Burn Rate Read online

  My idea, in early 1993, for the Internet was a New York–type of idea, a media idea. It wasn’t about technology. It was about entertainment and service.

  A guide to the Net. NetGuide. That was a concept.

  People in the publishing business who had not tried the Internet—and no one had—could get enthusiastic about that!

  It was so clean and pure and self-explanatory and just right sounding that even I started to believe in it, even though (a) precious few people could get onto the Internet, (b) most of those who did could not make it work anyway, and (c) if you could get on and if you could make it work, all you’d find were pages and pages of computer text.

  But the notion of this medium—being able to access all the world’s libraries, to post a message and have unknown people read it, to send e-mail—bred a contagious enthusiasm. You wanted it to be more than it was. The early days of television were a powerful fantasy and impetus. Inventing a new medium was the kind of opportunity you never thought you’d have. More than anything you could do, more than any endeavor you could undertake—politics, business, technology—inventing a new mass medium would impact the world we live in.

  NetGuide appeared in book form in January 1994, little more than six months after the release of the first web browser and the beginnings of the World Wide Web. NetGuide contained more than two thousand reviews of various offerings on the Internet. It also contained an offer for fifteen free hours online, an 800-number, and an offer of assistance (“no question too dumb”).

  Other than the stray Nazi who phones at 3 A.M., I know how difficult it is to get America to call you up.

  The first call came on January 2. “Hello? Is this the Internet?” Forty thousand more calls came into our six-man company over the next few months.

  The zeitgeist, though, is an unreliable business partner.

  Jann Wenner, with Rolling Stone, created a magazine that made its readers feel that every other reader was hipper and druggier and had a better record collection than you. Hugh Hefner created a magazine that made you feel that everyone else was having sex but you. And Louis Rossetto, in Wired, created perhaps the most exclusive (or excluding) magazine of all. Its challenge was, Do you get it? Can you get it? Can you even follow the type on this page, you linear so-and-so?

  In addition to articulating the interests and style of a digital mind-set and demographic group, Louis also articulated a marketing approach. What you were buying, what you felt compelled to buy, was the notion that Louis, and the rapidly growing Wired magazine staff, knew more than you knew. They understood something that you didn’t understand. They had a feeling for the future, which you didn’t have. The fact that this knowledge basis was not profit producing was judged to be irrelevant by the marketplace. You had to understand the future, you had to step into the future, you had to be part of the future before you could make a buck off of it—or so the market seemed to be saying.

  This became, first for Wired, and then pretty much for every other Internet-associated business, the basic economic model. You are as valuable as your vision.

  Louis and Jane (subtly transformed from Parisian gamine to Bay Area power babe—flowing hair became tight cropped, long skirts became short, swaddled arms became bare and muscular) returned to New York to deal with the issue of a growing staff, exploding ambitions, and an ever-widening shortfall of cash. With a circulation of under one hundred thousand, large portions of which were unpaid, they began to look for new investors. They told potential investors that they believed the four-issue-old Wired was worth $20 million. In other words, if you invested $1 million, Louis and Jane would give you 5 percent of the Wired company. The discrepancy between the value they placed on the business and the value that a traditional financial analysis would place on a magazine with Wired’s revenues was approximately 20 to 1.

  “It’s not even something that you can pretend to take seriously,” said Christopher Meigher, who had just left one of the top posts at Time Warner to start a magazine investment fund.

  But Louis was unwavering. Evidently, doubt was not in his emotional makeup. There’s something compelling about someone who can’t see or even sense doubt. Such certainty sells.

  “Louis will never compromise,” said Jane, proudly. It was a stance that was thrilling to her. To me, too, I confess. It was playing chicken on a grand, and financially tantalizing, scale. It was heroic. It was.

