Burn Rate Read online

  Almost immediately, disbelief becomes absolute certainty. I thought I not only deserved what I was about to get but that I was being cheated out of more. Equally so, an investor, who is agreeing to pay sums not grounded in any logic whatsoever, believes—must believe—that he is cheating the entrepreneur out of the value that is rightfully his.

  After surveying the field of capital, Machinist zeroed in on our Investor, who represented not only check-writing capabilities but who had “an incredible hard-on. He definitely wants to be a big swinging dick.”

  At twenty-eight our Investor, using family funds, was dabbling in a variety of diverse businesses: helping the Clintons raise money, publishing inspirational books, selling steaks through the mail, developing micro-transaction systems for the Internet. He was thinking about making an investment in OUT, the upscale gay magazine, an association that was creating a minor disturbance among the folks at Patricof. “I actually hear he goes out with models,” said Machinist.

  Models were worrisome to me. “If he’s a coke head in a limo, we probably ought to know.”

  “And if he is, then what? The question is, Is it cheap money or expensive money? not Is it responsible money? That’s not our problem,” said Machinist, cutting me off at my naïveté. “He’s the good-looking son of a garmento, and he’s going to capitalize your business at approximately twenty times its book value. Period. End of story. That isn’t what you want? Tell me. Just tell me. You are the client. Would I prefer Michael Eisner’s money? There’s the phone. I’m sure Michael is waiting. Right now, we take this kid’s money because it’s there, it’s cheap, it’s stupid. We won’t have to do a huge due-dilly song and dance, which, quite honestly, you couldn’t perform. You run this business out of your checkbook! But it’s your business. Call it. Call it,” demanded Machinist, looming over me in his blue chalk-stripe Jermyn Street suit (“Dress British, think Yiddish,” he once mirthfully explained; indeed, there were no gentiles in his bank).

  “No, no. ”

  “Actually, I hear he goes out with Drew Barrymore.”

  In fact, Machinist was very pleased with himself. He was embarking on a financial strategy for catapulting our business to the heights of valuation—fairy-tale multiples of revenues—that was not dissimilar to taking a rock group up the charts. He was David Geffen, or Brian Epstein, or the Colonel himself. At times, I thought of him, with his dominating physical presence, as closer to Suge Knight, the menacing despot of Death Row Records. The process was about creating legitimacy, building image, spinning a story that would roll into a juggernaut.

  All investors are means to an end. But certain types of investors—ours among them—are a means to a better investor. This notion would not have insulted our investor. He understood that his money was supposed to be used to enhance the attributes of the company in such a way as to make it more attractive to a class of more professional, more businesslike, investors, who would pay a premium for such an enhanced enterprise.

  There is an implicit contradiction, however, in this model. There is the assumption that by putting his money in early, prior to a company increasing in value, our type of investor is smarter than the professional class of investors; equally, there is the assumption that he is too dumb to know any better.

  The professional investor possesses amounts of dispassion and caution because the money he has to invest is most often not his alone (he’s a professional and knows better, after all). If he invests unwisely, he’ll lose his job.

  Whereas our type of investor can invest in our type of company on the basis of good vibes or a good mood. He is not accountable. He can do what he wants, when he wants, wearing what he wants, behaving the way he wants. He is both childlike in his whims and parental in his control.

  The fact that our investor was a young man whose wealth and resources flowed from his father tended to reinforce the unbusinesslike nature of the roles and relationships. We were embroiled in family issues and interpersonal conflicts and generational rivalries.

  “This is the definition of opportunity,” explained Machinist. “In ordinary business terms, who would ever invest in this company? According to the information in front of us, there is no way for this company to be profitable, ever. This is the proposition you’re offering: ‘Give me five million dollars, and I’ll spend it.’ Not likely. But not impossible if what you’re saying is: ‘Give me five million dollars, and I’ll make you a different sort of person—cooler, smarter, sexier.’ ”

  The transaction with the investor is, then, by another name, a Faustian bargain. Taking money is not just a business exchange; it has broader implications and immensely more complicated strings. Even beyond a simple Faustian bargain, the investor wants not only my soul, but his own. He wants a reason for being.

