I
Power corrupts, and absolute power corrupts absolutely, Lord Acton said. On Wall Street, financial success corrupts, and absolute financial success corrupts absolutely. The corruption is not necessarily venal: it affects people’s judgment rather than their probity. In early 1999, the stock market was putting a negative value on caution and common sense. Since everybody involved in the Internet bubble—entrepreneurs, VCs, investment bankers, stock analysts, mutual fund managers, ordinary investors, even journalists—was reacting to the incentives provided by the market, these traits became harder and harder to find. Mary Meeker witnessed this process firsthand. An earnest and well-meaning woman, she found herself trapped in the internal logic of a speculative bubble that she had helped to create. Like many others, she eventually succumbed to this logic and did things that she would later regret.
Since Frank Quattrone and his colleagues had quit Morgan Stanley in 1996, Meeker had become the firm’s main weapon in the race to attract Internet IPOs. Every week, dozens of venture capitalists and Internet entrepreneurs got in touch with her, hoping that Morgan Stanley would agree to take their firms public. With Meeker’s reputation and Morgan Stanley’s sales force behind it, an IPO was almost guaranteed success. Inasmuch as Meeker was meant to be giving objective advice to investors, her role as an investment banker, which involved attracting and promoting Morgan-sponsored stock issues, left her in a hopelessly conflicted position.
In order to avoid such conflicts of interest, investment banks at least pretend to maintain “Chinese Walls” between their research and investment banking departments. As a research department employee, Meeker was not supposed to have access to any inside information from public companies, such as their future acquisition plans, which investment bankers often know about. If she did obtain this sort of information, she would be considered “over the wall” and, therefore, unable to write about the company. But since Internet start-ups are not public companies until their IPOs, Meeker was not breaking any rules by visiting them, pitching for their business, and helping them go public. In a typical IPO, she would advise the Internet company how to position itself to investors, accompany its senior management on at least parts of the road show, and then, a few days before the IPO, lecture Morgan Stanley’s sales staff about how to market the company’s stock to investors. Twenty-five days after the stock started trading, the minimum period allowed by law, she would initiate coverage, almost always with a strong buy recommendation. Even after the IPO, Meeker usually kept in contact with the firm and, again in almost all cases, she maintained a buy rating on its stock.
Meeker defended her dual role by pointing out that she turned down at least nine out of ten IPO proposals. Although she was widely portrayed as the champion of Internet stocks, that was somewhat misleading. Her list of recommended stocks was still short, and it consisted mainly of Morgan clients: America Online, Amazon.com, Yahoo!, At Home, eBay, VeriSign, and several others. Before Meeker would consider backing a company, it had to satisfy the three conditions she had always insisted upon for Internet investments: big potential market, sound management, and original product. In the early days, maintaining this discipline was easy. Meeker was the first to admit that many Internet enterprises didn’t deserve the public’s money. (Though she somehow made an exception for Healtheon.) As the Internet boom progressed, maintaining high standards or, indeed, any standards, became a lot harder. TheGlobe.com’s IPO was a turning point. Meeker refused to have anything to do with the company, then looked on astonished as Bear Stearns, a firm she didn’t even consider a serious rival, not only took the firm public but engineered the biggest first-day gain in history.
IVillage’s IPO, which took place in March 1999, was another milestone. The women’s Web site, which had fourteen “channels” covering subjects like relationships, health, and astrology, had been racked by management turmoil since Claudia Carpenter, a former executive at QVC and Time Life, founded it in 1995. In three years, iVillage had burned through more than $65 million. In 1998 alone it had lost $43.7 million on revenues of just $15 million. When Morgan Stanley turned down the opportunity to take iVillage public, Goldman Sachs stepped in and placed its reputation on the line. This seemed to have been a dubious decision when, a week before the IPO, one of iVillage’s four former chief financial officers accused the firm of using “inappropriate” accounting practices to boost its scant revenues. “Based on my experience at, and my knowledge of, iVillage, I would not be comfortable today being the chief financial officer taking this company public,” Joanne O’Rourke Hindman, who had previously spent twelve years working for The Washington Post Company, said in a statement.1 In other circumstances, such a charge, which iVillage strongly denied, could easily have derailed an unproven company’s IPO. But investors ignored Hindman’s allegations, and a relieved Goldman pressed ahead. A few days before the IPO was due to take place, the investment bank raised the estimated issue price to $22 to $24, from $12 to $14. On March 19, 3.65 million iVillage shares started trading on the Nasdaq. They jumped from $24 to $80, a rise of 233 percent, and at the end of its first day as a public company iVillage was valued at about $1.9 billion. Even by Internet standards, this was a stunning valuation for a troubled company that faced imminent competition from Oprah Winfrey and the Walt Disney Company. (Winfrey and Disney had both invested in a rival multi-media company aimed at women, Oxygen Media.) Carpenter was worth $80 million.