  Condé Nast, the magazine arm (Vogue, Vanity Fair, the New Yorker, Glamour, Brides, etc.) of Advance Communications, which includes one of the largest national newspaper chains, cable stations, and, until recently, Random House, sat down with Louis. Condé Nast had few, if any, technology resources. The media industry in general had shown only a limited interest in how personal computers fit into the editorial (aka the “content”) business.

  Condé Nast invested $3 million for 15 percent of Wired.

  The investment had a fascinating ripple effect. It meant Wired could stay in business and pursue its ambitions. It validated Wired magazine and Wired’s business plan (“I certainly wish we had bought it,” said Walter Isaacson, in retrospect, from Time’s fabled thirty-fourth floor). And it contributed to making “validation” a part of every other money-losing cyber business. If you could find a “name company” to give you money, then the fact that you were losing money was okay.

  The way the Wired enterprise began to grow was awe inspiring. The awe came from the realization that such transformations are, apparently, possible. Louis could go from lost soul to fearless mogul, Jane from ditziness to great stature in the publishing and advertising industries—all in a year and a half!

  “You know,” said someone in our office who went out to Wired for a visit, “it feels more like a cult than a business.”

  This appraisal was only partially negative. To achieve cult status in your business life, that is, to have sucked people in to your thinking and aspirations and sense of identity and working style, often makes a lot of business sense.

  Wired was speaking to people. And people were really listening. In February 1994 we placed an ad (gratis) in Wired for our book NetGuide. Not only was the response astounding, but it was global: for as much as a year afterward that single ad was causing people around the world to call us up.

  I think I can accurately trace Louis’s motivations in the cyber business. In the beginning he wanted to come to the U.S. from what had turned into, no doubt, something of a godforsaken exile in cold and small-time Amsterdam. No one would have hired him, so he had to come with an idea of his own. His idea for a magazine about technology and culture was taken up by a group of wealthy technologists and futurists, a community in which he was comfortable (and there weren’t too many communities Louis would be comfortable in). When Wired started to work, Louis began to believe that he was, more than just putting out a magazine, bringing the components of a new philosophy together in a way that no one had before. That he was, really, performing a public service. This was not about getting rich. In fact, when you’re as exposed as Louis was, at such emotional and financial risk (few entrepreneurs ever really are, except the crazy and bankrupt ones), you’re mostly concerned with downside rather than upside, survival rather than, as the bankers say, “exit strategy.” But then there’s this other group that jumps into the picture—the people in it for the money. They’ve gotten into the business, at least in part, because Louis and Wired articulated the need and demonstrated the market for the Internet and digital products. These people, and they tend to be primarily professional moneymakers—for instance the venture capital firm Kleiner Perkins Caufield & Byers, which backed Netscape and Excite, or Sequoia Capital, which backed Yahoo—got to the money sooner than Louis did. They began to develop their strategies for getting to the money in early 1995, just at the time Wired was swelling to a vast cult proportion (I saw a thousand people, at least, in a downtown San Francisco ballroom writhing together at Wired’s second anniversary party in the kind of sexual and electric atmosphere older Bay
Area denizens were likening to the age of the Fillmore) and passing two hundred, on its way to three hundred, employees. At this time, in fact, Louis was still, in many ways, anti–the business. He was still a critic. He was still the judge, and he was not very free with his approval.

  Louis was late out of the gate by the time he started to focus on the possibility of vast cyber riches. The IPOs had been going for a year already: first the hardware infrastructure IPOs, then the software IPOs, then the search engine IPOs. They’d gone out or they were in place to go.

  Because Louis was motivated by a sense of mission and truth and certainty and superiority, his plan for Wired’s embrace by the public was, well, operatic.

  The stage was certainly set. Goldman Sachs, the Rolls Royce of the Street, was the underwriter. Wired was the most recognizable brand name in cyberspace. In addition to Condé Nast, Wired’s investors now included WPP, the world’s largest advertising agency, and Burda, the big German publisher. What’s more, if, as some investors were starting to suspect, valuations were now being derived from multiples of losses, well then, Wired’s losses were as large as any in the business—to date, more than $40 million! Goldman and Wired set a value of $450 million for the company, nearly twenty times the value it would have had if it had not been an Internet-related business, that is, if it had been just a hot magazine. At that price Louis would have been worth, personally, $70 million. That irked a lot of people.

