I
The interest rate cuts in the fall of 1998 marked the transition from the boom stage of the speculative bubble to euphoria. The peak of a speculative mania is a sight to behold. In the scramble to cash in before it is too late, all prior reasoning, sentiment, and knowledge count for naught. Only the twisted logic of the market matters. “I have enquired of some that have come from London, what is the religion there?” Jonathan Swift, who lived in Dublin, wrote during the South Sea bubble of 1720. “They tell me it is South Sea stock; what is the policy of England? the answer is the same, what is the trade? South Sea still; and what is the business? Nothing but South Sea.”1 Alexander Pope, when he wasn’t lamenting this “miserable mercenary Period,” was busy speculating with the rest.2 Sir Isaac Newton, after selling his South Sea stock early in the year, reentered the market at a higher price and ended up losing twenty thousand pounds. Edward Harley, whose brother Robert founded the South Sea Company, described the atmosphere in London in colorful terms: “The demon stock jobbing is the genius of this place. This fills all hearts, tongues, and thoughts, and nothing is so like bedlam as the present humor which has seized all parties, Whigs, Tories, Jacobites, Papists, and all sects. No one is satisfied with even exorbitant gains, but everyone thirsts for more, and all this is founded upon a machine of paper credit supported only by imagination.”3
The parallels between the South Sea bubble and the Internet bubble are striking. According to the historian Edward Chancellor, who supplied the quotes above, a total of 190 “bubble” companies were founded during 1720, of which four survived. The epic stage of the Internet bubble lasted from October 1998 to April 2000. During that period, more than 300 Internet firms did IPOs. At the end of 2001 most of them were still alive, but the attrition rate was high. During both speculative episodes, the sight of rising prices destroyed people’s judgment. In 1720, Englishmen openly referred to the new companies as “bubbles,” but that didn’t prevent them from venturing to the City of London and handing over money. As the poet Edward Ward wrote:
Few Men, who follow Reason’s Rules,
Grow Fat with South-Sea Diet,
Young Rattles and unthinking Fools
Are those that flourish by it.4
During the Internet bubble, similar reasoning was at work. Most people knew that Internet stocks were overvalued, but they couldn’t resist joining the speculative horde, which, in many cases, included their friends, neighbors, and family members. All across the country, Americans who thought of themselves as sensible, upstanding citizens had watched their cousins and coworkers and even, in some cases, mothers-in-law making big profits on stocks like Excite, Yahoo!, and Amazon.com. “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich,” Charles Kindleberger, the MIT historian of financial manias, used to tell his pupils.5 Refusing to buy Internet stocks, which had at first seemed to be a matter of mere common sense, was turning out to be costly and embarrassing. The most respected voices at the local parents association or poker group were those that had bought Internet stocks back in 1995 and 1996, while the voices of caution were being laughed at. Should there be another wave of speculative madness, as people like James Cramer were predicting, many people who had previously remained on the sidelines were determined to join in.
II
In late October and early November 1998, Internet stocks shot up, none more dramatically than eBay. The online auctioneer had been the only Internet firm to go public during the international financial crisis. On September 24, 1998, Goldman Sachs issued 3.5 million eBay shares at $18, and the stock closed at 47 3/8, a first-day pop of about 160 percent. This sterling performance amid an investor panic reflected the widespread fascination with eBay’s Web site, on which everything from Beanie Babies to tropical islands was being sold to the highest bidder. EBay was one of the few online ventures that exploited the Internet to provide a service that couldn’t otherwise have been provided; and it was also one of the few Internet IPO candidates to have recorded a profit: $215,000 on revenues of $14.9 million in the first half of 1999.
Pierre Omidyar, a thirty-one-year-old Silicon Valley entrepreneur who left France when he was six, founded eBay in September 1995. According to many media accounts of the firm’s genesis, Omidyar was motivated by his girlfriend, who complained that she didn’t have enough trading partners for her growing collection of Pez dispensers. Randall Stross, in his exhaustively researched book eBoys, tells a fuller and more convincing story.6 During a previous incarnation, as the cofounder of Ink Development, a company that made software for pen-based computers, Omidyar oversaw the development of a back-end system to handle sales and accounting. In 1995, he decided, on a whim, to write some software that would allow people selling things online to conduct an electronic auction. He posted the service on a home page, which he called www.AuctionWeb, and let people use it for nothing. Omidyar didn’t do any advertising, but word of his new site spread, and by the end of 1995 it was getting a couple of thousand hits a day.
