Waging the war for Internet supremacy
September 11, 1998
by Bill Rosenblatt
I enjoyed this book more than any I have read since starting this column. It is a fabulous piece of work that is very hard to put down once you start reading. But I should temper my rave with the proviso that this book touches on subjects, people, and places that are particularly near and dear to me. They may not be so to others.
"Burn Rate" is the story of three years in the life of Wolff, an entrepreneur who approaches the Internet with the mindset of a writer: a journalist, storyteller, content creator, media guy. In 1994, the Web was going to be the stage for the great synthesis of Silicon Valley technology and New York content into a new mass medium. The New York-based media conglomerates' rallying cry was "content is king"; their idea was that no Web site could succeed in building traffic with technology alone. Only good, name-brand content would bring users to Web sites -- and therefore, only that kind of content was a bankable commodity on the Web.
Michael Wolff's business, Wolff New Media, was predicated on this assumption. His big idea was "NetGuide," an Internet analog to "TV Guide" -- the magazine with the largest subscribership in the world. Remember, this was 1994, and it was still possible to produce a "what's on the Net" listing on a monthly basis without it being larger than the "Encyclopedia Brittanica" and instantly out of date. "NetGuide" was, at first, a print product only; a Web version was added later. In addition to Web URLs it covered newsgroups, FTP sites, and other resources.
Much of the book relates Wolff's adventures in search of two things: money to fund his business and synergistic partnerships with technology companies. The sources of money initially emanate from a former college classmate of his with the unlikely name of Bob Machinist (possibly a pseudonym: his Park Avenue venture firm's Web site has no one by that name in its list of investment professionals). Machinist's firm uses its name, reputation, and relationships -- but never its actual money -- to hook Wolff up with a series of potential investors. These range from rich kids with more money than brains to larger Wall Street firms. Wolff attempts partnerships with firms ranging from software developers to phone companies to publishers.
At first, Wolff portrays himself as a babe in the woods of high finance, with Machinist as his mentor. Among other things, Machinist gives him instruction in the fine art of valuation for Internet companies. Like Edstrom and Eller's "Barbarians Led by Bill Gates," reviewed in July's Bookshelf, this part of the book is an allusion to Bryan Burroughs's "Barbarians at the Gate" -- specifically, the scene in which the investment banker reveals to RJ Reynolds CEO Ross Johnson the mysteries and secrets of the hostile takeover. Both can be viewed as examples of how to create a whole lot of money out of thin air.
Machinist instructs Wolff that the idea in lining up investors for your Internet startup is to get the ones who are credulous enough to believe tall tales of astronomically high post-IPO valuations, so that they will be satisfied with owning a smaller piece of your company. (As a simplistic example: Say you're trying to get 1 million dollars from an investor, and his objective is to turn that 1 million into 10 million. If you get him to believe a 100-million-dollar-post-IPO valuation, the investor will agree to take 10 percent ownership of the company, leaving more for you. But if he'll only believe in a 50-million market cap, you have to give him 20 percent.)
How smart is your money?
This factor, according to Machinist, gives rise to dumb and smart money. Dumb money comes from people like Jon Rubin, the twentysomething kid in Wolff's book who has a rich dad, a technology advisor in tow, and a naive desire to hop onto the Internet bandwagon. Smart money, on the other hand, comes from seasoned technology venture investors like Kleiner Perkins or Hummer Winblad, who know at least as well as anyone else what they're looking at and how to structure deals. Smarter money, then, is more expensive money in terms of its claim on company ownership.
Valuations of Wolff New Media throughout this book are all over the map -- from the low tens of millions into the hundreds. To rational people, who spend their lives doing things like developing code or writing, it seems absolutely insane. Wolff portrays the technology investment world as a circle controlled by wolves like Machinist who understand how to attract dumb money, minimize their own personal risk, and maximize their control over businesses they work with. Insane as it may be, it's easy to get caught up in this world of dizzyingly quick riches.
Machinist and Wolff spend a long time courting Rubin and his dumb money. Rubin, after months of hemming and hawing, ends up investing, but only after Wolff tricks him into it, and only enough to keep a modest payroll going for a few months. Machinist repeatedly fails to land the big fish and refuses to be the big fish himself.
The dumbest money
Wolff eventually feels that he's learned the game well enough to play it himself, and he does. He finds even dumber money: that of CMP Media, the family-owned, Long Island-based chain of computer magazines like "Information Week" and "Windows Magazine." (For the record, CMP actively competes with the publishers of this magazine, who will no doubt enjoy the shameless brown nosing inherent in the previous sentence.) Wolff ends up selling CMP what amounts to an electronic rolodex of Internet resources -- like newsgroups, FTP sites, and early Web URLs -- for 10 million dollars. He feels guilty about it, at least for a while -- and especially when CMP comes back to him later, intensely unhappy about its return on investment.
