It’s now four years since the ‘tech-wreck’ of April 2000. Four years!!! Can you believe it?
Yet, it’s so hard to move on. We continue to talk about it, romanticize it, lament it, tut-tut at our folly. And we definitely can’t stop writing about it. Like the unnamed narrator in Joseph Conrad’s Heart of Darkness, we find it impossible to let go, repeatedly drawn back to that place where untold riches were generously offered, then just as abruptly snatched away.
The Horror! The Horror!
But it wasn’t all that bad. That colourful term, ‘tech-wreck’, conjures up memories of a time when anything seemed possible. A magical script called ‘code’, hardware with exponentially expanding memory and the creative vision of anyone using the abbreviation .com could be brought together to give life to almost any concept or idea.
Even better, youth, finance and untested business models allowed companies to try things never thought possible and introduce business practices seemingly stripped from the pages of children’s fiction, implemented with incontestable faith in the ‘new economy’ and justified with almost religious fervour.
“When a successful company deliberately dumps profitable cash paying work for Fortune 500 companies, to focus instead on start-ups – providing services for stock! – you know that something’s not right. But I remember one company doing just that, based on the belief that no significant upside could be gained by working for some of the largest companies in the US,” says Michael Gale, Managing Director of Gramercy Venture Advisors.
Gale was a founder and the managing director of now defunct Double Impact Incorporated, which was one of the boutique investment banks in San Francisco in the late 1990s.
He was part and parcel of the Silicon Valley set – an advisor, matchmaker and confidant to many of the start-ups and investors that have since fallen to infamy, risen to stardom or even become the subject of legend. He was exposed, often personally, to the irrationality and untamed enthusiasm that has come to represent the dotcom era.
These are his stories.
GOING FOR BROKE
How do you spend US$160,000 in 48 hours without acquiring any assets? This was the happy dilemma Michael Gale was faced with while providing professional services to a billionaire investor in New York.
“You need to remember that this was a time when tried and tested business rules were simply being disregarded. Older investors, with more experience, who should have known better, were ignoring all they had learned in a lifetime – simply caught up in the hype,” says Gale.
“This one extremely successful investor in his sixties had become a billionaire over several decades being a hard-edged, ‘watch the pennies’ businessman. He knew his stuff but couldn’t resist doing a deal. Once a deal was in progress, he had to finish it according to his terms.
“He came to us wanting to invest in a start-up computer graphics company. With our assistance, he invested US$5 million with a default clause giving him the right to buy-out the founders – if the company should go insolvent by a certain date.
“The company was untested, the management had little experience, little or no revenue was being produced and a rift quickly formed between the founders, who were managing the business, and the billionaire investor who was bridging the company. Capital was running out and things were looking shaky.
“The next thing I know, the Chief Operating Officer (COO) and the billionaire investor are calling me up with a plan to trigger the default clause and wrest control from the founders.
“The premise was simple. The company had only US$160,000 left on the balance sheet with 48 hours remaining before the default clause would expire. Using the COO’s company gold card we would need to spend all this money, which was more than a quarter of a million if you convert this into Australian dollars, within a two day period.
“It might sound easy, but we didn’t want to acquire any assets as they would go back on the balance sheet.
“For the next 48 hours we ate and drank like dotcom sultans. The investor told us the places to go and suggested which wines and champagnes to buy. Every restaurant and bar came to know our names and welcome us with ready smiles and open arms as our reputations quickly spread.
“Unfortunately, it wasn’t to last of course. We did our dash, spent the money in the 48 hour period and the billionaire bought out the founders. Six months later, the company went broke, the investor wrote it off as experience and the founders kicked-back, laughing in their new New York homesteads, which they bought when the billionaire bought them out.
“Every now and then I will visit a New York restaurant and be greeted like a king or a long lost friend. They must be terribly disappointed when I don’t ask to see the ‘good wines’,” says Gale.
SLIDES, SCOOTERS AND AIR TRAVEL
According to Gale, another familiar and often bemusing aspect of the dotcom revolution was the often frivolous spending of its new elite, generally caused by an idealised notion of the ‘new economy’, coupled with a lack of business experience.
“Boo.com is a case in point. This company was created by a young Scandinavian couple as a business school project. The idea was to create software that could model clothes on a subject while they waited at a retail counter. The potential buyer could try on clothes ‘virtually’.
