Dot Com Week – a personal history
If you didn’t guess from Julio’s post, we decided it is “dot com week” here at TLRB. Actually, we are a week early- the true top of the dot com mania was officially March 10, 2000. We used the NASDAQ’s all time peak to call the date. More specifically, the index stood at 5,048.62 which is a stunning figure compared to today’s 1,321 and 2,000 around Thanksgiving, 1998.
At the time, I was part of a small group making investment decisions for a roughly $15 billion fund. Given our size and reputation, we got to meet anyone who was anyone in the business world. I was seeing one or two “road shows” per day. When a company goes public, their investment bankers take senior management on a “road show”, the purpose of which is to let management tell their “story” to potential investors. By “investors” we mean the large institutional money managers who get to place orders for the IPO at the offering price rather than buying when the shares began to trade like all the poor retail schlubs. Remember those days, when an IPO would open and the first trade would be up 50% or more? In the first few months of 2000, IPO’s were regularly closing several hundred percent above the offering price on the first day.
The most memorable thing about those days, was that each roadshow was basically the same. I got to see lots of them- not just IPOs, but secondaries and just management teams simply trying to sell their “story” (even Enron). Now, an investment “story” is just that: a compelling narrative of why this or that investment is so very attractive. Think back a few years and you’ll recall it went something like this:
We all know the internet is The Big Thing and will change everything. Nothing will be the same ever again, everything will be connected and everything will be real time. The first true internet pioneers- web companies like Yahoo!, eBay, Amazon were obvious ways to “play” this phenomenon called the internet. Duh. Then investors realized, “well if the web keeps growing people will have to buy servers and fiber optic capacity and chips and software etc.” Everyone wanted to invest in anything that enabled the New Era. There was even a bull market in Aeron chairs.
So this new startup (“startup” was a sexy word then, since no established company could possibly be flexible and hip enough to provide foozball tables and ample stock options when creating the Next Big Must Have Web Tool) had a thingamabob that its chief scientist had patents pending on. And this widget had a name with a lower case ‘i’ or ‘e’ in front of it, used the word nano and had something to do with “next gen communications” or “enabled” something else.
Then management would promply show a series of charts. We referred to these charts as “obligatory hockey sticks” for what management could possible pitch their stock without showing some analyst/banker/consultant’s “projections” of the market their product was to dominate. It was a “hockey stick” because the line sloped up gradually for another year or so, then suddenly skyrocketed exponentially- the shape of a hockey stick. And with a handshake, a smile and a few souveniers, management were off into the magical land of easy money. (Those “souveniers”, by the way, were always logo stress balls, laser pointers, sample semiconductor chips, fiber optic “switches” or other such cool looking gimmicks that made my office look like a Spencer’s Gifts of High Tech Gadgetry.)
While I have a hundred stories of those days, perhaps my favorite was one night a week or so before that fateful March 10th. I was in Silicon Valley for a conference and attending a special cocktail party hosted by some investment bankers. It was a mixer of startup managements and investors- a ‘big money’ networking affair. Many of these companies were gearing up to go public, many without any revenue to speak of. So I start making conversation with a thirty-something CEO of new fiber optic company. I ask him about his company and he describes a larger, more prominent competitor that came public in the last year or two. When I point out that his business model is basically identical to this competitor, but that he is late to the game, had little R&D and no products. (Mind you that in techland, innovation is your lifeblood. Imagine if Intel decided that its current products were good enough and didn’t launch a new chip for a year. AMD would eat their lunch.) So what did this CEO have to say? “Yeah, but we can do it cheaper.” Huh? So you can do nothing cheaper than doing something? Impressive indeed.
Apparently my face gave away my astonishment and an investment banker who had been participating in our conversation, changed the subject. He said to me “you obviously understand the landscape better than most, why aren’t you a CEO?” As flattering as that may be, it was complete nonsense. When I politely pointed out that in my late 20′s, I had no experience managing a company, let alone a startup, he said “who needs experience? Wing it!” To top it off, this banker was responsible for making untold piles of money finding these “startups” and taking them public. As you can tell, towards the end of the dot com era startups and IPOs were not the bonafide venture-capital backed and promising business models they ought to be. They were more like manufactured, no talent boy bands that could be “sold” to eager teens regardless of staying power. One hit wonders indeed.
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