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I, Cringely - The Survival of the Nerdiest with Robert X. Cringely
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Weekly Column

Let It Ride: Fantasy Meets Reality on the IPO Trail

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

I have built a so-called career on giving, but not taking, good advice about high tech investments. More than 20 years ago I turned down the offer of a sizeable stock grant from Apple Computer in favor of earning six dollars per hour. Much more recently, I somehow managed to talk the founders of Excite out of selling me 14 percent of their company for $3,000. And these are just a few of many sorry examples. In short, I'm an idiot. So imagine my surprise this week when I came to own stock in a successful company.

The company is E-Loan, an Internet mortgage broker. E-Loan president Janina Pawlowski is a friend of mine. I have written before how the investment came to be, but the short version is that virtually no brainpower or effort was required on my part. Otherwise, I would have blown it.

Once the investment was made, I did the only thing one can do with an angel investment. I forgot about it. Since my holdings were tiny and there was no way to buy or sell shares beyond the original transaction, there was literally nothing I could do but watch from a distance. I'd pretty much forgotten the investment when a call came early this year from someone representing Softbank Ventures, which was trying to beef-up its holdings in anticipation of an Initial Public Offering. Softbank was apparently contacting all the little guys like me, trying to buy up our shares.

When somebody calls to offer you 50 times what you paid for a stock you'd forgotten even owning, it has a remarkable way of focussing attention. Around the Cringely house, this offer led to some lively discussion, mainly because I had instantly said "No." This looked like another bonehead move on my part, but I had seen this behavior before from Softbank, and knew what to expect. Softbank is a bully and had forced $50 million plus on Yahoo right before that company's very successful IPO. It's not clear to me what kind of leverage Softbank has in these cases, but it seemed obvious that if they thought E-Loan was worth the amount they were offering, then the true value of the stock was probably even higher.

So I said, "No." A couple months later, E-Loan filed papers with the Securities and Exchange Commission and the IPO shuffle began. Silicon Valley etiquette in cases like this says you play it cool. Don't bug the company. Especially don't call your friend the president, who as a single mom and wannabe tycoon probably has her hands full with actually running the company. But it was hard at times not to call, both because of the chance that I might make what for me would be some serious money, and because the Internet IPO market became flaky almost the moment E-Loan applied to go public. Where the stock markets seemed to require only a dot-com suffix to drive stock prices through the roof, suddenly shares were dropping in price after their opening. Suddenly, going public wasn't a way to instant riches. And I could see this from the outside by the way E-Loan delayed its IPO, then repriced the shares twice. Was the great Internet market already over? Should I have taken Softbank's offer after all?

I had to keep telling myself that the company was a good investment, which I had known from the beginning. For once, I said, I should just stop worrying and listen to my own advice.

E-Loan satisfied my five criteria for a great Internet investment:

  1. I could afford to make the investment.
  2. The niche they chose — Internet mortgage brokerage — was a no-brainer. The Internet is perfect for selling any product that can be delivered as electrons and where the Net can be used to eliminate middlemen.
  3. E-Loan was an early player in this niche.
  4. The founders were experienced mortgage brokers who added technology rather than nerds who were trying to learn the mortgage industry.
  5. It just seemed obvious that E-Loan would either be a long-term player in this niche or would be acquired at a premium.

This is easy to say, of course, but seen in the context of both my past investment performance and my current credit card bills, it was easy for me to think that perhaps I'd already missed my opportunity. But like everyone else in the Valley, I just pretended it didn't matter. That's all you can do: Fake it until you make it.

Spend some time around some Internet zillionaires and you'll come away with the sense that they don't really believe their wealth. Maybe it isn't real. Certainly it is considered in bad taste to actually buy things with the money. Instead, the archetype is David Filo of Yahoo, who lives in the same grotty apartment and drives the same grotty car as he did as a Stanford graduate student.

The money doesn't matter, they lie, these tycoons who can barely shave. We're changing the world.

I was on a television show with the twenty-something co-founders of theglobe.com right after their stratospheric IPO, and they were clearly in shock at having gone from net worth of zero to $500 million in less than a week. But as company founders and executives, these guys had the advantage that they couldn't even sell their shares if they wanted to. The SEC typically requires those shares to be locked-up for at least six months after the IPO. They also had the advantage of real jobs and real salaries. My little pile of shares were completely unencumbered (I could sell at any time) and I DON'T have a real job, as my accountant keeps pointing out.

Should I have taken Softbank's offer? Oh well, it was too late for that.

Well, E-Loan finally hit the market this week with an initial offering price of $14, which rose to $37 by the end of the first day of trading. This was more than double what Softbank had offered me, so my gamble maybe hadn't been as much of a gamble as I'd feared. I had a moment of giddiness during which I realized that I had a paper gain of more than 10,000 percent.

Then the feeling passed. I stopped checking the stock price, put on my mental blinders and realized that maybe my Visa bill really wasn't THAT big. In a millisecond, I had become a long-term investor. My grandchildren can worry about how to spend the money, because I'm not going to. And that must be the mental change all these founders and early investors go through to come to terms with their changed circumstances. Can the Internet stock bubble be based, at least in part, on denial? It certainly is in my case. Unable to even deal with the fact that I finally got a little bit lucky, my response is to do nothing at all.

Let it ride.

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