  Our mission was to be out of here before we knew if the business was a hit or a flop. “We don’t want to be around when it’s time to find out if you can really sell advertising on the Internet,” Rubin had said to me when we were discussing the terms of his investment in our company.

  “I’m actually very confident about how online advertising is going to work.”

  “I respect your confidence,” he said, with a commanding cynicism that gave him sudden stature, “but I’m not prepared to take that risk. We’re going to let AOL or AT&T or a Baby Bell or TCI or the American public take that risk.”

  “Okay.”

  He struck me as, well, an opportunist. He was a young man who’d arrived on the scene just in time to take advantage of a situation. I understood, of course, that in business terms this is a laudable strategy and that opportunism is an admirable character trait. And I was relatively confident that as a good entrepreneur, I could balance my visceral dislike with my longer-term goals.

  Still, if you telescoped in on the personalities I had now surrounded myself with, I certainly had the sense that I was not going to get a lot of sympathy if I woke up with fleas.

  There was Machinist, whose manic grandiosity had suddenly filled my bank account with millions of unearned dollars. There were his functionaries, swarming all over our business as though it were a strategic industry beachhead (instead of the more or less profitable way that I passed my time). There was Rubin, a playboy investor (using his father’s money, no less) who seemed to genuinely believe he could multiply his money five or ten times in a couple of months. And there were his people, the world’s great experts in whatever they were supposed to be expert in by virtue of their association with him (he had a direct marketing expert who created and placed $50,000 worth of ads for us—embarrassing inflight-magazine-looking ads—that yielded $4,000 in sales), including his technology advisor, who sat in our office day in and day out, sphinxlike and oracular, and his lawyer, an angry, threatening, almost antisocial fly in the ointment (“If Jesse gets out of hand, let me know,” Rubin said).

  And then, of course, I had to deal with myself. I had become the passive capitalist. I was letting riches (or theoretical riches) just happen to me. I did not know enough to contribute much to this multiplying of value, and I was too human or greedy or entrepreneurial or fascinated to object. So I tried to do just what I’d always done, paying as little attention as possible to the fact that my staff of six was growing tenfold.

  “These are bad guys,” said Alison bluntly and enigmatically. I did not think she was making just a business point.

  “Are you speaking as my attorney or as my wife?”

  I don’t think she was entirely sure. “I’m speaking as your advisor.”

  “As my business advisor or as my moral advisor?”

  “I’m not your moral advisor.”

  “Listen—”

  “Yes?”

  “Let’s not pretend otherwise—”

  “All right.”

  “This is a get-rich-quick scheme. I can’t stand your disapproval. If it’s not something you can accept, let’s walk away.”

  “These people don’t have your best interest in mind, is what I’m saying.
”

  “They don’t have to. We share the same economic interest.”

  Her eyes narrowed. “Is that what they say?”

  “Yes,” I acknowledge sheepishly. It was something they say in the venture capital brochures. “Listen, if they can manage to do whatever they do, however they do it, and we can come away with enough money not to have to worry about mortgages, tuitions, vacations, parking garages—”

  Her silence was a powerful judgment, which I chose to ignore.

  Like those in a criminal conspiracy, I imagine, the relationships between partners in a speculative business—that is, one without real performance measurements and actual day-to-day business goals but one waiting for lightning to strike—change situationally and with perceptions of greater and lesser risk. So it went with me and my investors. Is it happening or is it not happening? Are people getting wise to us or are they even stupider than we thought? Oh shit, it’s the cops! We teetered back and forth between confidence and blame.

  When it was good, when my name was in the newspapers, when the stock market was enthusiastic about the Internet, when some other company like ours managed an impressive con, then we were a tight bunch, expansive in our regard for each other, dining in the Eurotrash cafés on East Fifty-fourth Street, considering our vast good fortune at having found ourselves in the cyber business.