Meeker was stunned. “With every IPO the envelope is being pushed a little further and a little further,” she told a reporter from The New Yorker, who was working on a profile of her, a few days after iVillage’s Wall Street debut. “At some point you have to scream, Uncle.”2 These days, when Meeker went to see Internet entrepreneurs they weren’t content to make tens, or even hundreds, of millions of dollars in an IPO: they wanted billions. Many of them compared their firms to Yahoo! or eBay, which were now valued at $35 billion and $20 billion, respectively. If Meeker expressed any doubts about the prospects of achieving such a valuation, the entrepreneurs would choose another investment bank to take them public. “We are seeing the second generation of Internet entrepreneurs, and they have market cap envy of the Jerry Yangs and Marc Andreessens,” Meeker complained. “Their expectations are starting at a much higher level. The first generation was, like, ‘Hey, isn’t this great? I’m a billionaire. Well, that’s kind of embarrassing. What am I going to do with all this stuff?’ The next generation is saying, ‘Well, if he’s a billionaire, then I’ve gotta be a billionaire too.”3
It wasn’t clear how far Meeker was willing to go in her criticism. If she had really wanted to take a stand, she could have downgraded some of the leading Internet stocks, such as eBay, which was trading at about 1,600 times its revenues. This, Meeker wasn’t willing to do. Instead, she called up eBay’s Web site on her office computer. “There are 1.9 million items for sale,” she said. “At the end of December there were only a million. Not even three months, and traffic on the site has nearly doubled.” Meeker clicked on a few of the ongoing auctions, pointing out some of the unusual items that were for sale. “We’ve never seen companies grow this rapidly,” she went on. “There’s no doubt in my mind that the aggregate market value of the sector will be higher in two years than it is today. It’s just a question of which companies succeed and which fail. I think there will be only a couple of handful of companies that really succeed.”4
Meeker didn’t believe that eBay’s stock was worth 1,600 times earnings on a valuation basis, but she didn’t want to make the mistake of downgrading the stock and then watch it rise further. She had done that once before. Shortly after At Home went public, in 1997, Meeker decided to give its stock a neutral rating because it had risen so far so fast. When the stock kept on gaining, she looked silly. Things were a lot crazier now. She was constantly getting calls from major investors that wanted her advice about how to invest in the Internet. Even Fidelity’s Magellan Fund, the biggest mutual fund in the country, was buying Internet stocks. Henry Blodget, Meeker’s opposite number at Merrill Lynch, had just published a report in which he conceded there was a speculative bubble in Internet stocks but nevertheless advised investors to keep buying. “The overall Internet stock phenomenon may well be a ‘bubble,’ but in at least one respect it is very different from other bubbles: there are great fundamental reasons to own these stocks,” Blodget wrote. “The companies underneath these stocks are (1) growing amazingly quickly, and (2) threatening the status quo in multiple sectors of the economy.”5
Following his coup with Amazon.com, Blodget was now challenging Meeker’s position as the most widely quoted Internet analyst, and his report, which was entitled “Overview of Our Internet Investment Philosophy,” was an obvious attempt to challenge her intellectual leadership. Blodget conceded that Internet stocks had always seemed “absurdly expensive” on traditional grounds, but he argued that they were, nonetheless, valuable investments because of their practically unlimited potential. “When Yahoo! went public, it looked like the biggest joke in history—a list of Web sites with $1 million in revenue and a $1 billion valuation. Investors the world over (understandably) crowed about manias and insanity, but it was actually trading at an absurdly cheap 10X Q4 1998 annualized earnings. Investors who failed to ask themselves two questions—(1) how big the company could actually be, and (2) how fast it could get there—missed the boat. With these types of investments, we would also argue that the real ‘risk’ is not losing some money—it is missing a much bigger upside.”
