July 7, 2000
SPENCER MICHELS: Not so long ago, working at an Internet company seemed a good bet for cashing in on the explosive growth of the online economy. But in the last month, the bet has gone bust for many working and investing in those Internet businesses known as dot-coms. The industry standard, the bible of the Internet, reported recently that at least 17 dot- coms had closed up shop, and that's a conservative number. They included the apparel maker Boo.Com, and the media company Newswatch.Org, where fans of the site are posting regrets about its demise.
The "Standard" reports that layoffs are also on the rise, in an industry known for its hiring frenzy. At least 5,000 workers, and probably many more, at more than 70 dot-coms, have been fired, including 140 layoffs at newswire APBnews.com, which filed for bankruptcy this week. Even the most established companies, such as online bookseller amazon.com, have lost their luster. "Time" magazine last year named Amazon founder Jeff Bezos man of the year. This month, analysts are questioning whether Amazon can even survive. The dot-coms have also lost some of their cachet on Wall Street, where many entrepreneurs had turned to raise cash. The technology-heavy NASDAQ has dropped 20% of its value in the last three months alone.
That has meant Internet workers who once banked on valuable stock options have less to cash in. And many companies that once rushed to attach the seemingly hip dot-com label to their name are deleting the moniker just as quickly. Still, while the dot-com craze may be losing steam, the dream of striking it rich via the Internet is still very much alive. A year ago a young French woman began Gigraf, a software startup, in her garage near San Francisco. Virginie Glaenzer had come to America to succeed.
VIRGINIE GLAENZER, Software Developer: That's what we want to become, a next Microsoft, and we are working very hard for that.
SPENCER MICHELS: What is your eventual goal with the company? What do you want to do, get rich?
VIRGINIE GLAENZER: Of course, get rich in less than five years, maybe something in three years, get IPO, and create great software.
SPENCER MICHELS: Since then, the company has changed names, to Inventop, and has put its five former employees on a consulting status. Although money has been hard to get, the company plunges ahead. And some researchers say there's good reason. Online sales, estimated at $12 billion this year, should jump to $41 billion by 2002. The Internet economy, at $500 billion in 1999, is predicted to top $850 billion this year. Industry boosters point out that 50,000 companies collect all or some of their revenues from the net, and employment in Internet related jobs doubled to 2.5 million people last year. Yet those numbers may be little solace for laid-off dot-com workers, and unhappy investors still licking their wounds from bets gone bad.
JIM LEHRER: Our business correspondent Paul Solman takes it from there.
PAUL SOLMAN: So has dot-commonsense finally cooled the fever of dot.com competition? For that and other questions, we're joined by Ben Gordon, founder and CEO of 3plex.com, who's here with us in Boston; Timothy Draper is founder and managing director of Draper, Fisher, Jurvetson, a venture capital firm in Silicon Valley; Bob Walberg is chief equity analyst at Briefing.com, an online research and analysis firm; and Wendy Haig is the founder and CEO of Global Strategy Corporation, a dot-com consulting company. Welcome to you all.
PAUL SOLMAN: Wendy Haig, what happened to the dot-com gravy train?
WENDY HAIG, Global Strategy Corporation: I think the dot-com gravy train is still very, very much alive. The think there's a lot of media hype. I think that failure is the new sexy term that's being used out there. I think that dot-coms are here to stay. I think we have to be very cautionary though, and look at the 30% of the dot-coms who are simply existing; those not quite in a failure mode, those not in a hugely successful mode, but those who are simply coasting through. If they begin to fail, then I think we really will have a bit of a dot-com loss of the gravy train to face.
PAUL SOLMAN: Ben Gordon, profitability is what people keep talking about as the new metric, and that that's what explains this cascade of prices, given say compared to say a year ago. Is that what's going on?
BEN GORDON, 3Plex.com: I think that's right. The dot-coms aren't dead. It's the dot-coms who are really just a web site and marketing campaign. Those are the guys that are dead. I think the winners are the ones that can demonstrate a clear path to profitability. So, for example, the real businesses, the ones that can say, as 3plex is saying in a year and a half from now, we'll be profitable. Those are the ones we think will be around because it's not just the web site, not just a marketing campaign. It's some sort of substance underneath. That is I think what matters.
PAUL SOLMAN: Bob Walberg, how could people have started companies that weren't going to be profitable? Is Ben Gordon right here?
BOB WALBERG, Briefing.com: I think he is largely. What happened early on -- the Internet revolution basically was about a big land rush. The general theory was that the first to arrive and those who spent the most announcing their arrival would be successful, and basically benefit from huge rewards. What's happened is, however, like a little ponzie scheme, companies were given a lot of money early by venture capitalists. They got consumers who drove revenues who then basically gave people ors the ability to go public; they got more money from going public, they spent that money on additional marketing. However that scheme worked as long as it somebody else was will to fund the next marketing campaign. When we had the big tech correction in March and April, however, the equity window closed and that left a lot of companies without cash. Those companies... the further we move away from the closing of the equity window, you're going to see more and more failures, largely because the big spending on marketing did not build brand. It has not resulted in increased operating margins or profitability.