  When it was bad, when I couldn’t beg a mention in the press, when the stock market lost billions in Internet value, when other companies like ours began to tank, we were two-bit punks, bickering, nasty, volatile, potentially violent (at least verbally so).

  For Machinist, if everything went well, we’d take the company public. That was the most ambitious scenario. That was hundred-million-dollar territory. Going public for a financier was like an election for a politician. Sure you could be appointed to a position of vast influence—secretary of state, the Supreme Court—but it was not the same as winning an election. One wanted the public’s acclaim and love.

  In some sense, Jon Rubin was more modest. He was wary of hundreds of millions. That seemed to him to be flying too close to the sun. Fifty million was where he was comfortable. He had a calculated plan, too. He wanted our company to be bought by @Home, the company founded by TCI, the cable giant, and Kleiner Perkins to bring the Internet into America’s homes via cable television wires. It was a plan he had spent a lot of time thinking about.

  The plan went this way: William Randolph Hearst III (“Will”), who had been running the San Francisco Enquirer, left his family’s publishing empire to become a partner in the venture capital firm Kleiner Perkins. Will Hearst had tried to strike out on his own before, notably when he started Outside magazine with Jann Wenner, twenty or so years earlier. Going to Kleiner was smart because Kleiner was arguably the most powerful and most lucrative financial concern in the Bay Area; it was on its way to being for the 1990s something like what Drexel Burnham was to the 1980s. Kleiner and its senior partner John Doerr were creating wealth nearly on the level that Drexel and Michael Milken had created wealth ten years before. More and more, Doerr was thought to be a combination of Milken and agent extraordinaire Michael Ovitz (before Ovitz went to Disney, no doubt a cautionary tale for Doerr, who often seemed to toy with the notion of becoming a CEO); that is, Doerr was a financier, fixer, net-worker, guru, all-around string puller.

  The company @Home was a classic Doerr creation. It wasn’t so much a good idea or a bad idea (it would work depending on how much money was spent); rather, it was, like an Ovitz blockbuster, so full of stars that it would be big even if it was bad. You had TCI, representing an almost unstoppable force in the cable industry; you had Kleiner, one of technology’s finest imprimaturs; and you had Will Hearst, who was, well, a Hearst.

  At Outside, Will Hearst had gotten to know Roger Black, who in the intervening years had designed and redesigned virtually every significant publication in the country. Roger, with a little critical interpretation, had designed the printed world. Recently, and somewhat audaciously, he had recast himself as a Web designer. Will Hearst brought Roger to @Home to oversee the look and feel and design of the new service.

  Roger was the nexus.

  While considering an investment in OUT, the upscale gay magazine, Jon Rubin had befriended Michael Goff, the twenty-nine-year-old founder and publishing whiz kid. Goff, who had previously been Black’s assistant and protégé, introduced Rubin to Black. In a kind of Kismet, or by the measure of two degrees of separation in the cyber business, Black and Goff and I had shared offices once and worked on a magazine project together.

  The myriad permutations of who worked for whom and knew whom in what previous life were becoming the Krazy Glue of the cyber business. My connection to Roger Black was then, I suspect, the deciding vote in Rubin’s decision to invest his money with us. Rubin believed that from him to me to Roger Black to Will Hearst he had forged the path to a transaction with @Home. The final step, the one that would be of highest value to him, was the step to John Doerr. Obviously, this made sense. If you were going to be in this business, one of your main activities had to be figuring out how to get to know Doerr. I was actually depressed not to have thought of this myself; not to have thought of John Doerr and not to have thought that my connection to Roger Black could be parlayed into gun range of Doerr made me question, once again, my drive and hunter’s instincts.

  Unfortunately, the two major variables in business (and life), personality and timing, played against Rubin’s plan.

