Assessing the carnage

.container{ margin:auto; width: 700px; text-align:center;} .content{ text-align:left;} table{ margin:10px;} table td{ padding:3px;} A year after the Net bubble burst, blame game begins John Hagel, author, 'Net Gain' and 'Net Worth' By Rachel Konrad and Dawn Kawamoto Staff Writers, CNET News.com March 8, 2001, 4:00 a.m. Internet evangelists once boasted that the new medium would redistribute wealth, enable around-the-clock communication, revamp the industrial economy's supply chain, and otherwise change the world for the better. Today, historians are painting a far less flattering portrait of the era and its players--who, in turn, are engaged in an ugly game of finger-pointing aimed at placing responsibility as far from themselves as possible. Some are accepting responsibility for their roles in the fall of the digital economy, in hopes of avoiding a similar disaster in the future. But far more are blaming high-tech companies, industry analysts, Wall Street brokers, news media, and even the hapless individual investor for inflating the Internet bubble that burst a year ago Saturday. As all parties assess the damage wrought by the market meltdown, 20-20 hindsight shows some startlingly clear mistakes--beginning with a preponderance of money in search of investment, no matter how dubious the venture. Sizing up the market's swift demise A growing number of academics, analysts and executives are placing blame, cracking history books, rethinking careers, and otherwise attempting to determine how the Internet Economy went from boom to bust so quickly. The BankerSince the bubble burst, Tony Meneghetti's time is much less frenetic--not entirely by choice. The Angel Investor Steve Miller, who backs start-ups with his own money, saw his wings quickly clipped. The Venture Capitalist For Peter Morris, the bust has caused life to slow to a more reasonable pace. The EntrepreneurWhen the venture capital dried up, Charles Corbalis went through a funding nightmare. Dirty dozen Even the biggest tech names have proved to be no refuge for investors since the Nasdaq peaked March 10, 2000. Company 3/10/00 price 3/05/01 price* % change Yahoo $178.06 $22.19 -88 Gateway $62.50 $16.07 -74 Cisco Systems $68.19 $23.08 -66 eBay $96.63 $38.00 -61 Hewlett-Packard $73.47 $30.38 -59 Oracle $40.81 $17.00 -58 Sun Microsystems $47.09 $20.94 -56 Dell $51.25 $23.44 -54 Intel $60.00 $30.38 -49 Microsoft $101.00 $57.44 -43 Compaq $28.44 $20.07 -29 America Online $58.63 $43.80 -25 * adjusted for splits Source: CNET Investor Dot-com workers losing insurance when firms close Apart at the seams: Furniture.com a case study in e-tail problems Pets.com latest high-profile dot-com disaster AT&T shares trade near 1991 levels Dot-commers going from laid off to lounge lizard E-commerce loses shine in 2000 2000 marked tumultuous times for telecom companies Disney to shutter Go.com portal eToys files for Chapter 11 In sink-or-swim New Economy, how one company stays afloatThe Seattle Times Reeling from the dot-com falloutThe Seattle Times Lessons learned, sometimes too painfullyTechWeb Will consult for foodRedherring.com New low for dot-com workersE-Commerce Times Shop till you break $2 a shareThe Industry Standard Dot-com shakeout breeds feelings of paybackTechWeb Taking the burn out of flaming outThe Industry Standard End of the dot-com cultural revolution?E-Commerce Times My dot-com business mags have fallen on me and I can't get up!Salon.com CNET Tech JobsLaid off? Apply for a new job now .container{ margin:auto; width: 700px; text-align:center;} .content{ text-align:left;} table{ margin:10px;} table td{ padding:3px;} .f6 {padding:4px;} Sizing up the market's swift demise By Rachel Konrad Staff Writer, CNET News.com March 8, 2001, 4:00 a.m. PT Michael Goguen isn't afraid to admit he made mistakes in the bull-run days of 1999 and early 2000, when the partner at venerable venture firm Sequoia Capital served on 14 boards and pushed hordes of fledgling companies toward Wall Street. Reversal of fortune Most of the 10 best-performing tech stocks of 1999 have been pummeled in the past 14 months. Company 1999 % gain 12/31/99 to 3/5/01 % change Qualcomm 2,619 -64 BroadVision 1,494 -88 Metricom 1,416 -95 VeriSign 1,191 -75 ARM Holdings ADS 1,171 -65 BEA Systems 1,042 -0.4 DoubleClick 1,037 -89 Emulex 1,025 -51 InfoSpace 1,023 -93 Exodus 1,006 -67 * adjusted for splits Source: CNET Investor "All the VCs were throwing out money, competing to take companies public," Goguen said. "We got sucked in, like everyone else, to businesses that simply weren't real...We'd pat ourselves on the back and say, 'We got it, isn't that great?' Then six months down the line the company was a mess and we'd regret it." Few executives with high stakes in the technology industry are willing to admit that greed and ego fueled irrational choices, and in that respect Goguen's candor makes him stand out. But as the peak of the Nasdaq Stock Market approaches its one-year anniversary on March 10, when it closed at 5,048.60, a growing number of academics, analysts and executives are pointing fingers, cracking history books, rethinking careers, and otherwise attempting to assess how the Internet Economy went from boom to bust so quickly. Some, like Goguen, are examining their own roles in the debacle. Even more are casting an increasingly disdainful eye on almost everyone who contributed to the mania: day traders who gambled on obscure companies; midlevel engineers who cashed in stock options and retired at 29; Wall Street analysts who preached that "eyeballs," "stickiness" and