As Blodget also pointed out, the laws of supply and demand, not revenues or earnings, were now determining the prices of Internet stocks. Despite the ongoing wave of IPOs, the supply of Internet stocks remained severely restricted. Most Internet companies still had only a small minority of their shares trading on the open market, with the rest still owned by the original investors. With so many people wanting in on the Internet stock boom and so few shares available to buy, there was only one way for prices to go: up. In such an environment, Meeker was wary about standing in front of an oncoming train. “I don’t want to be the Internet stock poster child,” she said. “At the same time, though, it would be easy for me to say, ‘Hey, based on traditional valuation methodologies these stocks are overvalued.’ They’d go down for two weeks and then go up again, because the money flows will continue to drive the sector.”6
II
In spite of her growing reservations, Meeker continued to play the Internet IPO game at an unrelenting pace. She had breakfast meetings, lunch meetings, dinner meetings, and she often worked through the night on her research reports. Cabin crews on flights between New York and San Francisco got to know her personally. They were the lucky ones. Trying to see Meeker was like trying to get an audience with the Pope. Every day, she received hundreds of e-mails and phone calls requesting her presence at company meetings, Internet conferences, and media interviews. Sumner Redstone, the chairman of Viacom, wanted to talk about his company’s Internet strategy. Morgan Stanley’s London office wanted her to come to Europe to discuss Internet opportunities there. Barbra Streisand wanted her investment advice. As Meeker looked back over the last year, she realized that for the first time in her life she hadn’t seen any of the films that won Oscars. She hadn’t even had time to watch the Oscars ceremony.
To take some of the strain off Meeker’s shoulders, Morgan Stanley had hired an investment banker from Robertson, Stephens, Andre de Baubigny, to act as her gatekeeper and emissary. While Meeker dealt mostly with Internet firms that were preparing for IPOs, de Baubigny sifted through the hundreds of hopefuls that were just getting off the ground. If a new venture showed sufficient promise, de Baubigny would advise Meeker to go and meet its management. As time passed, the quality of the firms that de Baubigny referred to Meeker went down. The reason for this was not hard to find. Most of the obvious ideas for doing business on the Web had already been exploited. Many second-generation Internet business plans were either derivative or downright loopy. Meeker knew this as well as anybody, but she wasn’t willing to leave the field to Goldman Sachs, let alone Bear Stearns and Merrill Lynch.
Even if she failed to land an IPO for Morgan Stanley, Meeker tried to persuade the company to do business with the firm later on. After her superiors barred her from pitching for the Amazon.com IPO, Meeker publicly supported Jeff Bezos’s “Get Big Fast” strategy and maintained a strong buy recommendation on Amazon.com’s stock, despite its massive run-up. “If Amazon.com executes to its plan, it’s a very powerful business,” she insisted in March 1999. “They are the online leader in books, the online leader in music sales, the online leader in video sales, and they will soon be the online leader in online drugstores. The question becomes: how much of that business goes online? I am fairly confident that Amazon will have a market share in excess of 50 percent for online sales. It could become a super-retailing company.”7 Meeker’s loyalty paid off. In late 1998 and early 1999, after finally jettisoning its allegiance to Barnes & Noble, Morgan Stanley landed the lucrative jobs of helping Amazon.com to sell $500 million in high-yield debt and $1.25 billion in convertible bonds. Both issues were the biggest of their type yet done by an e-commerce company, but Morgan Stanley didn’t have any trouble selling them and earning its commissions.
