Contribution: theglobe.com

Highlights of an interview with Todd Krizelman, Co-founder, former co-CEO of theglobe.com October 30, 2001

Many believe venture capitalists and investment bankers somehow caused the Internet mania of the late 1990s. While they certainly played a part, it was only a supporting role. Financiers are in the business of trying to find returns for their investors. In this context, they were not acting irrationally or immorally by pursuing investments in the Internet; they were simply doing their job. All financiers will pursue the highest returns and the Internet provided that. Venture capitalists, investment banks, and fund managers probably didn't act too differently in the Internet bubble than they have acted in the past. The biotech craze of the 80's comes to mind.

What did change dramatically was the public's perception of how easy running a company might be. The press glamorized Internet companies, made them look fun and created idyllic representations. Of all perceptions, it became common for people to believe they could create substantial wealth instantly. As a result, thousands of people actively left their jobs to take a chance being an entrepreneur. What they did not know were the difficulties running or working within a start-up.

Start-ups are high risk, even in the best of situations—and the role of the entrepreneur is equally as exhilarating as it is terrifying. It's as if disbelief was suspended in this time. During 1998 and 1999, many people with low appetites for risk, without good ideas and without experience, established new firms and raised capital. The result was a substantial decline in quality of new companies and a saturation of competition. This is a stark contrast to the earliest Internet companies. In the beginning, start-ups were mostly run by management teams with smart capital behind them. More importantly, there was limited competition, and the growth rate in Internet usage was rising sharply (making it cheaper and faster to find customers). This made it possible for companies to grow quickly and allowed room for mistakes along the way. Conversely, by the end of the century, usage growth was diminishing, user loyalties were already established, and the substantial competition caused the market to suffocate (think Thomas Malthus on population). This made it difficult for both bad companies and good companies to survive.

What made people forget about risk?

I think they looked at the press and saw time after time the press talking about some star that made tons of money, or how Jim Barksdale's secretary made a couple million. Those stories become pervasive. It is the American story. It's very Americana. Rags to Riches. And there was enough of that in the press that people said “You know what? I can be in any field and I can just jump into this Internet thing.” And I think this idea of low barrier to entry is a huge difference between the high tech and the Internet. In high tech in the past, like hardware and real software development, as well as in bio tech, as well as most of the fields you associate venture capitalists with, there's a real barrier to entry. If you didn't have experience in engineering you weren't going to understand it. You're never going to start Genetech unless you're a biologist with four years of undergraduate work and a Ph.D. So suddenly this new field comes along, where you can, by 1999, buy off-the shelf software to set up your own site. You have tons of companies trying to sell bandwidth, so it's easy to set up your business. And so because there aren't these barriers, a lot of people thought, “I can do this,” and I think a lot of people were probably very surprised.

Didn't giving stock options to employees imply get-rich-quick?

In the beginning that's what I thought. But you want to tell people that it's going to be bad. I liked to sensitize people before they were hired by saying, “I don't want to dress this up. This is going to be hard.” We were building a company that was going to be a long-term investment of their time. It was a very quick way to self-select in the hiring process. We were very selfish with the options—or I'm sure that's how it would have been perceived. But it was more than that. It was to enforce that we were building a culture that wasn't falling all over itself to get rich.

For us there was this fear of failure. When you start hiring 100 people, and they have kids and families and health care, this is your family. You don't want to screw over someone in your family. We wouldn't so much say, “We're going to fail,” but we would certainly tell them a lot about how the job actually would be. When you came to our offices you did not see fancy chairs. It wasn't highly decorated. Our first administrative person came in our fourth year. We really went a long way to say, even when we didn't have to be that way, even when we had a lot of money, “Let's still be paranoid and frugal.”

One of your early investors, David Duffield [founder and CEO of PeopleSoft], said “I can't honestly say I understand their products”—this was some time after he wrote a $2M check. This is someone early on who didn't understand the risks. What do you think led him to invest?

The article in which David was quoted was written in 1997. The company had been in business for three years at this point.

Most venture capitalists, especially with very early investments—some look at specific products—but most look at people—the quality of people, the team of people. That's our relationship with David and some of the other early investors. When you are dealing with very new technology and you have a passive investor, you want to be able to evaluate the integrity of the management team: Are they in a position to evaluate and see trends before they hit the mainstream? And that was consistent with our relationship with him. That was not a negative comment, especially in 1997 when the Internet was new enough that people didn't know in general how it was going to change society. They didn't know that the Internet was going to shift Dell's whole model online. You didn't know all these variables.

If you go back in 1999 and read The Wall Street Journal or The New York Times, you would believe that 50% of the U.S. GDP was being produced by start-up companies, based upon the amount of space they were allocated in The New York Times or The Wall Street Journal. That was the predominant topic. In the case of The Times, they actually added a new section, “Circuits,” just to accommodate it, in addition to still seeing it all over the paper. So I think a lot of people really did jump in during those years and, as a result. the price to run your company escalated, both to retain employees, to attract employees, and to purchase insurance. All the costs that are cost components into your business rose dramatically.

How did you go about selecting bankers?

As an entrepreneur, especially when you're doing an IPO, the prestige of your bank doesn't matter as much. When you're looking to raise $30–$50 million, you go to people who are going to get you public first, and who are going to charge least to do it. Those are the qualifications.

Some people say, “If you go with Merrill or Goldman this makes a big difference.” But in fact it doesn't make a big difference.

For those who believe that Merrill or Goldman are going to support your stock in the aftermarket, you're going to have a rude awakening. You're only important so long as you are the current client. As soon as you are the former client, it just doesn't matter.

What was the nature of their questions?

Research analysts egg you on to increase your numbers, but they don't tell you to change your model.

Did the institutional investors ask the right questions, knowing what you knew about the business and what your worries were? Did they serve their clients well?

I think for us, they did. I wonder if that was true for other companies. We went public in 1998, early in the bubble, so there was still a sense that there weren't companies going public every day. It was not a free-for-all at the time we went public. Some people spent a lot of time with us. Bankers were pretty thorough with us. Some invested. Some didn't invest. It was the way I would have imagined it being.

People would argue that these mutual fund guys just rubber-stamped a whole bunch of companies and got screwed afterwards. I didn't have that feeling at all. They were doing models on us, research on us. Certainly, at each mutual fund there were some about whom you said, “That guy was a great analyst,” and others, “This is just an average analyst.” But this kind of inconsistency is going to be in any environment.

Is there a fault anywhere among the key players?

I would certainly take the financial press and say, “These guys played a much larger role than I bet they believe.” This idea of the Fourth Estate was very powerful, as I'm sure you can imagine. For years we had about 10 articles a day coming out on our company. We thought long and hard about PR. It wasn't something we took lightly. We hired some good people.

We used the press because we thought it would be cheaper than using cash dollars in marketing. I assign financial press a different blame than just press. Press is under no obligation to be accurate or right, whereas the financial press does have some obligation to its readership to be accurate. We were spared the brunt of this inaccuracy. You saw a huge number of errors in the financial press. As well, you had the financial press taking an opinion that was consistent with this idea of, “How much is right?”judging for themselves what is right and wrong for companies. If the financial press didn't like your product, then you didn't have a company.

So I do assign some blame there. I also say that because there are some times when the financial press in the early days would say, “This is a great business. Got to buy in! Got to buy in!” and people would do it. One of the scariest things is that you have CNBC, who has investment fund managers to talk about what they like, and of course those fund managers are buying that stock, and they stand to gain by hyping.