was very expensive to sell stocks, for example, and it took time to sell them, what the Internet has changed is that stocks are now near-money -- you can sell them very quickly; they're extremely liquid."
This change, Davidow asserted, is one of the reasons Alan Greenspan, the Federal Reserve chairman, is concerned about the tremendous overvaluation of the stock market. "All these institutions had physical constraints on the speed at which money moved through the system," he said. "When that constraint is gone, stock equals money, and the method that you once used to control the money supply is gone, too."
Closer to home, the ability of entrepreneurs and investors to pull cash out of companies quickly and with impunity may soon begin to crumple those Internet businesses that can no longer get free money from investors or the public markets.
"These companies have voracious, unsustainable cash requirements," Davidow said. "And their business models are based on cash being available. It's not a even a Ponzi scheme, because there's nothing downstream to pay off the investors."
And by nature of their interconnections -- Internet businesses are nothing if not linked to each other, by their swapping of advertising "revenue," their reliance on each other to drive each other's businesses, their critical need for cash to acquire customers -- a few crumpled companies could quickly turn into a big tumble for the successful businesses in the networked economy.
As one investor put it, "The point is that they will pull down the good companies with them."
So much for the millennial pause.
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