price-to-sales ratios should trump profits; forecasting companies that predicted exponential growth in seemingly everything digital; and business publications that canonized the rich and gave others hope of striking similar fortunes. Finally, in what might be called a classic case of blaming the victim, many executives are criticizing individual investors for succumbing to greed and emptying their bank accounts to take part in the new Gold Rush, thereby helping to fuel an artificial boom. "The depravity of it all is what is so stunning," said Lawrence Haverty Jr., senior vice president of State Street Research, who likened the Internet boom to the savings and loan scandal of the late 1980s and early 1990s. "It will be remembered as a true, unmitigated investment tragedy." Haverty said the stock market losses for America Online, now AOL Time Warner, Yahoo and Amazon.com alone have erased $300 billion in market capitalization since the March 2000 market peak. That's roughly 10 times the market capitalization of General Motors, the world's largest manufacturing company by revenue. The silver lining From a purely practical, nonfinancial level, no one is denying the Internet's lasting benefits: E-mail has revolutionized communication; children can research school reports on the Web even if they don't have encyclopedias or live near libraries; and the homebound and elderly can become part of global communities, sharing their world with others of similar persuasion. In addition, consumers have bought items ranging from books to automobiles at deep discounts from e-commerce companies selling goods at a loss to build market share. But those discounts most often have come at investors' expense. And many skeptics are chalking up the boom not to the underlying technology surrounding the Internet, which they dismiss as no more significant than the dawn of catalog retailing, but rather to global economic conditions and timing. Ultimately, they say, the late 1990s Internet bubble will go down as a period of temporary insanity--an international giddiness no different from the Dutch tulip craze of the 17th century, when gullible investors paid $300 for a single bulb. And those who profited from the Internet bubble may largely be remembered as deft con artists or lucky fools. One favorite target of blame is the research companies and publications that spouted reports of virtually infinite growth. Typical forecasts from both Internet consulting companies and blue-chip consultancies showed growth of PCs, DSL access, online shopping, demand for ASPs (application service providers) and other areas shooting up at a 45-degree angle for a year or two, then ratcheting up to a 60- or 70-degree angle for the foreseeable future. "Hockey stick charts" In their defense, these researchers point to pressure from companies and others in the industry that pushed for higher numbers--projections so common that researchers gave them a nickname: "hockey stick charts." "We were all duped by this vision that it was only going up," said Berge Ayvazian, chief executive of The Yankee Group and one of the few researchers willing to openly admit his role in the frenzy. "We were actually criticized for being way too conservative in our estimates. We were under considerable pressure from Internet companies that wanted to use this to get more venture capital funding, to make this hockey stick even steeper." It was only in the past several months that forecasters seemed to catch wind of the changing economy. Like a technology company that can't meet its financial expectations on Wall Street for its next quarterly report, research group IDC issued a revised fourth-quarter report on PC sales in December 2000. IDC cut its original fourth-quarter projections about 10 percentage points, from 21.2 percent year-over-year growth to 10.2 percent. But even that proved too bullish. By mid-January, IDC reported only 0.3 percent year-over-year growth in fourth-quarter PC shipments in the United States. Such disappointing revisions, repeated in other sectors throughout the industry, have been a bitter pill for thousands of workers who took part in the Internet land grab--and they underscore another weak link in the digital economic chain, the over-reliance on stock options. In addition to research companies, the increasingly long shadow of blame cast by historians includes regular working stiffs, many of whom got greedy during the mid-1990s when the stock market took off on the longest peacetime bull run in U.S. history. Many came to believe they were entitled to vast sums of stock options that would be their ticket to fortune, or at least early retirement. Between 1992 and 1998, the compensation of the average CEO almost doubled, to $8.4 million, according to a survey of Fortune 200 companies by Pearl Meyer & Partners. And $4.6 million of that average--more than half of an executive's total compensation--was through options grants. In 1999 alone, the unexercised options of Intel CEO Craig Barrett were worth more than $100 million. From top to bottom Tech companies extended grants from the executive suite to the mailroom, typically offering thousands of options to midlevel employees and more than 1 million to senior executives. Employees of San Jose, Calif.