  There was something, people said, about Louis, something that started to make investors feel that he was rubbing it in their faces. Reports were coming from the Wired road show—presentations before financial analysts, brokerages, funds, and other groups that make a successful IPO—suggesting that Louis’s hauteur and hubris were in full flower.

  “He wears sneakers,” people said.

  The sneakers were just the symbol, of course, of wider-ranging annoying attitudes. If Louis were twenty-four and wearing sneakers, that would be one thing. But Louis was forty-six and wearing sneakers. He was as old as the average fund manager, who was not wearing sneakers.

  More damaging, people started to say Wired wasn’t really an Internet business. It was the magazine business, the publishing business. It was content. It wasn’t software. A money-losing software business with a good brand name and the chance to be number one in its category could be worth twenty times its revenues. A money-losing content business, even one with a good brand name and chance to be number one in its category was maybe, on a fine day, worth one times its revenues.

  Still, it wasn’t just one of those things that didn’t work, that didn’t manage to “price,” to find investors willing to pay what Louis was asking. Rather, the possibility that Goldman Sachs would fail to complete a high-profile IPO was so remote that Wired’s withdrawn offering had to be a bellwether moment in the history of the Internet.

  The signal was not necessarily clear—did it mean that the Internet was over or just that content companies were screwed? Or was it just the inevitable development that hubris would be humbled?—but it was loud.

  Through the summer Wired got ready to do another offer. This time cooler heads were in charge, more realistic goals were set. This time Louis only wanted $250 million.

  Again, Wired hung over my head. If it “went out” successfully, then it would be good weather for our business; if not, it meant big storm clouds.

  “Well, what happens, hypothetically,” I asked our investment banker, “if Wired doesn’t get out the second time around?”

  “You don’t want to know,” our banker said. “You really don’t.”

  Chapter Three

  The Board Meeting

  The cyber newsroom in our offices on Madison Avenue and Fifty-third Street—in fifteen thousand square feet of prime real estate that I’d bartered for Web advertising space (of which we had unlimited amounts)—was similar to a conventional newsroom except that it was outfitted in T-1 lines and staffed by people, most well under the age of twenty-five, with baseball caps and dramatic piercings.

  At the head of the newsroom was a large, glassed-in conference room which created a zoo effect when bankers and investors arrived, the staff curiously eyeing the suits and the suits amused by the staff. Each group was slightly threatened by the other but satisfied that barriers existed and precautions had been taken to keep them apart.

  In August, shortly after I returned from the conference in Laguna Beach, the board and its advisors gathered in relative good humor for our monthly meeting around the long table in the glass conference room. Fancy sandwiches were provided.

  There were, however, reasons to feel less than sanguine. Our new electronic products were three months behind schedule and well over budget. As the balance sheet stood now, we would not be able to make next month’s payroll.

  Six months earlier, the investors at the table had provided more than $4 million to the company to finance an aggressive business plan. According to this plan, we would take their money and spend it as fast as possible to build brand, gain position, stake out beachfront property in this new cyber landscape. And then we would cash in. We would provoke, as the bankers described it, a “liquidity event,” turning our equity from a dreamed-of value into a river of cash.

  It was the belief of the board that our company, with revenues of slightly more than $1 million and losses of about $3 million, was worth, in a down moment, at least $60 million. If we could hit the market right, match ourselves with a buyer with, in banking terminology, a real “hard-on” (or, conversely, a buyer who had “gotten pregnant”), we’d get over $100 million.