In February 1996, Omidyar started charging sellers a small fee. Within a few months he was taking in $10,000 a month, which represented the commissions on the sales of fishing lures, coins, rare magazines, golf clubs, and all sorts of things. He left his day job, changed the site’s name to eBay, and recruited a partner Jeff Skoll, a Canadian-born engineer, to help him run it. In the continued absence of any marketing, the number of listings was doubling every two months. In the fall of 1996, Omidyar approached Bruce Dunlevie, a VC he had worked with while he was at Ink Development. Dunlevie was now a partner at Benchmark Capital, a newish firm that had been founded in 1995. Dunlevie introduced Omidyar to one of his colleagues, Bob Kagle, who, after some initial reluctance, agreed to invest about $5 million for a 20 percent stake in eBay.
The $5 million turned into the best venture capital investment of all time. In early 1998, Meg Whitman, a senior executive at Hasbro, the toy manufacturer, agreed to join eBay as chief executive in preparation for an IPO later in the year. Whitman had never heard of eBay, but its growth rate impressed her, and so did its business model. Unlike Amazon.com and most other e-commerce companies, eBay had no inventory or shipping costs. It really was a purely virtual company. It brought the buyer and seller together, charged the seller a commission of between 1.25 percent and 5 percent, then left the two parties to sort out how to get the auctioned good from point A to point B. As a result, its gross profit margins were about 90 percent.
One of Whitman’s first jobs was to hold a bake-off of investment banks for the job of managing eBay’s IPO, which was scheduled for September 1998. After a lackluster presentation by Morgan Stanley’s team, which was led by Mary Meeker, Whitman chose Goldman Sachs. In August, as Omidyar and Whitman set out on the inevitable investor road show, the Russian financial crisis erupted. There was some speculation that the stock issue would have to be postponed, as many others had been, but Goldman pressed ahead. EBay’s story was so compelling that investors were willing to listen to it even during a panic. More than a million people had now used the auction site, and a dedicated community of users had grown up. At any one time, about 80 percent of the traffic on eBay came from repeat visitors. By the end of the road show, Goldman was confident it could sell the 3.5 million shares eBay was planning to issue several times over. On the evening of September 23, the shares were priced at $18, valuing eBay at $700 million.
The following morning, before Goldman had handled a single trade, Mary Meeker issued a strong buy recommendation for eBay, an unprecedented move for an analyst at a rival firm. In a report initiating coverage of the new stock, Meeker wrote: “EBay is defining a new market that pulls together many of the key attributes of the best Internet companies: content (created by users), community, commerce, unprecedented broad-based links between buyers and sellers of goods, and, importantly, fun/entertainment/thrill of the hunt.” And Meeker went on: “EBay’s market opportunity is huge.”7 When the stock eventually opened, the first trade took place at $54. Later in the day, the stock fell back slightly, but at the closing price of 47 3/8 eBay was valued at almost $1.7 billion. When the overall market stabilized in late October, the stock rallied strongly, boosted by more buy recommendations. On October 26, Jamie Kiggen, of Donaldson, Lufkin & Jenrette issued a twelve-month price target of $100. The stock surpassed that milestone in ten days. On November 10, Michael Parekh and Rakesh Sood of Goldman Sachs raised their price target to $150, and the stock jumped 27 15/16 to 130 7/8. At this point, eBay had a market capitalization of $4.6 billion, and Benchmark Capital’s stake was worth more than $900 million.
Also on November 10, stock in K-Tel International jumped 8 5/8, or 75 percent, to 20 1/4. After surging to over $40 earlier in the year when it had announced plans to sell music over the Internet, K-Tel’s stock had collapsed during the summer. But investors were now snapping it up again because Microsoft Network had agreed to feature K-Tel on its shopping channel. With Internet stocks rising again, the investment bankers quickly relaunched some of the IPOs that they had been forced to postpone over the previous couple of months. Every big bank on Wall Street was now competing for Internet business. If Morgan Stanley and Goldman Sachs turned a company down, it could go across town to Credit Suisse First Boston (where Frank Quattrone and his team were now based, having moved on from Deutsche Morgan Grenfell), Merrill Lynch, or any of a dozen other firms.