-based Cisco Systems earned more than $7 billion exercising stock options in fiscal 2000. The media fueled America's fascination with options. A front-page article in The Wall Street Journal explained how Netscape Communications co-founder James Clark's secretary, D'Anne Schjerning, reaped $1.2 million in options while living in a San Jose trailer park. Other newspapers reported on a decision by Cisco CEO John Chambers to grant 1,300 college summer interns options for 500 shares if they returned after graduation. The dream that even secretaries and interns could get rich on stock options died last spring, when the stock market began a slide that largely still continues. At the close of trading Tuesday, the Nasdaq was down 56 percent from its March 10 peak. According to the preliminary results of a survey conducted in November by iQuantic, 50 percent of the option grants at 85 percent of companies are worthless because the stocks are trading below below their strike price--typically the closing share price on the day the options were issued. With the Nasdaq in a free fall, most options granted since last year are deeply underwater. To shore up flagging morale, Microsoft granted a total of 70 million more options to its 34,000 employees in April with a strike price of $66.63. But with the stock trading around $60, even the new options are underwater. "Stock options remain a great long-term opportunity," Microsoft CEO Steve Ballmer wrote in a December memo to managers, but "reality has set in--here and industrywide." That reality includes macroeconomic trends that allowed the bubble to swell unabated in the first place. Martin Fridson, director of global high-yield strategy at Merrill Lynch, who holds an undergraduate history degree from Harvard University, says technological breakthroughs "help to stir the pot" of a market frenzy, but an abundance of low-cost capital is the real catalyst. For example, when the French government began accelerating currency printing presses and the national bank dropped interest rates as low as 2 percent in the late 1600s and early 1700s, England and France entered a period of economic exuberance now known as the "South Sea Bubble." The idea, which seemed reasonable at the time, was that new, more efficient trade routes between the South Pacific and South America would create a commercial revolution for seafaring nations. Eager to capitalize on the boom, financiers reaped huge sums from ventures that seem absurd in hindsight: selling hair, developing a funeral home chain and importing walnut trees from Virginia. As interest rates dipped and more money was printed, developers even sold investors plans for a mysterious "perpetual-motion wheel"--an impossible, laughable device that uses less energy than it consumes in perpetuity. Investors became so crazed--and lost so much money when the bubble burst--that the British Lords Justices Council in 1720 abolished all companies trading in hair, funeral homes, walnut trees or motion wheels. Back to the future Flash forward roughly three centuries. Historically low interest rates in the United States throughout the late 1990s, combined with an Asian currency crisis and an increasingly dreary economic situation in Europe, inspired investors to throw cash at American ventures such as online pet-food retailers and dry-cleaning services. At the same time, because of banks' willingness to take risks they once would never have considered and an abundance of low-interest loans in the mid 1990s, consumers and businesses spent lavishly--even though the money was not their own. In the second half of the 1990s, tens of thousands of Americans bought houses for the first time, as well as cars and computers. By December 2000, consumer debt was $7.5 trillion, more than twice what it was in 1990. Corporate debt was $10.6 trillion. In 2000, the average American family owed more money than it made after taxes. As the perceived cost of capital dropped, modern investors needed a place to park their cash, and they became enamored with the idea that the Internet would revolutionize commerce. When those companies' IPOs resulted in stock prices that increased 100 percent, 400 percent or even 600 percent on the first day of trading, the venture capitalists cashed in--and the cost of capital became negative: Investors could make more money by selling shares after companies went public than they put into funding the companies to begin with. In March 2000, the British tabloids learned that even Queen Elizabeth was poking around the bubble, investing 100,000 British pounds in a pre-IPO company called Getmapping.com. (In a March 20 editorial, The London Daily Mail wrote an entire article about the similarity of the queen's newest investment to the South Sea Bubble: "The parallels are uncanny. An investment frenzy fuelled largely by hype.") As investors piled into Getmapping and thousands of other start-ups, venture capitalists threw money at entrepreneurs, business school graduates, high-level executives, rookie programmers--virtually anyone with a half-baked business plan scribbled on the proverbial cocktail napkin. It was a perfect environment for an economic bubble. "If the cost of capital gets low, you should expect a boom whether or not there's technology to be found," Fridson said, noting that the economy ebbs and flows, but such irrational gushes of capital usually come no more than once per generation. "That explains the infinite supply of IPOs." "Things got sloppy" The pace could not sustain itself. Although the 451 IPOs in 2000 posted average first-day gains of about 55 percent, the vast majority tumbled by year's end, to an average loss of 15 percent from the offering price, according to Thomson Financial Securities Data. "Last year, things got sloppy," admitted Bob Marshall, general partner for Selby Ventures, a group specializing