PAUL SOLMAN: Are you actually suggesting this is a ponzie scheme? We're in Boston and that's where Ponzie had his scheme back in the old days. That was a flimflam operation back in the early part of the century.
BOB WALBERG: We think a lot of what took place early on, particularly in e-tailing industry. You took a traditional business, said you were going to move it to the net and basically you spent a lot of money on marketing to do so and announced were you there and you were going to build a huge profitability. Profitability never came. Now that the market... the equity window has closed and availability of cash has disappeared, a lot of companies are beginning to lay off people because they're running out of cash or beginning to close. And I think we're at the very early stages of companies announcing their failure. You're going to see more and more companies the further we move away from April and the close of that equity window, announce failures.
PAUL SOLMAN: Tim Draper, you're a venture capitalist. Were you funding ponzie schemes? You didn't think were you?
TIMOTHY DRAPER, Venture Capitalist: I sure hope not. We think that actually the Internet has a major discontinuity, something never seen in the history of economics. And it is growing at an extraordinary rate. And Wall Street will glom on to it one day and let it go the next and... but there are real fundamental companies that are being built underneath all of this. And when there's a lot of capital available, the entrepreneurs will take advantage of it. They'll become focused on building market share and they will be growing as big and as quickly as they possibly can. When it goes... when Wall Street loses its enthusiasm, what happens is the entrepreneurs focus more on getting profitable and growing their business that way.
PAUL SOLMAN: Wendy Haig, even amazon.com isn't profitable yet, right? I mean is anybody profitable at this point, and when are profits going to flow if profitability is what everybody is looking for and what explains this year's worth of correction?
WENDY HAIG: There are certainly many, many companies out there that are profitable, and very profitable. Some of the companies out there will be forced to go in and restructure their business plans or their revenue models. I think that the...
PAUL SOLMAN: What does it mean when you restructure revenue model? You say there's going to be more revenue?
WENDY HAIG: I think in the past the venture groups have been tolerant of ideas, and the ideas of revenue generation. I think now they're going to ask for revenue visibility. I think that they will want to see that revenues can be generated more quickly than they have been in the past. I think in the past there has been a tremendous amount of marketing and not a lot of attention on revenue. It's probably good to look at the time, learn from it, be prudent, and go back to a little bit of the old school way; to pull a little bit of what our parents and their generation taught us, combine it with today's new economy, and somewhere in there, what we certainly learned from our parents' generation was go for revenues.
PAUL SOLMAN: So there were, at the turn of the century there were 400 to 500 car companies, automobile companies. Ten years later there were a few and now we're down to just a very, very few. Is this industry going to be any different do you think? Is there any reason why it should be or basically is everybody but a few last players going to exit the field?
WENDY HAIG: I think it's a great question. I think we absolutely will see a tremendous amount of mergers go on in the next 18 months. And, again, I think a lot the going to depend on what happens to the 30 percent of the Internet companies that are out there that are simply surviving out there. Are they going to go the route of failure or are they going to be pushed a little bit harder by their investment groups, held a little bit more accountable and put that usual in that will take them to be what we would say very successful? There's a lot of success in many mergers.
PAUL SOLMAN: Ben Gordon, you said you're going to be profitable in a year and a half I think, if I heard you correctly. So isn't it sort of everybody saying something like that? You yourself are not profitable yet.
BEN GORDON: Well, we just started six months ago. Give me break, please.
PAUL SOLMAN: We're not trying to make you feel bad. I just want to know if what you are you're saying is what, in fact, we would be hearing from lots of the people that Wendy Haig is, for example, saying is on the bubble, the 30% who might not survive in some proximate period of time.
BEN GORDON: Well, I think you have to have a credible plan to how you get to profitability. You know, it's easy to draw a chart and a hockey stick and it says, well, our revenues are here but they're going to be here in two years, and the profits are here, but they're going to be up here.
PAUL SOLMAN: The hockey stick meaning there's the part where you shoot from and there's your stem.
BEN GORDON: Exactly. So, it's easy to say that. I think the issue is you have to make sure there is defensibility behind the revenue model, and, you know, it does go back to our parents' or our grandparents' generation. That rings true for me actually because when you talked about the four or five hundred auto and transportation companies at the turn of the century, I actually have a relative, a fifth generation auto entrepreneurship, so I know, going back from generations, people who did have to build their businesses on profits. This is not a foreign concept - truly about taking those principles and applying them using Internet technology. You have to have real nuts and bolts underneath that. And there are plenty of businesses out there that don't have that right now.
PAUL SOLMAN: Bob Walberg, who are the real losers right here? We're billing this segment as talking about unemployment. We saw it in Spencer Michels' piece. But who's losing?
