Magazine article Management Today

E-Mail from the Valley

Magazine article Management Today

E-Mail from the Valley

Article excerpt

Like many internet entrepreneurs, I suspect, I am re-reading Burn Rate, the account by Michael Wolf of his adventures in the early internet years. Wolf, formerly and now again a journalist, was briefly in the mid-1990s an internet entrepreneur.

Most people have forgotten that the internet bubble burst once before, in 1997, when Yahoo! traded down to a value of $300 million and analysts questioned whether internet companies would ever make money. Burn Rote is set during this trough. And it is as dismally appropriate to the mood in early 2001 as The New New Thing, Michael Lewis's book about hyper-entrepreneur Jim Clark, suited the exuberance of a year ago. Burn Rate is the more educative book, with lessons for the naive entrepreneur that are as powerful as they are obvious.

First, internet businesses can be as miserable as any other small business. During the internet boom, capital was on tap, like free beer at a party. Entrepreneurs could play table football, and brainstorm. From The New New Thing, one would have thought that business was about changing the world, one sector at a time.

The backbone of Burn Rote's plot is the race to raise investment, with seven weeks to go before the cash runs out. Wolf's account of his presentation to an investor conference, a facade of confidence hiding growing panic, makes me anxious just reading it. And it's a particularly relevant story now. One of our partners, a small firm with strong technology, had those ambitions. But it is out of cash. The founders are physically worn. I doubt they sleep. They cannot meet the next payroll.

The lesson: most internet businesses are small businesses, and as such are usually just a step away from bankruptcy. And that is no fun.

Second, venture capitalists are not always your friends. Wolf's lead backers, Patricof in NewYork, dug up clauses in their investment agreement to squeeze Wolf out of the company. At the time I assumed it was because they were New York financiers, and sharks by definition -- true technology investors were collaborative and supportive. Now I realise that investors are creatures of the markets. For all the rhetoric about long-term, through thick and thin, many act more like mezzanine investors, calculating the likelihood of a successful IPO rather than the intrinsic value of a business. With the markets frail, these VCs are under pressure -- their ruthlessness is a function not of personality but of the market. …

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