  It’s a tricky proposition using someone as a bridge or conduit. Roger himself had built a complex network of business relationships based on a particular kind of elegance and charm and disinclination to take much of anything seriously. In other words, it was hard to pin him down. My own opinion was that Roger’s sense of social artifices and strategic subtleties was a New York kind of thing that didn’t play so well in the relatively flat-footed world of Silicon Valley engineers.

  Also, Jon Rubin was much too literal in what he wanted out of Roger. Jon Rubin wanted the deal, but he couldn’t keep up the banter. He grew too insistent; he snarled at Roger once too often.

  “Better be careful about crossing Rubin,” Roger said sotto voce to me, “or you’ll never wear designer jeans in this town again.”

  “Roger doesn’t come through on what he promises,” Rubin, son of the Polo jeans kingpin, said with a kind of surly disappointment.

  “Roger is more textured, more nuanced, more about long-term relationships,” I tried to explain.

  But Rubin held Roger against me.

  Then, in the fall of 1996 TCI let it be known that it wasn’t doing any more Internet investments. TCI, in a very rapid turnaround, had gone from deep believer in the industry to major sourpuss. The fact that John Malone, TCI’s chairman, no longer believed in the Internet was, for a moment, nothing less than terrifying. It would come to pass, however, that the Internet would rise, John Malone would begin to fall, and by spring @Home would have the most successful IPO of nearly any company ever. But few people are constitutionally able to think two seasons ahead. Jon Rubin, like everyone, did not want to wait.

  During the months I was spending his money, I tried to be attentive to Rubin’s mood swings. The pendulum went from omnipotence (a playboyish “I’ve got the world by a string” omnipotence) to an agitated paranoia (“Is there anyone who is not trying to take my money?”).

  In the arch of our board meeting, Rubin went through a transition from young man of artless charm to caged animal pacing behind the conference table. As he impatiently tried to determine the right technology strategy, he became annoyed that no answer was clear.

  I had yet to see him last for an entire meeting. For one thing, details—and especially details on top of details—crushed him. For another, he smoked, and after an hour he was jumpy and distracted.

  “Okay,” he said, coming to attention. “I’ll put another five hundred thousand dollars on the table.”

  “Do you want to do it as a loan or on
the same equity terms?” asked the factotum, calculator at his side.

  “I’d like to do it on somewhat better terms,” said Machinist.

  “Fine,” Rubin said, as though with equanimity. “Make me a proposal. I’m on my way to the airport. You can reach me tomorrow in L.A. at the Bel Air Hotel.”

  Chapter Four

  The Art of the Deal

  “Industries get organized in essentially logical ways,” Machinist expounded as we sat in his office reviewing the opportunities of the Internet age some four months before I was due to run out of cash. “What appears to be random is usually not. Monopolies are formed, brands created, behaviors defined, and consumers habituated as a reasonable expression of a variety of market forces.”

  In the beginning, there was the battle for the home page. The thinking was that people would elect a home page—that is, set their browser to open to the same Web page every time they logged onto the Internet—from a wide range of high-profile, well-advertised, nicely hyped sites, like Pathfinder or HotWired or, we hoped, our site, Your Personal Net.

  “What do you have for your home page?” Net people asked each other for a while (a while in the Internet business being a month or two), believing that your home page would be a personal statement, like what paper you took when New York had a multitude of dailies.

  But Netscape launched its browser late in 1994 and achieved “ubiquity” by making its software available free to everyone online. It was razor blade marketing: give away the razor and sell the blades. In an accidental turn of fortune, users neglected to pick their own home page. Instead, they passively opened to Netscape’s site (www.netscape.com), a page offering nothing but an advertisement for Netscape. This page quickly became the most visited site on the Net. Helpfully, Netscape pointed users to some of the indexes of Web sites, like Yahoo, a search site particularly favored by programmers and college students. There were other search sites that Netscape started to inadvertently promote, like Web Crawler and Lycos. These sites were hobbies, obsessions, academic exercises. But with a sudden torrent of Netscape-provided traffic, these search engines became the business.