BOB WALBERG: Well, from the corporate standpoint it's going to be those companies that don't have enough cash to get to the point where they are going to be profitable. If it's basically the companies are predicting there will be a year and a half to two years to profitability -- if they don't have enough cash to get themselves to that point, the companies will have a difficult time in a sluggish economic environment in a time when the DC money is basically is putting stricter guidelines on who they are going to fund - they're going to have a hard time sustaining their business. From an investor's standpoint, it is going to be those people that bought into the pie in the sky theory of what was going to take place in the industry. We see a lot of the e-tailors going down, we're going to see many of the content sites we think begin to have difficulties and very possibly the b-to-b companies that...
PAUL SOLMAN: The b-to-b, business-to-business.
BOB WALBERB: The business to business net companies, which were in vogue over the last few months, as a number of those second and third tier companies begin to show that revenue numbers aren't growing at the same rate they were in the past, money is going to be very difficult for them to get down the road as well. Again, the key here is the fact that the March and April decline in the technology sector closed the access to equity, made it much more expensive. It's going to get very difficult for marginal net companies to survive.
PAUL SOLMAN: Tim Draper, are you going to pull the plug on Ben Gordon or people of his ilk?
TIMTOHY DRAPER: Absolutely not. We like to stick with our entrepreneurs as long as we possibly can.
PAUL SOLMAN: Does he have to show his profits right away?
TIMOTHY DRAPER: I don't think there really are losers in this opportunity. There are companies that will go out of business, but we have absolute full employment. And it's a result of this equity economy that's growing here in the Silicon Valley and in other places around the country.
PAUL SOLMAN: What do you mean by equity economy?
TIMOTHY DRAPER: Well, what happens is if someone is an equity holder, they're an owner of a company.
PAUL SOLMAN: Stock.
TIMOTHY DRAPER: And they work much harder for that to succeed, and more comes out of it. And it grows an overall economy. They had an experiment in Russia where they gave 5% of the land of the agricultural community to the owners. They actually gave them ownership of 5% of the land. It turned out that that 5% created 55% of the output of Russia's agriculture.
PAUL SOLMAN: This is way back, early in the century.
TIMOTHY DRAPER: Yeah, and it was a feeling of ownership. And that feeling of ownership is all over the Silicon Valley, where an entrepreneur can start their company with their rent paid and their legal work done and their advertising PR all paid for with equity. They can get cash from a venture capitalist for equity. And so it's a new economy, it's a new way of looking at things, and it's a much more exciting place to be than the old debt economy.
PAUL SOLMAN: But, wait a second, people are being laid off. Ben Gordon, suppose had you to lay off everybody in your company. What would happen?
BEN GORDON: It would be terrible.
TIMOTHY DRAPER: We can hire them all.
PAUL SOLMAN: What did you say? You can hire them all?
TIMOTHY DRAPER: We can hire them all. We can fill all those slots.
BEN GORDON: But to that point, actually one of the best things that we've seen in the last couple of months as part of the shakeout is we actually have done exactly what Tim is alluding to. We've been interviewing and in some cases hiring a number of terrific people that have come from other dot-coms... and whether they chose to leave or because of the shakeout, their segment, you know, went to the pits and they got laid off, the fact of the matter is that there are a lot of terrific people out there people who have been through the process of taking a swing and missing and understanding why they missed, those are often terrific people to hire.
PAUL SOLMAN: You're a Harvard Business School graduate as of?
BEN GORDON: Last month.
PAUL SOLMAN: Last month. So you were doing this while were you at Harvard Business School. Fewer Harvard Business School students doing this now? Are a few of them doing dot-coms because of what has happened?
BEN GORDON: There are definitely fewer people doing them right now. But again I think it's a healthy thing because the people that are focused on building great sustainable businesses still have the chance do it and still have the chance to win. And those are the guys that are going to continue to start businesses and be successful.
PAUL SOLMAN: Tim Draper, are you funding fewer people?
TIMOTHY DRAPER: No, actually we're on the same pace. In fact when there are opportunities created when a company is given up on, often there is a great opportunity to come in as a venture capitalist and fund them and grow them maybe in a new direction. And we do that often. And so I think we're funding at just about the same pace, maybe a little quicker than we were in April.
PAUL SOLMAN: Bob Walberg, do you believe all this? This is a happy story. There are no losers, the NASDAQ is down I guess 25...20% from its height, but everything is for the best in this best of all possible worlds.
BOB WALBERG: You know, I do think if you're building a solid business that has a path to profitability there are tremendous opportunities on the Internet. However, this assumption that simply by paying people in equity, you are going to be able to draw all kinds of exciting people and good, talented people to your companies -- that worked really well when the stocks were tripling and quadrupling in a year. But as stocks drop 80%, 90%, as companies go out of business, a lot of talented people are going to be much less attracted to the dot-com industry than they were just several months ago. Nobody wants a stock option when the stock is falling 80 to 90%, as many of the second and third-tier e-tailors have done over the last several months. So I really don't think that it is the new economy. It is the same basic principles. You have to have a fundamental business that can reach profitability, whether it's on the Internet or off the Internet. If you don't, your company will fail.
PAUL SOLMAN: All right. Well, let's leave it at that. Thank you all very much.