On November 11, Veteran’s Day, J. P. Morgan issued 2.1 million shares in EarthWeb, a New York–based Internet company that published information online about the computer industry. Jack and Murray Hidary, two brothers from Ocean Parkway, Brooklyn, founded EarthWeb. In the first half of 1998, it had lost $5.3 million on revenues of $1.9 million, but that didn’t matter to investors. The eBay offering aside, EarthWeb’s Wall Street debut was the first chance for investors to get in on an Internet IPO for months. The stock jumped from $14 to 48 11/16, a rise of about 250 percent, the second biggest first-day gain ever, behind Broadcast.com. On paper, the Hidarys were worth $65 million each.
Two days after EarthWeb’s IPO, Bear Stearns issued 3.1 million shares in TheGlobe.com, an online community that two Cornell science majors, Todd Krizelman and Stephan Paternot, formed in their dorm room in 1995. Like GeoCities, which had gone public earlier in the year, TheGlobe.com encouraged people to set up home pages on its site and hoped to make money by selling advertising. The first part of the strategy worked pretty well. When it filed to go public, TheGlobe.com had more than 2 million members. But advertising remained scarce. In the first nine months of 1998, TheGlobe.com’s revenues came to just $2.7 million, and it lost $11.5 million. Even on the Internet, losing $4 for every $1 in revenue was notable.
Bear Stearns was a new name to Internet IPOs. The firm only got the opportunity to take TheGlobe.com public after several more established firms turned it down. Bear’s investment bankers were determined to break into the Internet business, regardless of the risks. In October, they were forced to postpone the IPO because they couldn’t find enough buyers for 3.1 million TheGlobe.com shares. A month later, after hurriedly resurrecting the stock issue, they were rewarded for their recklessness. This time, they had more than enough buying interest. On the morning of November 13, a Friday, Bear issued the shares at $9 each to its most favored clients. It then faced the tricky task of trying to maintain an orderly market when trading started. There was a massive imbalance in buy and sell orders. Tens of thousands of small investors had placed orders to buy TGLO “at market,” which means at whatever price the stock is trading at when the order gets filled. Professional investors usually place “limit orders,” which stipulate a price beyond which they won’t trade, but many of the investors trying to buy TheGlobe.com’s stock were new to the game, and they didn’t realize the risks they were taking. In these circumstances, Bear’s traders found it difficult to establish a floor for the first trade. Whatever price they indicated—$20, $30, $40, $50—was too low. CNBC reported that the first trade might be at $70, but even this proved to be a conservative estimate. After a lengthy delay, the first trade took place at $87—almost ten times the issue price. Even for an Internet stock, this was unheard of. Within an hour, the price had risen to $97. Everybody on Wall Street knew that this price couldn’t be sustained, and the smart money started to sell. “I sold my TGLO at 88—who wouldn’t?” Seth Tobias, a hedge fund manager, told TheStreet.com.8 Another professional investor who sold at $90 and made a quick profit of $65,000 said: “I’ve had days similar to this, but this definitely feels good.”9
As the professionals sold, the only purchasers were the individual investors who had placed orders to buy “at market” and were therefore buying blindly. By the close of trading, TheGlobe.com’s stock had dropped back to $63.50. Even at this price, the stock had risen more than 600 percent, by far the biggest first-day gain in Wall Street history. The New York Post hailed Krizelman and Paternot as the latest “net geeks” to strike gold—their stakes were worth about $50 million each on paper.10 This was true, but the real story was that the IPO market had veered out of control. On the following Monday, TheGlobe.com’s stock fell to $48. Within a week, it was down to $32. Anybody who had bought shares on the first morning and held on to them had suffered a big loss.