in early financing of technology companies. "Everything was getting funding." It's hard to overstate how dramatically the pendulum has swung since the March 2000 stock market peak. Instead of attending lavish launch parties to celebrate companies going public, many workers in San Francisco and New York are instead bringing their resumes to pink slip parties. Executives are offering more cash to jaded employees, and human resources experts have generally acknowledged that the stock option frenzy--like the market frenzy that precipitated it--over-promised and under-delivered for the vast majority of employees. Today, boosters are reassessing the technology revolution in terms that are more realistic, if not downright humble: Rather than a brave new economic force, they say, e-commerce is just another way to peddle goods and services. Although cutting-edge technology companies captured headlines and investor imagination, the Internet Economy of 2005 will likely be full of old-world names that were largely ignored during the bubble--behemoths such as Procter & Gamble, Chevron, Coca-Cola and Boise Cascade. "At the end of the rainbow, is e-commerce a new kind of business? Or is e-commerce merely the way you gain competitive advantage in the brick-and-mortar world?" Ayvazian asked. "I think instead of tipping the apple cart, e-commerce will merely be one distribution channel...just like mail-order catalogs." Late 1999 Dec. 9: Shares in VA Linux Systems soar eightfold, the largest first-day gain of any IPO. Dec. 22: Microsoft's market value surpasses $600 billion for the first time, $100 billion more than the second-largest U.S. company, General Electric. Shares hit $118. Dec. 27: Time magazine names Amazon.com CEO Jeff Bezos Person of the Year. The 35-year-old "king of cybercommerce" is the fourth-youngest honoree, preceded by Charles Lindbergh, Queen Elizabeth II and Martin Luther King Jr. 2000 January: Margin debt--borrowing money from a broker to buy stock--jumps 7 percent to a record $244 billion. Jan. 23: Pets.com spends $2.6 million to tout its sock puppet icon in a Super Bowl advertisement. A dozen dot-coms spend an average $2.2 million for 30-second spots. Feb. 10: Pets.com IPO raises $82.5 million. Feb. 29: VA Linux stock sinks to 50 percent below the IPO price. March 6: Securities and Exchange Commission Chairman Arthur Levitt warns that investors are overly bullish: "Any way you look at it, many of today's valuations seem to defy traditional explanation." March 10: Nasdaq hits all-time closing high of 5,048.60. March 20: In an article titled "Burning Up," Barron's predicts at least 51 of 207 dot-coms will run out of cash within 12 months. CDNow, Secure Computing, Drkoop.com, Medscape, Infonautics, Intraware and Peapod top the list. Late March: Week-long sell-off in tech stocks knocks the Nasdaq down 300 points. April 3: A federal judge concludes Microsoft violated antitrust laws. Stock dips to $90 per share. April 14: A massive sell-off in tech stocks sends the Nasdaq and Dow to their largest point declines ever. April 25: Microsoft grants 70 million options with a strike price of $66.63 to 34,000 employees in hopes of boosting morale because so many options are "underwater," or worthless. April 28: The Justice Department asks a federal judge to divide Microsoft to prevent further abuse of monopoly. May 18: After six months of operation, Boo.com becomes first European e-commerce giant to close. June: Philip Kaplan, a 24-year-old would-be journalist, launches F***edCompany.com, including a "dot-com deadpool" where readers can place bets on when companies will expire. June 23: Shares of e-commerce giant Amazon.com plunge 19 percent and hit a new 52-week low of $33.78. Lehman Brothers convertible debt analyst Ravi Suria warns that "negative cash flow, poor working capital management and high debt load in a hyper-competitive environment will put the company under extremely high risk." Aug. 11: Online bargain bin Value America files for bankruptcy and lays off 60 percent of staff. When it went public in April 1999, the stock more than doubled. Sept. 11: F***edCompany goes up for auction on eBay because a torrent of failing companies has created too much work for its founder. Sept. 13: After collecting investments totaling $2.6 million over three months, spoof site Dotcomfailures.com fails. Oct. 10: London's Guardian reports Boo.com founders Ernst Malmsten and Kajsa Leander will get $189,500 to write a "warts and all" book on how they burned $120 million in a year. Nov. 6: Dot-com poster child Furniture.com axes 76 of 88 employees. Nov. 7: Pets.com closes retail operations, lays off hundreds of employees and begins selling assets, including URL and sock puppet rights. Nov. 10: First-ever "World Internet Forum," scheduled for Nov. 13 in London, is canceled for lack of interest. Mid-November: Nearly 130 Internet companies have failed since January, leading to 8,000 layoffs. E-commerce sites account for 60 percent of the casualties. Nov. 24: Day-after-Thanksgiving PC sales drop 18 percent from 1999. Late November: 50 percent of option grants at 85 percent of companies are underwater because stock prices are below strike prices. Early December: San Francisco and New York host pink slip parties for laid-off dot-commers. 