“The pair raised $135 million, by being young and hip and fuelling the hype. They then spent the next nine months burning that money up, without producing a product that actually worked at the then average connection speed… Every month they would have a company meeting and fly half the staff between their two offices in New York and London via Concorde! They were rumored to never use the mail, everything went by FedEx!
“The problem, of course, was that broadband wasn’t ubiquitous yet and customers had to wait twenty minutes while the images uploaded. The company failed before it got off the ground – unlike its lucky travel happy staff members,” says Gale. Its assets were sold for $375,000.
“Kozmo was another company that was built on the premise that if you threw enough money at it the company would naturally come together and start making a profit.
“The philosophy behind this company was that it would deliver anything for free at anytime using smart, cleverly branded scooters throughout New York. The company took a margin on some products and mostly sought to make money out of DVD rental.. The downside quickly presented itself when spoilt New York teenagers decided to take the company up on its promise, ordering scooters across town so that they could buy products as little as a bagel or a pack of gum.
“The only thing profitable that came out of that company were the scooters, which have almost acquired iconic status and can be purchased on e-bay for a small mint,” says Gale. At the time of its winding up Kozmo had consumed $280m. Of course that pales into insignificance compared to the $1B plus that was lost in Webvan, though it was arguably a better business with better execution, but failed anyway.
But what about demonstrable inexperience? Gale believes that a common lack of foresight evident among many, but not all, technology boom entrepreneurs can be demonstrated through one incident involving the chief executive officer (CEO) of an online medical service.
“The company had a market capitalisation in the vicinity of US$20 billion, which was larger than many Fortune 500 companies. The business was to provide an online, one stop shop to identify and treat basic medical ailments. An advisory company was being paid a US$100,000 a month retainer to seek European partners and arranged a European partnering trip. But when the CEO got to the airport and was asked to present his passport he was bewildered. Having never traveled abroad before, he didn’t realize that such a thing was required. The partnering trip was obviously a write-off as he never made it off the airport tarmac.”
THE END OF AN ERA
In early 2000, Gale’s US advisory company Double Impact Incorporated was approached by a larger company seeking to buy a boutique firm. An offer of US$87 million was made.
“A larger company wanted to buy us out, which was a good outcome for me at the time. We had built the business, but I could see the writing on the wall,” says Gale.
“My turning point was when a 22 year-old entrepreneur approached us with a compression algorithm and the claim that his company was going to be ‘bigger than Microsoft’. He was seeking US$200 to US$300 million, with sketchy details, and had a list of 20 big name investment houses that he claimed were willing to back him.
“He wanted to know how much we would pay him to be his advisor!
“I figured that if these other investment firms were going to back this entrepreneur the world had gone mad and it was time to get out. It was impossible to get fees from clients because the entrepreneurs insisted on paying in stock and advisors were agreeing to these terms.
“Even lawyers and landlords were taking shares for fees and rent.
“Another moment of epiphany was when a young advisor, who twenty-something years of age, began to tell me about an opportunity that he thought ‘in his experience’ was a great investment. It occurred to me that the center of influence and wealth had shifted to a generation of people who didn’t have experience – they had never experienced hard-times and couldn’t comprehend a cyclical bust.
“All systems and controls from the smallest to the largest banks were being overturned by a fashion wave. It was time to get out,” says Gale.
In return for Double Impact Incorporated, Gale agreed to accept US$87 million in stock with an escrow period of two years. US$500,000 was paid into his account along with US$4 million in stock as a deposit, but the full deal was never consummated.
“The market turned and the sale of Double Impact died as a result. We wrote off our investments and shut down Double Impact. I then started up San Francisco based Gramercy Venture Advisors with long time business partner Steven Marder and spent 2000 and 2001 helping other companies clear up their messes – for fees, of course, rather than stock. This business helped us to grow Gramercy and make it a success quickly.”
Gale moved backed to Australia in late 2001 to establish an Australian operation for Gramercy.
As for the future, Gale is optimistic.
“Good investment opportunities are hard to come by and there is a lot of capital stuck in non-growth markets. I am starting to see competition between VCs, which is a good sign. Australia has yet to produce a global technology company, of the likes of Nokia, Sun or Microsoft.
“Like the athlete who gets bronze in the Commonwealth Games but can be trained up to win gold at the Olympics, we’ll be looking for an Australian company that has proven its worth locally, but has the potential to really find its strength in the US,” says Gale.