III
On November 17, 1998, just four days after TheGlobe.com’s astonishing IPO, the Fed cut interest rates again, from 5.0 percent to 4.75 percent. It was the third rate cut in six weeks—the sort of policy shift usually reserved for recessions. The American economy was growing strongly, but Greenspan was still worried about the financial markets, in particular the bond markets, where prices hadn’t fully returned to normal. “Although conditions in financial markets have settled down materially since mid-October, unusual strains remain,” the FOMC said in a statement.11 This was true, but in the stock market prices were straining in an upward direction, and Internet stocks were breaking free of any remaining ties. In cutting interest rates in such circumstances, Greenspan confirmed in the minds of many investors that he tacitly approved of what was happening.
Even the news that Netscape, the original Internet firm, had been forced to give up its independence didn’t stop the rally in Internet stocks. At the end of November, America Online announced that it was acquiring Netscape for $4.2 billion in stock. The deal marked the final submission in Netscape’s losing battle with Microsoft. In August 1995, at the time of Netscape’s IPO, the Netscape Navigator Web browser had had a market share of about 80 percent; now it was trailing the Internet Explorer. As a firm, Netscape was concentrating on other areas of its business, including its Netcenter site and its e-commerce division. One of the main reasons that America Online bought the company was because of its popular Web site.
Since mid-October, the tactics that Microsoft had used to overtake Netscape Navigator had been the subject of daily jousts in a Washington courtroom, where Judge Thomas Penfield Jackson was hearing United States v. Microsoft, the Department of Justice’s antitrust suit against Bill Gates’s company. The government had filed suit back in May 1998, accusing Microsoft of illegally exploiting its Windows monopoly to strangle Netscape. The legal details and ramifications of the Microsoft case have already filled several books, but its economic significance can be summarized quickly. Internet Explorer’s success demonstrated that many of the arguments used to rationalize the valuations of companies like Netscape, Yahoo!, and Amazon.com were deeply suspect. Microsoft had proved that in the Web browser part of the Internet economy, at least, the barriers to entry were low, and “first mover advantage” was a lot less important than deep pockets and overall clout in related markets. George Gilder’s 1995 suggestion that Netscape was going to break Microsoft’s grip on the computer industry now sounded like a bad joke, although Marc Andreessen tried to put a brave face on things. “This ought to be the preeminent Internet company over the next decade,” he told The New York Times the day after Netscape’s merger with America Online was announced.12 As it happened, Andreessen was to be proved correct, but neither he nor Netscape would have much to do with the success of the merged company.
On November 28, the Nasdaq closed above 2,000 for the first time. Since the end of September, it had risen by more than 500 points. Five days later, the next Internet stock on the Wall Street conveyor belt, Ticketmaster Online–CitySearch, reached the Nasdaq. Earlier in the year, CitySearch, a publisher of online listings, had been planning to hold its own IPO, but the summer slump in Internet stocks put paid to that idea. In desperate need of money, it turned to Ticketmaster Online, the online arm of the well-known ticket agency. Ticketmaster was part of USA Networks, the owner of the USA cable channel. Barry Diller, the Hollywood executive who had tried to buy Paramount Pictures a few years back, was now the chairman of USA Networks, and he retained an eye for a deal. In September 1998, Diller merged Ticketmaster Online with CitySearch and hired some investment bankers from NationsBanc Montgomery Securities to offload the combined company to the public. In financial terms, it looked like a disaster area, with revenues in the first nine months of 1999 of $27 million and operating losses of $57.4 million, but, being an Internet company, this didn’t matter much. The stock was priced at $14, and on the first day of trading it jumped to $40.25, a rise of 187.5 percent, valuing Ticketmaster Online–CitySearch at $2.7 billion. Given all of the recent competition, this was only good enough for fifth place on the all-time list of first-day gains, but it did lead some newspapers to resurrect their “Diller Sizzle” headlines.