2001 Jan. 1: William Shatner stops appearing in advertisements for Priceline.com, which paid "Star Trek" Capt. James T. Kirk with stock. His shares' value has sunk from $20 million to less than $200,000. Sarah Jessica Parker, star of HBO's "Sex and the City," replaces him. Jan. 3: Nasdaq gets boost after Federal Reserve cuts short-term interest rates by a half-point--the first boost in two years. Jan. 8: Hewlett-Packard CEO Carly Fiorina receives $3.7 million in her first full year at the second-biggest computer maker but gives back $625,000 because the company missed targets. Jan. 17: Apple announces a $247 million fiscal first-quarter loss--its first quarterly deficit since 1997, when CEO Steve Jobs returned. Jan. 25: A decidedly non-tech offering--Peet's Coffee & Tea--becomes the first IPO of 2001, with shares jumping $1.38 to close at $9.38. Jan. 28: E*Trade's Super Bowl ad features a chimpanzee riding a horse through the ghost town of Pimentoloaf.com, Tieclasp.com and other bogus companies. Chimp picks up sock puppet, sheds tear. The tag: "Invest wisely." Jan. 30: Charles Schwab asks some of its 26,000 U.S. employees to take Fridays off without pay to cut costs. An executive later rescinds the order, which "may raise some legal questions." Feb. 6: Ravi Suria warns that Amazon faces a "creditor squeeze" in the second half of 2001 and urges investors to "avoid" its bonds. "Obviously you can't take this seriously," Amazon's representative replies. Feb. 13: Federal Reserve Chairman Alan Greenspan delivers a sober assessment to Congress, saying economic growth is "stalling out" and America faces more "downside risks." Feb. 14: TheGlobe.com faces Nasdaq delisting for falling below $1 a share for several months. The community site jump-started the Internet IPO frenzy in November 1998, when its stock soared 606 percent. Feb. 22: Server and network software giant Sun Microsystems warns it may miss estimates by more than 50 percent in the third quarter--in contrast to the "Sun always rises" philosophy that guided investors for years. Feb. 26: Dot-com version of Monopoly sells for 63 percent off retail price during close-out sale at eToys, which files for bankruptcy. Compiled by News.com's Rachel Konrad. .container{ margin:auto; width: 700px; text-align:center;} .content{ text-align:left;} table{ margin:10px;} table td{ padding:3px;} Investment banker less frazzled, though not by choice By Dawn Kawamoto Staff Writer, CNET News.com March 8, 2001, 4:00 a.m. PT Life has been a double-edged sword for Tony Meneghetti. Two years ago, the 40-year-old investment banker was cranking out more than 20 initial public offerings and at least a dozen mergers a year. Today, his time is considerably less frenetic--but not entirely by choice. Although Meneghetti is happy that he can spend more time with his wife and two young children, the business slowdown would have occurred regardless of his personal wishes, as the entire investment banking industry has fallen victim to the dramatic decline of the Internet Economy. "My wife is happy with this balance. But she may not be as happy with the income at the end of the year," joked Meneghetti, a nine-year veteran of Deutsche Banc Alex Brown who heads the bank's West Coast technology investment group and oversees 50 people. Meneghetti's tale is one that mirrors those of hundreds of investment bankers, who have seen their world turned upside-down since the bubble burst almost exactly a year ago. Throughout 1999 and early last year, companies in existence only a year or two were going public in every corner of high technology. Some of Meneghetti's more prominent deals include Foundry Networks, which launched its IPO with a 525 percent first-day gain, and Transmeta, which soared 115 percent on its first day. But such wild success has come at a larger price, one of personal and professional values. "My favorite part of the job is taking a company public and seeing the management team's dream realized. But in the last few years, with so many companies being formed, it's been awhile since I worked with companies where the CEOs have been grinding away for four years or so before their vision is realized," Meneghetti said. "There is something to be said about good, hardworking values, and some of that has been lost on Silicon Valley. But I think it will come back," he added. "It's been frustrating to see over the last several years that some companies and employees believe a large net worth is a birthright. It's changed the way companies view they should build themselves up and employees' views on institutional loyalty." With a number of young companies looking to go public or be acquired at inflated valuations during the markets' ether period, investment bankers were busy competing to work with these companies in contests known as "bake-offs." "It was a heady time and one we're not likely to see again for some time. We had less time to get to know the companies, know the management teams and, conversely, Wall Street had less time too. It was too much, too fast and a bit unrealistic," Meneghetti said. "You had much less time to spend with one individual client, and it was less satisfying as a banker." The rapid pace also resulted in a high turnover rate in the banking business. Meneghetti, one of the senior bankers at his company, noted that bankers used to remain in the business for 20 years. The Internet explosion changed that pattern, luring his industry brethren to venture firms or private equity practice after they were just a few years in the business. Investment banking has seen the pace slow to a crawl in the past year, as both IPOs and mergers and acquisitions have declined. But Meneghetti welcomes the change: "I slept a lot less and saw less of my family. I had about five hours of sleep a night and caught a lot of red-eye flights." The financial veteran