But as the book progresses, Wolff feels less and less guilty about taking people's money. After trying the Washington Post Company, Ameritech, and other sources of funding, he ends up in Vienna, VA, looking to America Online for funding. Wolff portrays AOL as perhaps the most dysfunctional organization on earth. He latches onto a senior executive there who remains nameless -- understandable, given the unflattering portrait Wolff paints of him -- who promises a deal, an investment, or outright acquisition. Because of AOL's hyper-rapid growth and turnover, it becomes impossible to push a deal over the finish line: they can't get a critical mass of AOLers to pay attention for a long enough period of time. Wolff thinks AOL is unique in this respect, but compared to other large, fast-growing technology firms, his description seems different only by degrees.
In desperate straits, Wolff tries one more time to land investment before his money pipeline runs out. He needs a mezzanine, or mezz round of funding to keep him going until his company is acquired or goes public.
I could tell you what happens here, but I'd rather you read it yourself. Unlike most other books of this type, Burn Rate is a real story: it has a beginning, middle, and end. It also has a conclusion that borders on "Grimm's Fairy Tales" -- or, perhaps it's more like Rocky & Bullwinkle's "Fractured Fairy Tales."
The characters in this book are finely drawn -- you can almost envision the Hollywood screenplay -- and they develop throughout the story. Wolff portrays himself as a naïf in the world of IPO finance who learns some hard lessons and emerges older, wiser, and transformed by the experience. His wife, a lawyer who serves as CFO and legal counsel for the company, is the voice of reason amid the wide-eyed, optimistic greed of the Internet scene. Machinist starts off a seemingly regal presence, a representative of the blueblood investment-banking class, and ends up a greedy, scheming manipulator with only a thin veneer of Savile Row and Greenwich.
The supporting cast includes a bunch of frat-boy investment bankers, Silicon Valley technoids, lawyers who are by turns obnoxious and befuddled, and many others. In fact, the writing is so engaging, and often hilariously funny, that I sometimes wonder how true the story can be. Dialog, events, and characterizations seem embellished and slightly exaggerated, though to positive effect.
Helping time find the path
The book also has a major subplot. During a mid-'90's lull in Wolff's business, he consults to Time Inc. during the early days of the publishing behemoth's Pathfinder Web site. Wolff hobnobs with a group that's legendary in New York media circles, including the likes of Walter Isaacson and Bruce Judson. Though they're giants in their circle, it's evident that they're no more sure than anyone else about the direction of the Internet. Nevertheless, Wolff's stance towards these people is largely adulatory.
That, to me, is the most poignant subtext of this book. I'm the converse of Michael Wolff: a publishing industry refugee with a technologist's background, working for a technology company in New York, the publishing capital of the world. I feel the tension between NYC and Silicon Valley -- a core theme in the growth of the Web -- viscerally and almost daily in my work. Is content king in this new medium? Will people read it? Will they pay for it? Or is the Internet primarily a conduit for financial transactions and direct marketing? Is it more like TV or phone lines? Is the Internet a "medium" at all?
These are questions Wolff ponders deeply and incisively throughout this book. He draws sharp observations about the NYC-Silicon Valley schism: mainly, that New York media companies are technological Neanderthals, Silicon Valley people (pace Halsey Minor) wouldn't know good content if it bit them in the face, and when the two factions try to talk business -- say, when Wolff New Media tries to do a content licensing deal with Excite -- they might as well be speaking in Urdu and Portuguese. The publishing community, by and large, still thinks of technology as a back-office function, and does not embrace the implications of bits and networks as carriers of its products and services. There is a sense, simmering below the surface, that each side wants to defeat the other. Which brand names will win: Time Warner, NBC, Disney? Or CNET, Yahoo, Excite? Or will Microsoft beat everyone?
Wolff draws his own conclusions. I won't tell you what they are, but I will say that I fear he must be right. I want you to read this book. It combines highly entertaining storytelling with thoughtful insights, and you will thoroughly enjoy it.
Bill Rosenblatt is market development manager for media and publishing industries at Sun Microsystems Inc. Reach Bill at firstname.lastname@example.org.
Apart from market cap, there are numerous business-school techniques for valuating companies. These involve factors like a company's balance sheet, revenue stream, fixed assets, and how well it is investing its profits. Bankers and financial analysts use these techniques and measure their results against market cap. They do this in order to find companies worth buying (i.e., a company's calculated valuation is greater than its market cap, making its stock a bargain), changing (its valuation would increase if only it did such and such), or merging (the valuation of the combined company exceeds the sum of the valuations of the separate companies).
If the owners of a private company are looking to take it public, they hire investment bankers to apply these techniques and make a stab at the company's market cap after the IPO, so they can price the stock accordingly. But if the company is a startup with little or no fixed assets or earnings, it's hard to apply standard valuation techniques. In that case, valuation becomes a function of sheer guesswork -- of predicting how the stock market will value it once it goes public. Add to this mix the crazed optimism surrounding the Internet and you get a wild scene indeed. It's easy to see how the Internet fills ordinarily normal people with delusions of grandeur, because when many Internet companies go public, their market caps reflect seemingly hallucinogen-induced views on their future earning potential. Recent P/Es for the Yahoos and Excites of the world have been over 1,000.
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