Way back in August 1995, Netscape cofounder Marc Andreessen woke up at his usual time to find out that his company’s initial public offering had become the most successful ever on Wall Street.
Young Marc’s holdings had made him a millionaire fifty-nine times over as the stock shot up from $12 to $71 on its first day, closing at $58.25 — about double what the most optimistic experts had expected. The message to Wall Street and Main Street was clear: Goldmine baby, goldmine .
The day propelled the Internet Revolution into mainstream culture and marked the beginning of the dot-com craze. Analysts, investors, bankers, and average Joes could now somehow quantify the potential windfalls of the so-called ‘new economy.’
Place your bets
Why fly to Vegas, partake in life’s sweet vices and blow your retirement nest egg, when you can start a dot-com and make millions in an IPO? As the Internet revolution was still in its infancy, lookers-on drooled about the potential gains that the sector presented.
Suits or Khakis?
Thousands of freshly minted MBAs began to put together business plans in the hopes of attracting venture capitalists’ money to help their businesses grow, hoping to take their company public and offer shares to the masses, while making a tidy sum in the process.
The fact that the IPO made Andreessen into a celebrity also contributed to the craze. He became increasingly famous for both his instant wealth (can you say jackpot?) and his impact on society. Netscape was to have a great social impact, but it had yet to make money critics argue.
What are your eyeballs worth?
Most didn’t care. Entrepreneurs scrambled to register catchy domain names, setting up shop in the hopes of attracting users. Capture all these eyeballs first , was the thinking, and then eventually you can worry about selling something to them. Forget about profits my good man, this is Vegas, uhh, I mean Silicon Valley, after all.
Eventually, financiers realized that investing in twenty such projects could prove very lucrative even if only one such company would go public. Think about it, you have enough chips to fill up the Russian roulette table, so load them chips up real good because eventually, one of your lucky numbers is bound to come up.
As a result, investors filled entrepreneurs’ pockets to the point where their demands subconsciously increased. These expectations were implying that some of these companies would have to generate hundreds of millions of dollars in sales and profits, but no one seemed to take note.
Pardon my french
“Don’t get technical with the math,” said the dreamers. After all, the Internet was a magical innovation that would smash all previous business paradigms. Jump on the bandwagon fool, if you don’t, then expect this crazy train to roll you over.
So long stable, respectable companies. Dot-coms and fast cash, here we come…
I want my returns!
One by one, investors funded companies with no business model and inexperienced managers with poor execution skills. Increasingly, these companies were going public after months of unprofitable operations. Pets.com, DrKoop.com, you name it. Hell, that sock puppet in the pets.com Super Bowl was really cute, who cares if I would never buy pet food for $10 over the Internet, only to pay $25 for the shipping and handling. And Dr. Koop, hey, the man was a surgeon general, so just add a Chairman title to his PhD, and you get IPO billions; who wants millions, after all, this is Vegas, not your local underground casino.
Young business students were snubbing the traditional companies that they would have killed to get into in previous years. Goldman Sachs sounded so bland. McKinsey Consultant? McWho? And forget the traditional industrial firms that actually built things. So pass
No, no, everyone wanted to be a dot-com. Companies started to shed their three-piece suits for khakis and casual wear. But it wasn’t just the younger generations. Andersen Consulting Managing Partner George Shaheen also fled the established consulting powerhouse for WebVan, figuring that shipping groceries online would be his calling.
One by one, gray-haired executives jumped ship and joined start-ups. After all, even Netscape’s Marc Andreessen got to where he did because he embarked with the more-experienced Jim Clark and James Barksdale.
Clark, who had funded or co-founded previous successful companies, had 9.7 million shares of Netscape, making his worth about $566 million to Andreessen’s $59 million. Still, not bad for someone who was being paid $6.85 an hour as a student researcher when he was dreaming up the browser that changed the world.
A radical shift?
As time passed, market capitalization’s of the largest companies were being dwarfed by their sexier but unproven online nemesis. One significant moment took place the day that Charles Schwab, the pioneer of online investing, was valued higher than Merrill Lynch, the grandfather of investing.
Who could blame people to want a piece of this action? Salaries? Please, that won’t buy me a Porsche.
Can’t teach an old dog new tricks
But old habits die hard and experienced managers needed sound dental plans, not lava lamps. As time went by, the more experienced were missing the perks offered at their old jobs: the assistants, the expense accounts, the salaries, as well as the overall safety that established companies offer their employees.
Simultaneously, the markets were beginning to waiver. A key moment was the days before 3Com was to spin-off Palm, makers of the popular handheld device. While clearly not a dot-com, Palm was being valued at a greater valuation than its former parent.
Sounds risky, fugget ’bout it …
Fear: that sounds risky!
As things continued on their natural progression, investors began to step back to ask whether any of this actually made sense. It did not really. Look at most dot-com’s stock charts. It should come as no surprise that these stocks are trading at 5 to 10% of their all-time highs. Why? Because they were about 100 times overvalued to begin with.
So here we are, wondering what to do: join the established firms that have operated for decades, or go to the newer companies that have been founded by people who have been around for a couple of decades. It has to be easier than Vegas after all, right?
The answer has always been that business, unlike gambling, requires innovation, risk-taking, speed, luck, intelligence, and many, many other factors. Gambling only requires some of these factors. So play your cards how you see fit. I don’t gamble. Why? I can control only a few variables, and these are not the most important ones.
A lesson learned
So, did Andreessen play Russian roulette or was he a good businessman? Neither. Andreessen graduated in December 1993, left the project that was to become Netscape (originally called Mosaic) and moved to Palo Alto, where he took a job with a small computer security firm.
In a matter of weeks, the then 22-year-old programmer was tracked down by Jim Clark, the former Stanford professor who’d made a decent fortune founding Silicon Graphics in 1982. Clark, the businessman, had recently resigned from Silicon Graphics and was looking for a new challenge. This challenge was the technical whiz kid.
As Netscape was catching all the headlines, the firm eventually caught the attention of Bill Gates’ Microsoft, you might have heard of them. This epic “browser war” was too much for Netscape. The company lacked direction as it was simultaneously trying to be a browser company, an Internet portal and a software company serving the corporate market. Less than three years after its IPO, industry observers were speculating how long Netscape could continue as an independent entity. Not long apparently.
Ten months later, America Online acquired Netscape for $4.3 billion, casting Andreessen in a symbolic role at the new company, bringing to a close one of the most critical chapters in the modern history of Silicon Valley, but starting a new chapter, as this acquisition pitted Microsoft versus AOL.
So, what can we learn from Andreessen? Life is hard and business is even harder. You cannot allow yourself to become overconfident in gambling. But you must be twice as vigilant in the business world; the stakes are actually higher, the margin of error is lower, and unlike gambling, you actually stand a chance of winning.
Ash Karbasfrooshan is also the author of Course To Success, available at www.CourseToSuccess.com.