put up with the insane hours because he knew they wouldn't last. "Before 1999, if a banker worked on three IPOs and three or four (merger and acquisition) assignments, that was a solid year. We're returning to that pace," he said. "But so many bankers have only been in this industry three years, so they have the deer-in-the-headlights look. Those in the business awhile knew this would be an aberration." Meneghetti noted, however, that he expects the pace of mergers and acquisitions to pick up to pre-meltdown levels as company executives come to realize that their company values will likely remain at these lower levels for months. Even through the merger frenzy of recent years, a number of companies have avoided stock-swap buyouts in the belief that their share price was too low to waste as currency. In addition to advising companies on IPOs and acquisitions, Meneghetti consults businesses on such topics as secondary offerings, corporate debt and private equity. If his pace has slowed with the market decline, it's difficult to tell. His day, which begins at 6 a.m. with exercising and taking the kids to school, usually revolves around two or three meetings with new or existing clients in Silicon Valley, interspersed with phone calls with chief executives, venture capitalists and financial analysts. Hard work is nothing new to Meneghetti, who was initially exposed to technology not on Wall Street but in Silicon Valley, as an engineer. He made the transition while studying for a master's degree in science at the Massachusetts Institute of Technology. During the summer break after his first year at MIT, he joined Goldman Sachs as a summer associate investment banker. "I had been interested in math and science all my life and wanted to see what financial services was like. I was also interested in seeing what it would be like to work in New York and on Wall Street. I thought, 'I'm going to see if I like it or not,'" said Meneghetti, whose father was an economist for 30 years at a bank in Dallas. "I thought I'd do this summer job, go back to MIT and return to Silicon Valley as a product manager." That's when Meneghetti's career took a detour. "I liked the pace. I realized it was a great job for someone with a shorter attention span than what a product manager needed. The beginning and end of deals came in shorter periods," he said. "I left that job thinking, 'If I could combine finance and technology, that would be the perfect job for me.'" His wish came true in February 1992, when he joined Alex Brown, a banking company known as a specialist in technology before the merger that made it Deutsche Banc Alex Brown. The fit was as good as he had anticipated, as he views entrepreneurs as being similar to engineers: logical thinkers, goal-oriented people who share the belief that technology is definitely a cool thing. "These guys are like the ones I did problem sets with in engineering school," Meneghetti said. "We have similar interests and I can relate to them." .container{ margin:auto; width: 700px; text-align:center;} .content{ text-align:left;} table{ margin:10px;} table td{ padding:3px;} .f6 {padding:4px;} Angel investor saw his wings clipped By Dawn Kawamoto Staff Writer, CNET News.com March 8, 2001, 4:00 a.m. PT Where angel investors fear to fly Steve Miller, angel investor, Origin Ventures Steve Miller learned a lot about business while growing up in Chicago, spending many afternoons at the office-supply company his father and uncle founded. After graduating from the University of Illinois with a bachelor's degree in marketing, he joined the family's Quill Corp. full time in 1988. He went on to work in the company's marketing department, ran its Canadian distribution center, oversaw a line of office products, and eventually developed its e-commerce Web site. Then, a decade after he started, office-supply giant Staples purchased Quill in a deal worth more than $700 million in 1998. "I worked at Staples for six months and decided that the office-supply business, as exciting as it was, was not the field I wanted to stay in," Miller, 35, said with a sarcastic laugh. "The Internet bug had bitten me, and I wanted to be involved somehow. I could start a company, but I didn't have a great entrepreneurial idea and I knew I didn't want to work for someone else. "But one avenue that was attractive to me was taking some of the money from Quill's sale and investing in companies where I could use my experience in building Quill's Web site." So Miller became an "angel" investor--someone who lends personal funds to newly formed companies that need to bridge the gap between start-up money from family and friends to more formal venture capital. What he didn't realize, though, was how quickly his wings could be clipped. It was a period when the markets were entering a surreal euphoria as share prices soared, dot-coms were born on little more than a prayer, and valuations for these new companies were climbing into the stratosphere. "Little did I know a dot-com company valued at $10 million (before any investments) was the exception and not the rule. The investments I made then were more expensive than what I would pay now," Miller said. "I didn't know any better then and didn't know any differently because I was new at it." For Miller, 1999 and early 2000 were periods of extreme swings. "It was the best of times because there was a lot of excitement and opportunity, and the worst of times because not all of the companies deserved one-tenth of the funding they received, if at all," said Miller, who works out of his Chicago