It was getting difficult to keep track of all the Internet IPOs. During the two weeks after Diller’s coup, there were another six of them; uBid, Internet America, Xoom, AboveNet, Infospace.com, and audiohighway.com. Some of these companies were little more than clever names. Audiohighway.com, a California provider of downloadable audio content, had garnered revenues of just $87,000 in the first nine months of 1998—less than a busy newsstand would have taken in. There were now so many Internet stocks that special stock indices were being set up to track their performance. Dow Jones launched the Dow Jones Internet Composite Index, which included a broad range of Internet issues. TheStreet.com set up TheStreet.com Internet Sector. “In an emerging and dynamic industry like the Internet, TheStreet.com Internet Sector gives investors the opportunity to track, trade, and invest in the aggregate performance of the Internet sector’s biggest players,” Keith English, TheStreet.com’s chief executive, said in a statement.13
The new stock indices helped to maintain the illusion that the Internet was a regular business sector, just like the transportation sector or the drugs sector, with its own internal logic, metrics, and authorities. One of the latter was Henry Blodget, a thirty-three-year-old stock analyst at CIBC Oppenheimer, a small Wall Street brokerage owned by a Canadian bank. Blodget, a tall fellow with blue eyes and a shock of blond hair, was a Yale history major and a former fact-checker at Harper’s magazine who only turned to Wall Street after his journalistic ambitions didn’t pan out. He didn’t have an MBA, but he did have a genius for publicity. On the evening of December 15, 1998, he issued a $400 price target for Amazon.com. The stock had just closed above $242, a price most old-timers considered outrageous. In attempting to justify his $400 target, Blodget admitted that he was on somewhat shaky ground, since Amazon.com’s stock was already “incredibly expensive.”14 Nevertheless, he went on, “Amazon’s valuation is clearly more art than science, and we believe that the stock will continue to be driven higher in large part by the company’s astounding revenue momentum.”15 In its most recent quarter, Amazon.com’s revenues had tripled compared to the same quarter in 1997. Since launching its music store earlier in the year, it had sold more CDs than all other online stores combined. Blodget interpreted this as evidence that Amazon.com could become the Wal-Mart of the Web. If Amazon.com could replicate Wal-Mart’s 10 percent share of the discount retailing market in the $100 billion market for books, music, and videos, it would have annual revenues of $10 billion. Assuming it could also achieve a profit margin of 7 percent, it would earn $700 million a year. Applying to these earnings a PE multiple of 30, a relatively modest one for technology companies, Amazon.com would be worth about $21 billion, or about $400 a share.
Blodget’s arithmetic was sound, but everything else about his valuation model was suspect. In its latest quarter, Amazon.com had lost $50 million. The company’s capacity to generate any profit at all was questionable, let alone a net margin of 7 percent. Even the most profitable retailers, such as Wal-Mart, have net margins below 5 percent. Blodget’s timing was excellent, however. Three months earlier, Amazon.com’s stock had been trading below $100. Lately, it had rallied strongly as investors focused on its rapid revenue growth. On December 16, after Blodget’s $400 price target hit the news wires, Amazon.com’s stock jumped 46 1/4, to $289. At this price, Amazon.com was capitalized at $15.3 billion, almost as much as Sears. Things didn’t stop there. With the media full of stories about holiday shopping online, Amazon.com was getting even more free publicity than usual. Mary Meeker added to the fervor when, in an interview with Barron’s, she compared the firm’s rapid growth to the early days of America Online. In the first week of the New Year—less than a month after Blodget made his seemingly outlandish prediction—Amazon.com’s stock, which had just split three for one, topped $400 on a pre-split basis.
Blodget was hailed as a visionary. Jonathan Cohen, his rival at Merrill Lynch, looked more like a chump. A couple of days after Blodget’s attention-grabbing move, Cohen had described Amazon.com as “probably the single most expensive piece of equity ever, not just for Internet stocks but for any stock in the history of modern equity markets.” Unlike Blodget, who treated Amazon.com as a technology company, Cohen looked on it as a retailer, with the normal retailer’s task of managing inventory, distribution, and marketing expenses. Even the most successful retailers have relatively low stock market valuations. Wal-Mart, for example, had a market capitalization that was equal to about 1.5 times its annual revenues. Cohen believed that Amazon, which had lower costs than a bricks-and-mortar retailer, should trade at a revenue multiple of somewhere between two and four. Using this valuation model as his guide, he predicted that within twelve months Amazon.com’s stock would fall back to $50. Early in 1999, with the stock trading at more than $500 on a pre-split basis, Cohen resigned and moved to Wit Capital, an online brokerage. Blodget took Cohen’s old job at Merrill Lynch, whose senior executives were now determined to break into the Internet IPO business. In hiring Blodget, they were hoping to create their own version of Mary Meeker.
