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Digital Strategy & Information Architecture
http://iArchitect.org/
Posted at 8:06 p.m. PST Wednesday, November 17, 1999
Internet bubble's about to burst
BY SCOTT HERHOLD
Mercury News Staff Writer
IN THEIR most candid moments -- say, after their stock is sold -- most
people in Silicon Valley would concede that Michael Perkins and Tony
Perkins
are probably right when they say there's an Internet bubble that will
collapse. The question has always been when.
For the past four years, the adults in Silicon Valley -- the doubters,
the
skeptics, the people who hew to the old-fashioned notion of earnings --
have
consistently eaten crow. Is now different?
With their new book, ``The Internet Bubble,'' (HarperBusiness, $27), the
two
Perkinses -- brothers and founding editors of Red Herring Magazine --
say
the time of reckoning is near. They predict that people holding public
Internet stocks could be looking at a 50 percent meltdown if they don't
sell
before the bubble bursts.
Although the book is careful to stay away from predicting the precise
moment
of meltdown, the two Perkinses say they expect the first stage of
collapse
to occur after the holiday season. ``We think all this money that's
being
thrown at advertising doesn't portend well for these dot.coms,'' says
Michael Perkins, who calculates the dot.coms will have spent more than
$1
billion this year on radio and television advertising.
>From the venture capital point of view, what's most intriguing about
the
book are the remarks from VCs, who as a group have engineered much of
this
bubble -- but who fear that it is indeed likely to be punctured.
``We're in one of the biggest speculative excesses of all time,'' Bob
Kagle,
a partner with Benchmark Capital is quoted as saying. ``Money is thrown
at
companies long before they've proven anything or learned the disciplines
that come from facing the market.''
``We've stopped putting the effort into actually trying to build a
company,'' Bandel Carano, a partner with Oak Investment Partners in Palo
Alto tells the authors. ``We've put our effort into building stocks,
because
you can do that pretty quickly. You can put together a team, spin a
story,
get rich quick.''
So why do the VCs and investment bankers continue to do this if they
know
they're turning inferior goods out the door? A cynic might answer that
the
VCs and investment bankers do well even if the stock collapses later on:
After all, they bought shares for pennies or have an allotment at the
time
of the IPO. But another reason is the sheer competitiveness of the
Internet
landscape.
``The irony of the Internet mania is that everybody wants the same
thing,
but nobody is willing to take the pain on his deal, so companies that
shouldn't be public are public,'' IVP and now-Redpoint Ventures partner
Geoff Yang says in the book. ``But no one, from investment bankers down
to
venture capitalists and the entrepreneurs, will sacrifice his deal if
the
public is willing to ride it.''
LONG-TERM CAPITAL: One of the intriguing challenges for venture
capitalists,
just as it is for ordinary mortals, is knowing when to fold 'em and when
to
hold 'em. It's typical to distribute shares in a newly public company to
the
limited partners of a VC fund shortly after an IPO. But there's no
consensus
about how long VCs should hold a public stock. Much depends on the
company,
the VCs' judgment about its potential, and what a big sale might do to
the
stock price.
For perspective on this issue, meet Phil Greer, one of the name partners
in
the San Francisco-New York venture firm of Weiss, Peck & Greer. A
generation
ago, in the early 1970s, Greer was one of the early investors in a
struggling young company called Federal Express, then run by a
20-something
entrepreneur, Frederick W. Smith, who had the brash idea of delivering
mail
and packages overnight. Smith had already burned through two substantial
rounds of funding in building his fleet of airplanes. Though the
business
indicators looked good, Federal Express's coffers were empty. And it was
a
day when people clung to the quaint idea that a company had to show a
profit
to go public.
Smith embarked on what became a desperation mission. He gave up half his
company for $4 million, a sum that seems trivial today. Greer, who had
invested in both earlier rounds, stayed with Federal Express for what
became
a very lucrative investment for the VC firm. ``I was traveling to the
board
meetings fairly often, and I could see things turning around,'' he says
now.
Here's the kicker: Greer still holds some of the original stock from
that
round, known as a ``down round'' in VC parlance. ``I hold stock a long
time,'' he explained the other day at a Weiss, Peck & Greer partners
meeting
at the Robert Mondavi Winery in Napa Valley.
What's probably just as noteworthy is that Smith and Greer have remained
friends despite the extraordinarily sweet deal the VCs got. In fact,
Greer
has remained on Federal Express's board for a quarter-century. And when
Smith spoke to the assembled partners about the Internet economy -- his
message was that the ordinary laws of physical distribution aren't
suspended
for dot.coms -- it was Greer who warmly introduced him. It doesn't hurt
either man that Federal Express's market cap today is close to $13
billion.
TEN MILLION TALKS: Rich Shapero, a partner at Crosspoint Venture
Partners in
Woodside, is used to thinking the kind of big, strategic thoughts that
pierce the ordinary fog of the marketplace. Crosspoint, after all, has
invested in successes like Ariba, Covad Communications and Juniper
Networks.
But bravado isn't part of Shapero's normal portfolio. So the story of
how he
came to fund Aristasoft, a Mountain View applications services provider,
is
worth the retelling.
A little more than a year ago, Shapero did an interview with Upside
Magazine
and began with a challenge to entrepreneurs to start a company providing
business software over high-speed pipes. ``I've got a check for $10
million
for the first senior executive out of SAP, Baan or Oracle who can
reinvent a
sector of the applications business and deliver it not as a software
package
but as a revenue service over high-bandwidth pipes,'' he said.
Mind you, Shapero wasn't offering to give the money away. But he did get
plenty of takers. ``The reality is that we had a very specific thing in
mind,'' Shapero says. ``Of the plans we saw, Aristasoft's was already
pretty
highly articulated, a shared view of the one we had.'' The key for
Shapero:
Aristasoft proposed to offer business software by industry, beginning
with
high-tech companies. Bingo: It got the $10 million.
Of course, there were a few details to straighten out. Through
Crosspoint's
good offices, Drew Hoffman, an executive formerly with Adaptec and
Echelon,
came on as CEO. Aristasoft, meanwhile, has plunged ahead. It recently
announced a $30 million second round that included checks from
Crosspoint as
well as Warburg Pincus and Co. Shapero and Alan Baratz of Warburg Pincus
serve on the board.
Term Sheet -- a name drawn from the formal proposal that a venture
capitalist offers to an entrepreneur -- is an occasional column about
venture capitalists and the companies they fund. Contact Scott Herhold
at
[email protected] or (408)920-5877. The fax number is (408)
920-5917.