high-rise apartment and holds business meetings at a nearby Starbucks. Feeling that he lacked a firm financial background, Miller eventually teamed with Bruce Barron, chief executive of Molecular Geriatrics. The two created Origin Ventures, which invests around $500,000 in e-commerce companies in the Chicago area. The pair have invested in iNest, a Web site that features new homes for sale, and Home Director, a spinoff of the former IBM home networking solutions unit. Separate from Origin, Miller has personally invested in two more companies: VideoHomeTours.com, a video production business that showcases homes for sale on the Internet, and SchoolKidz.com, an online school-supply store. "I invest in what I know, and e-commerce is what I know," he said. "I know it's out of favor and people look at me sideways when I say I invest in the sector, but I believe there's still good opportunities out there in niche markets." In between those opportunities, however, Miller has felt his share of pain. As the market turmoil pushed stocks to rock-bottom prices, for example, he worked with two of his portfolio companies to secure additional funding--but one was not able to get an amount that was higher than the previous round of financing, resulting in what is known as a "down round." Investors prefer to have their companies receive higher valuations with each round, making their initial investments more valuable. "It was a choice of going out of business or doing a down round," said Miller, who declined to identify the company. "I still believe in the company and their business and where it's going. They're generating revenue and meeting their milestones. It's just a case of a difficult environment to raise funds." Moreover, he says, angel investors need to do more than just open their bank accounts to nascent businesses. "A good angel investor has contacts and the ability to roll up their sleeves to help a company get venture funding. And a good angel will also have good marketing, finance or operations experience," Miller said. "It's wrong and even detrimental to a company just to give money." And it helps to have a sense of humor to see you through the tough times. Miller, who once trained with the famed Second City comedy troupe, has retained his appreciation for the unconventional and the importance of persistence. "I was toying with the idea of becoming a comedian but didn't. But one thing I did take away from improvisational training was you learn to never say no, because the scene would just die," Miller said. "With angel investing, instead of saying no, I try to see if I can build on a kernel of opportunity." .container{ margin:auto; width: 700px; text-align:center;} .content{ text-align:left;} table{ margin:10px;} table td{ padding:3px;} .f6 {padding:4px;} Venture capitalist's sprint has slowed to a jog By Dawn Kawamoto Staff Writer, CNET News.com March 8, 2001, 4:00 a.m. PT If Peter Morris has learned anything from the Internet bust, it's this: Know how your client plans to make money. "The business model is the biggest change from last year," said the soft-spoken Morris, a 44-year-old venture capitalist with New Enterprise Associates. "We're looking for business models that are proven and not speculative--and that was what was lacking in the dot-com era." Truer words have never been spoken, but that wasn't the case a year ago. At that time, venture capitalists--the key players in setting the stage for financing as a company evolves from start-up to a stock offering or an acquisition--were used to taking a business public in a few years and cashing in almost immediately. Now, Morris says, that process may take as long as seven years. Venture capital firms receive investments from outside sources, such as wealthy individuals or "institutional investors" such as corporations, organizations and managed pension funds. This money is then placed into venture funds, which make investments in privately held companies with the hope that they will go public or be acquired--and thereby provide a profit. But this system works only if people are willing to invest their money in the first place. "I now spend about 15 percent of my time looking at new potential investments, as opposed to 25 percent a year ago, and I might have one board meeting a day instead of two or three," Morris said, describing how his workday has changed in the last year. Each partner handles about one or two new deals a year, compared with two or three deals per partner during the online Gold Rush. And the industry now considers 30 percent a normal return, rather than the 100 percent-plus gains that some funds were known to post. (New Enterprise, which has about $3 billion in assets, expects long-term returns of around 35 percent.) Though venture capitalists invested a whopping $68.8 billion into companies last year and far exceeded the $38.2 billion of 1999, nearly a third of that money flowed in the first quarter, just before the market began its precipitous fall, according to finance research firm VentureOne. Venture capitalists, as a result, closed their wallets over the next three quarters, a trend not seen for more than five years. And once-astronomic company valuations rose just 17 percent in 2000. As with all memorable events, Morris vividly remembers what he was doing on the day the Internet bubble burst. Morris was listening to a presentation by the CEO of a communications company, who was seeking an investment. The bucolic view outside his office in Menlo Park, Calif., was in stark contrast to the mayhem occurring on Wall