IV
“If there must be madness,” John Kenneth Galbraith wrote of September 1929, when the ill-fated Shenandoah and Blue Ridge investment trusts made their debut, “something may be said for having it on a heroic scale.”16 By the start of 1999, Galbraith, witty and articulate still at ninety, had his wish fulfilled. Henry Blodget’s rise marked the final defeat for the already depleted ranks of reason and common sense. In the middle of January, CBS.Marketwatch.com, a financial news site, went public. After being priced at $17, its stock jumped to $130, before closing at 97 1/2, a first-day gain of almost 500 percent. A few days later, At Home, the Kleiner Perkins start-up that offered high-speed access to the Internet, agreed to buy Excite, the Kleiner Perkins search-engine-turned-portal, for $6 billion in stock. Excite was the sixth most popular site on the Web, but it was still bleeding money. On January 28, Yahoo! announced that it was acquiring GeoCities for $3.6 billion in stock—a price that was more than 300 times GeoCities’ 1998 revenues of $18.4 million.
If these events had given Alan Greenspan pause, he didn’t let it show. At the end of January, during an appearance on Capitol Hill, Senator Ron Wyden, an Oregon Democrat, asked the Fed chairman how much of the Internet stock boom was “based on sound fundamentals and how much is based on hype?” This was how Greenspan replied to Wyden’s question:
First of all, you wouldn’t get “hype” working if there weren’t something fundamentally, potentially sound under it.
The size of that potential market is so huge that you have these pie-in-the-sky type of potentials for a lot of different (firms). Undoubtedly, some of these small companies whose stock prices are going through the roof will succeed. And they may very well justify even higher prices. The vast majority are almost sure to fail. That’s the way the markets tend to work in this regard.
There is something else going on here, though, which is a fascinating thing to watch. It is, for want of a better term, the “lottery principle.” What lottery managers have known for centuries is that you could get somebody to pay for a one-in-a-million shot more than the value of that chance. In other words, people pay more for a claim on a very big pay-off, and that’s where the profits from lotteries have always come from. So there is a lottery premium built into the prices of Internet stocks.
But there is at root here something far more fundamental—the stock market seeking out profitable ventures and directing capital to hopeful projects before the profits materialize. That’s good for our system. And that, in fact, with all of its hype and craziness, is something that, at the end of the day, probably is more plus than minus.17
The language was awkward, but the meaning of “the Fed’s gentle genius” (which is how USA Today described Greenspan a few weeks after he made this statement) couldn’t have been clearer if he had been filmed buying a hundred shares of Amazon.com: investing in Internet stocks didn’t just make sense; it was good for America.18
From an investor’s perspective, the key question was for how long the rise in stock prices could be maintained. America Online was now worth more than Time Warner, the biggest entertainment company in the country. Even the most bullish Internet analysts didn’t seriously attempt to defend this sort of valuation. The only way it could be rationalized was to think of Internet stocks as a parallel currency that was convertible to U.S. dollars on a one-to-one basis. When America Online paid $4.2 billion for Netscape, At Home paid $6 billion for Excite, and Yahoo! paid $3.6 billion for GeoCities, they didn’t pay with cash: they used their stocks as currency. In U.S. dollars, the prices paid were beyond reason. In Internet dollars, they made a certain amount of sense. Investors were valuing online businesses on the basis of how many eyeballs their Web sites attracted. By joining together, Internet firms could claim a bigger audience and, thereby, give their stock prices yet another boost.
Any currency that is expanded recklessly—be it the German mark during the 1920s, or the U.S. dollar during the 1960s—is sure to be devalued at some point, because investors will eventually lose faith in it. In the case of U.S. dollars, the Fed bank controls the rate of expansion, and it usually does a decent job of retaining the currency’s value. But the supply of Internet stocks was determined by VCs and investment bankers, both of whom had a strong incentive to speed up the printing presses, which is precisely what they were doing. If they were to keep this up, they would eventually flood the market, but for the moment this seemed like a remote danger. On February 10, 1998, there were three more Internet IPOs, each one representing a different aspect of the online dream.
