Four years ago, a 26-year-old grad-school student decided he wanted to be an Internet mogul. His business plan was different from most of those that investors around town were drooling over. That is, he intended to make money soon.
Of course, the young businessman was laughed out of every venture capital office in town. So, like many others who were determined to stake a claim in the great dot-com gold rush, he turned to his own address book and hit up college buddies, childhood friends and family. He found 50 investors, got the money together and launched the Web site.
Now it is dying. He is running out of cash, and none is forthcoming. Today, he is hoping to sell what’s left of the business to whomever will buy it. For any amount of money.
“At this point, I’ll take just about any price,” said the founder, now 30, who has remained the company’s chief executive and driving force. “It’s just been beating me up for so long. I’m not giving up, but I’m not too confident. It’s a strange moment when you spend four years building a company, only to realize it might be worth zero dollars. It’s either worth $15 million or zero, and there’s a fine line between the two.”
But if he does find a buyer, he will face an even larger question than how much his company is worth: How much is he worth?
“What do you do if you’re the C.E.O. of a failed Internet company?” he said ruefully. “Where do you go?”
To another Internet start-up! That, at least, has been the answer in recent years, as entrepreneurs who have failed have routinely been rewarded with better jobs. It’s a twist on the infamous “Peter Principle,” by which people in an organization rise to their level of incompetence. Here, you shed incompetence by demonstrating it repeatedly.
From Wall Street to Silicon Alley, the consensus seems to be that as the dot-com shakeout continues, old economy employers will be deluged by packs of prodigal ex-entrepreneurs. A year ago the chief executive of a bombed-out dot-com may have had little trouble landing a better job, but now, as venture capitalists and the capital markets grow more discerning, the newly jobless hordes may soon overwhelm the market, making it difficult to continue failing upward. The masses will have to get back to failing sideways.
According to the Web site IPO.com, which tracks Internet start-ups, 70 companies have either postponed or withdrawn their applications to go public so far this year. While eight of those companies have already rescheduled, 62 (with a total of 30,580 employees) are still holding off. Without new cash to feed on, these companies won’t survive long. People who have cleared their wallets of all their obsolete business cards may have more trouble than in the past replacing them with new ones.
In the heady days of a 5,000-point Nasdaq, having a few failed Internet companies under your belt virtually guaranteed a higher-paying job with a souped-up title.
“It was like a badge of honor,” said New York high-tech headhunter Bonnie Halper. “It baffles me and I don’t understand it, but it’s true.”
Take, for example, Seth Goldstein. After launching SiteSpecific, one of the first on-line marketing companies, in 1995, the business was soon struggling. It was bought by CKS Group, and Mr. Goldstein went to start Root.net, a site serving mobile executives. That, too, failed. Mr. Goldstein moved on to Flatiron Partners, one of the most prestigious venture capital firms in New York, where he took up the mantle of Entrepreneur in Residence. Suddenly, he was near the top of the food chain. (Mr. Goldstein declined to comment on his career path.)
Or Justin Anderson, 25, who a year ago launched iCelebrate.com, an online purveyor of holiday gifts. He ran through $7 million ($5 million of it on advertising) in a matter of months, but couldn’t make it work. Just before iCelebrate.com’s crash, however, he landed a job as director of product development for another start-up. Now he’s making much more money than before. And the old-school companies are after him, too. “All the consulting companies won’t stop calling,” he said. “It gets annoying after awhile.”
Dara Khosrowshahi, president of U.S.A. Networks Interactive, has been surveying the wreckage from the dot-com shakeout, watching failed executives land plumb new jobs.
“People are having absolutely no trouble getting jobs out there,” Mr. Khosrowshahi said. “Tons of businesses are getting funded, and they have to hire people. People are finding the next thing. It’s like a big party. You know, from 7 to 9, people go to one party, and once the beer’s finished at that one, it’s time for the next one. It may be 1 a.m. right now, but it’s still going strong. And there’s plenty of alcohol left. It’s dried up at the B-to-C party, and the B-to-B party’s running low, but at wireless and broadband there’s plenty to go around.”
The phenomenon of failing one’s way to a better job may simply be a self-fulfilling prophecy, according to one manager at a high-tech recruiting firm in New York.
“Whether or not it was true that these people were valuable, it was the general belief that people were being driven by,” the manager said. “It’s bizarre, but it’s very true. And these days, what’s true usually doesn’t carry as much weight as the illusion of what’s true. If enough people believe the illusion, the illusion becomes reality.”
For a time, investors believed in the Internet community site Theglobe.com in a big way. The company’s co-chief executives, Todd Krizelman and Stephan Paternot, both 26, built up their content site for three years before staging a mind-boggling I.P.O.: The stock soared from $9 to $63.50 on its opening day, a 606 percent gain. At that point it was the biggest opening in market history. And so Theglobe.com guys became the poster boys for vast, instantaneous wealth, as well as the target for all the rotten envy hurled at them by their mere salaried peers.
But that was another era. Theglobe.com is a dying company. On May 15, its stock closed at just under $3. And Messrs. Krizelman and Paternot are failed leaders, having gobbled up cash in a doomed quest to build a business.
Mr. Krizelman and Mr. Paternot are still hanging around the company, although they will be stepping down as co-chief executives and are in search of their own replacement. Market analysts are speculating that the company is ripe to be sold. The founders’ fate is unclear. But they aren’t going to be canning salmon.
“In much the same way, if you create a really bad TV show, you’re probably set for life, because they’re going to let you create 20 more really bad TV shows, for whatever reason,” said Richard Patrick Sternin, president of the Greenwich Village high-tech headhunter Seven Staffing.
Eric Tenety, another recruiter, said that in today’s easy-come, easy-go market, a failed dot-com is no hindrance at all. “The truth is, it’s a pretty small world, and most industries are pretty intimate,” Mr. Tenety said. “If Billy Bob goes out to start Grapefruit.com and falls flat on his face, most of his colleagues in his industry probably know, and they might even say, ‘Wow! He made it six months! We thought he would only make it for two!’”
On May 8, Nick Hall, a veteran of several failed start-ups who lives in San Francisco, launched a Web site for the losers, called Startupfailures.com. It is, among other things, a place for failed entrepreneurs to bond over their misfortune. “My name is Sam,” read a May 15 post, “and I see your failure as an asset that is just as good as some superstar’s latest success.”
“So to each of you who have failed,” read another, “I say with my hand stretched out to shake yours, congradulations [sic], you in a cool club [sic]. You are now a member of the new elite, those that have had the power and authority to destroy your own company.”
Meanwhile, those that do not have the fortitude to continue failing upward, or downward, are scurrying back to the old economy jobs they gave up to strike out on their own.
“Three months ago, every twentysomething banker or consultant had a unique Series A business plan worth $15 million,” said Jonathan Lipton, 30, managing partner of Metropolis Capital Management, a venture capital firm. “Now that they’re begging for their old jobs back. I wouldn’t be surprised if their former employers require them to wear three-piece suits to work just to make a point.”
But success at reentering the job market, healthy as it is, may depend on exactly how much of a failure you are. As for the anonymous, 26-year-old entrepreneur who is looking for a buyer for his company, he is banking on the hope that his struggles will be valuable to another start-up. Someone who has made mistakes may have learned how not to make them again.
“You learn a tremendous amount because you kind of have to do everything,” he said. “You are exposed to so much pain and misery that I think it does make you stronger. And supposedly investors do respect the guys who have failed for that reason. But I think there are limits to that-especially if you’ve burned through a lot of someone else’s money.”