Street. "I was seated at my desk and he sat across from me. From time to time, I would glance at my computer to see how the companies in our portfolio were doing," Morris recalled. "Suddenly, the conversation shifted from his business to, 'Oh my God, look at the markets.' Initially, he was offended until he realized the severity of the drop and wondered what impact it would have on his funding activity. I told him it was too early to tell. The difference between then and now is that we now know." On March 20, the Nasdaq closed at 4,610--more than a 188-point drop, or roughly 4 percent. Within two weeks, it plummeted nearly 400 points more over three days. Despite the free fall, some things haven't changed. Morris, who focuses on communications companies and is a director on 15 boards, bases his investment decisions on potential markets of at least $1 billion, a solid product that fits the opportunity, a management team of experienced entrepreneurs, and a proven business model. Morris still wades through three or four business plans a day and has yet to invest in a company that wasn't referred to him by someone he knew and trusted. He does, however, keep much closer tabs on the companies he works with. Morris, who brought in such successes as Juniper Networks, an Internet routing equipment maker that posted nearly a 200 percent gain on its market debut in 1999, says he visits at least two or three of his portfolio's companies each day. But he says it's the part of the job he thrives on. "As a venture capitalist, I'm a financial adviser, a backboard for strategic ideas, an executive recruiter and business development resource," Morris said. "But lately, I'm training and mentoring a lot more management teams than I did a couple of years ago, because you can't get lucky anymore." .container{ margin:auto; width: 700px; text-align:center;} .content{ text-align:left;} table{ margin:10px;} table td{ padding:3px;} .f6 {padding:4px;} Entrepreneur copes with aftermath of funding nightmare By Dawn Kawamoto Staff Writer, CNET News.com March 8, 2001, 4:00 a.m. PT Easy money. That's how it felt a year ago when Charles Corbalis started hitting up investors to finance his company, Calient Networks. Within weeks of founding the company in March 1999, Corbalis raised $6 million in his first round of financing. So he was in no rush to get more, thinking that financing would be the least of his worries in running a complicated business that makes software used in photonic switching systems. The second round, for $50 million, was secured in March 2000--just before the markets began their perilous slide. "The optical switching market was white hot, so it was easy to raise money on our terms," said Corbalis, chief executive of Calient. Then came the big drought, and investment money dried up as the markets took a nosedive. Like so many other technology entrepreneurs, Corbalis was caught off guard by the 180-degree turn in attitudes toward financing start-ups. "The money came too fast," he admits. "We had to sit down and figure out what to do with it." Stories like this are commonplace among dot-com start-ups with questionable business models, but the industry's investment shutdown pained all companies--even those run by people like Corbalis, who is considered the father of ATM frame relay switching and who co-founded StrataCom, which was later purchased by networking giant Cisco Systems for $4 billion in 1996. His formidable background undoubtedly played a part in Calient eventually raising $195 million, the largest amount of venture capital amassed in a single round by any company during the fourth quarter last year, according to research firm VentureOne. But getting the money was an arduous undertaking. Corbalis soon found he was pounding the pavement and constantly on the phone to keep investors together in the third round, though just nine months ago it took only one call. He would often spend much of the day calling corporate investors while trying to run a company whose operations spanned from San Jose, Calif., to Ithaca, N.Y. "In the second round, all we needed was one meeting with investors and a phone call to get the round locked in," Corbalis recalled. "But in the third round, we had some new strategic investors who would say something like they'd put in $10 million but the next week they'd drop it down to $5 million. We were sitting on pins and needles. We were trying to get those that committed to hold on while we got others committed." All of this taught Corbalis a valuable lesson. "The easy money of (early) 2000 gave me a false security. I didn't spend the time I needed with strategic investors so I could rely on them when the markets started to go south," he said. "I could have probably closed the third round a lot faster if I had spent more time up front with the relationship." That real-life education provides a strong incentive for Corbalis to succeed at Calient, which will be shipping its prototype software for early customer trials in the next few months. Corbalis says he is as motivated today as when he was president of engineering at StrataCom. After it was sold, he stayed on as vice president and general manager of Cisco's wide-area switching network business for two years before getting back into the entrepreneurial life with Calient. The experience has also carried personal meaning, as a way to deal with his fear of failure. "The hardest challenge is learning how to avoid letting it take over and rule your life," he said.

Assessing the carnage

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