Prodigy, the online service that IBM and Sears had launched with high hopes back in 1989, represented the inglorious past. In ten years, it had lost more than $300 million. Now owned by Global Telecom, an international telephone company, it could boast just 500,000 subscribers, and it had lost another $15 million in the latest quarter. Even in early 1999, marketing such a firm to the public was no trifling matter. Prodigy turned to Bear Stearns, which, following its success with the TheGlobe.com, was becoming known as the investment bank that did the deals others wouldn’t. Once again, Bear didn’t disappoint. It issued 8 million shares in Prodigy at $15 each, and the stock closed at $28.125.
VerticalNet, a Pennsylvania start-up that operated Web sites with names like adhesivesandsealants.com, testandmeasurement.com, and meatandpoultryonline.com, represented the boundless future. On Wall Street, and in the media, B2B (business to business) commerce was being touted as the next big thing. (Something had to be found to replace broadband communication, which hadn’t lived up to the billing.) The ever-optimistic Forrester Research was predicting that B2B commerce, which included the online sales of everything from steel ingots to printing paper, would grow to $1.3 trillion by 2003. VerticalNet seemed poised to exploit this growth trend, despite the fact that its 1998 revenues came to just $3.1 million. Lehman Brothers issued 3.5 million shares in the company at $16, and they closed at 45 3/8.
Healtheon, the third Internet IPO of the day, was very much of the present: it represented the IPO hat-trick attempt by Jim Clark, the founder of Netscape and Silicon Graphics. Clark started Healtheon in 1995 after he stepped down from running Netscape. From day one, it was a firm long on concept and short on marketable products. Michael Lewis, in his book The New New Thing, described how Healtheon started life as a blank piece of paper with a diamond on it.19 At the corners of the diamond, Clark wrote four words: Payers, Doctors, Providers, and Consumers. In the middle, he placed an asterisk. The asterisk represented the new company, which would somehow link the corners, representing a sixth of the American economy, in an online network. Armed with his Magic Diamond, Clark went to see the VCs on Sand Hill Road and announced that he planned to “fix the U.S. health care system,” a challenge that had recently bested Bill and Hillary Clinton.
Given Clark’s success with Silicon Graphics and Netscape he could have announced that he was going to commercialize space travel and he would have been inundated with offers of money. The only question was which VCs he would allow to back him. He chose Kleiner Perkins, which had backed Netscape, and New Enterprise Associates, which had backed Silicon Graphics. Using the VCs’ money, and some of his own, Clark hired some Indian software engineers and told them to get on with it. What the “it” was remained something of a puzzle, not least to Healtheon’s own employees, many of whom had no idea how the U.S. health care industry worked. When the Indians wrote their first piece of software, Blue Cross Blue Shield of Massachusetts declined to buy it. Other customers proved equally reticent. Nevertheless, in the fall of 1998, Morgan Stanley tried to take Healtheon public. It was a reuniting of the Netscape team, but given the international financial crisis, the timing was off. The Wall Street Journal didn’t help matters with a front-page story pointing out that many of the problems facing the health care industry, such as the rising cost of drugs, had nothing to do with the Internet—and, even if they did, Healtheon’s software wasn’t finished.20 At the end of October, after Clark and Mike Long, Healtheon’s chief executive, had traversed Europe and the United States on a disastrous investor road show, Morgan pulled the IPO.
Healtheon needed more money to meet its payroll. Clark was still convinced that investors would eventually see the magic in his diamond, and he put up another $20 million. At the start of 1999, with Internet IPOs soaring again, he was proved right. This time, Morgan Stanley didn’t even bother with a road show. It simply invited some big investors to Silicon Valley, where Mike Long delivered his spiel. Despite the fact that Healtheon had by now run through almost $100 million, this proved more than enough of a marketing campaign for the 5 million shares the company was planning to issue. On February 10, when trading started, the stock jumped from the issue price of $8 to $33. It closed the day at 31 3/8, valuing Healtheon at more than $2 billion and adding another chapter to the legend of Jim Clark.