  The fact that we would run out of money within six weeks, while of nagging concern to me, was a situation against which the bankers believed they could apply a “corporate finance solution.” This might involve a “bridge,” a loan until the next investment came in, a “mezzanine fix,” investors brought in before the company goes public, or a “country club round,” money from individual fat cats.

  If I could only have banked this rich new lexicon, a kind of poetry of money in motion, I would be a rich man.

  The presiding poet was Robert B. Machinist, the president of Patricof & Co., one of an elite group of investment banking and venture capital firms in Manhattan. While he and I had, in an unlikely intersection, gone to college together, our paths had diverged in substantive and comic ways. He had achieved an air of fabulousness, with a kind of hollandaise richness, even Robert Maxwell ripeness; he wore bespoke suits and had a large stride and a fleshy imperious face with Robert McNamara slicked-back hair. He was a sportsman (racing cars), a paterfamilias (of four!), and a philanthropist (the largest giver, by a factor of ten, in our college class, his name was on the letterhead of scientific institutes). To me, he stood at the pinnacle of his life and times and was certainly one of the most confident and dominant individuals I’d ever met.

  He was accompanied, always, by his factotum, a boyish banker in significantly cheaper suits who worked the calculator and yawned widely and helplessly when he was not performing a ciphering task. (The factotum had spent his early career at Drexel Burnham and would often compare cyber deals to Drexel transactions: “This is really nothing, you know.”)

  The factotum, in turn, was most always accompanied by his own factotum, one or another of a group of hardworking women in even cheaper suits.

  Joining the board meeting for the first time was our company’s new executive vice president (EVP) for marketing, a buttoned-down Wharton classmate of the senior factotum, who had been brought by the bankers to the world of new media from a career in packaged goods marketing at Procter & Gamble. He was part of the plan to bring professional management into our company and to the Internet. Certainly, the mention of P&G, as unrelated to the Internet and cyber world as any business could be, seemed to have a salubrious effect on the investment community; even Microsoft was hiring P&G men. It was no secret to anyone, apparently, that marketing was the secret.

  Taking his seat, too, at the conference table was
the investor. He was brought into the deal by the bankers as dumb money, to supply the additional funds we needed to flip the company, or trade up to a different class of professional investor.

  The investor, a young man named Jon Rubin, a wire-thin, almost feminized JFK Jr. look-alike, had been raised between New York, the Colony in Malibu, and Washington, D.C., where he continued to maintain residences. His father, Miles Rubin, who controlled a large part of the designer blue jeans market, was a major Democratic Party power whose name surfaced and disappeared in the Clinton campaign fund-raising reports.

  Rubin junior had made several investments in Internet companies and showed up at the important conferences. One of his other companies, First Virtual Holdings, offered an online payment method. Used frequently by online pornography vendors, First Virtual, with revenues less than our own, was planning to go public before the end of the year. Rubin seemed hungry to be a part of this new industry.

  Rubin was accompanied by his technology advisor, an intense, praetorian-guard type in a T-shirt. (“I’m not here to interrupt,” the advisor would often interrupt, “I’m here to help.”)

  Rubin, while being played for a fool, I suspected, by the bankers (“If you don’t know who the fool is in a deal, it’s you,” they cautioned merrily), was working hard to get his head around this new era of communication and technology. He was not, however, detail oriented, and I was mindful that while the bankers’ plan seemed to be for Rubin to put an additional round of capital into the deal, there was no precise commitment from Rubin regarding our impending cash crisis.

  Board meetings were much more relaxed than I thought they’d be. There was a strong sense of self-congratulation. We had achieved something, and our primary job was to get the company’s name in the paper. A recurring issue, in fact, was our lack of success in finding a public relations firm (or, really, my reluctance to pay for one). There was now a proposal before us from an agency in San Francisco that was said to be as tied into the industry as any, an agency that was notable for the fact that all its employees wore identical dress, creating a slightly unnerving Heaven’s Gate effect. They proposed to take us on as a client (they rejected, they claimed, most potential clients) for $40,000 per month.