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."