Meeker also won over Meg Whitman, eBay’s chief executive. Having blown the chance to take eBay public, Meeker asked for a chance to redeem herself. She flew to Boston’s Logan airport, where she met Whitman, apologized for the poor IPO presentation, and showed her a draft of a glowing research report that she had written about eBay. Whitman stuck with her choice of Goldman Sachs to lead the IPO, but Meeker didn’t give up. She went ahead and published her research report on the day that eBay’s stock started trading. A few months later, when eBay was preparing for a $1.1 billion secondary stock offering, it chose Morgan Stanley to co-manage the issue, along with Goldman Sachs. “(Meeker) has been a terrific adviser in many ways,” Whitman said in March 1999. “She has great ideas for the company. She’s very thoughtful about what’s going on in the space, and I always incredibly value what she has to say.”8
Meeker’s bosses supported her aggressive approach. Like their counterparts at other big securities firms, the men who ran Morgan Stanley took their firm’s reputation seriously, but not as seriously as they took its profitability. Internet start-ups were an increasingly important source of Wall Street’s revenues. The 7 percent IPO commission was only the beginning. It was usually followed by generous fees for underwriting secondary stock offerings and bond issues, and for advising on mergers and acquisitions, as the examples of Amazon.com and eBay had demonstrated. When all these deals were added together, an investment bank could make as much money from a small Internet company as it could from one of its blue-chip clients. This was the reason why nearly every firm on Wall Street was chasing Internet business.
Morgan Stanley’s senior executives were just as determined as Meeker to retain the firm’s premier position. But when pressed to explain how they justified selling companies with no earnings to the public, they absolved themselves of responsibility. “The people buying Internet stocks don’t think they are buying Morgan Stanley, American Express, or Berkshire Hathaway,” Joseph Perella, the head of Morgan’s investment banking department, explained to a reporter in early 1999. “There has been a fundamental shift in American capitalism. Previously, venture capital was a private game. Now, the public is willing to fund the growth of companies that are almost start-ups. Basically, the public is saying, ‘I want to own every one of these companies. If I’m wrong on nineteen and the twentieth one is Yahoo! it doesn’t matter. I’ll do O.K.’ That’s job-creating. That’s wealth-creating. Yes, it is a lottery, as Greenspan said, but it’s also fundamental to the evolution of this country.”9 Tall, bearded, and possessed of a preternatural calm, Perella had spent twenty-seven years on Wall Street. In the 1980s, he cofounded Wasserstein Perella, an investment bank that specialized in advising companies involved in hostile takeovers. The valuations being accorded to stocks like Yahoo! and Amazon.com surprised Perella, but he didn’t let it disturb his equipoise. “Are they overvalued?” he said calmly. “Probably a lot of them are, but I don’t know if I would use a word like ‘excess.’ ” Perella regarded Meeker’s emergence as a media celebrity with an equal measure of insouciance. “Mary is one of a kind, and that has to do with her personality, her dedication, and her space,” he said. “If she were a steel analyst, you wouldn’t be sitting there.” And he went on: “Mary is the right person in the right place at the right time. That’s a very fortunate position to be in.”10
III
One of the firms that Andre de Baubigny advised Meeker to visit was Priceline.com. In the summer of 1998 de Baubigny drove up to Stamford to meet Richard Braddock, the company’s chairman and chief executive. He was so impressed that on the way back to New York he called Meeker from the car and urged her to make a trip to Connecticut as soon as possible. Jay Walker, who founded Priceline.com in July 1997, had already been an entrepreneur for fifteen years. His most successful venture was NewSub Services, a direct marketing firm that sold magazine subscriptions by placing advertisements alongside credit card bills and turned into a $250-million-a-year business. Walker described Priceline.com as a “demand collection system.” Stripped of the marketing jargon, the firm allowed airlines (and later hotels) to sell unfilled seats (and rooms) cheaply without undermining their overall fare structure. Tickets were nonchangeable and nonrefundable. Customers had to be willing to fly on any airline and make a stop en route. Somebody flying from New York to Miami might end up going through Memphis. These restrictions were designed to prevent business travelers from using Priceline.com to buy cheap tickets. If the airlines thought that Walker’s company would turn full-fare customers into bargain shoppers they would never agree to supply it with any seats.
Priceline.com’s business model was undoubtedly clever; whether it would work was less certain. In order to boost revenues, the firm had resorted to buying tickets from the airlines at higher prices than customers had offered and making up the difference itself. The financial rationale for this behavior was the same one that motivated Amazon.com to sell books for less than it cost to buy them from the publishers and ship them to customers: if the top line grew sufficiently fast, the bottom line would eventually take care of itself. As one of Amazon.com’s biggest supporters, Meeker could hardly argue with this strategy. Her basic view of the online economy had not changed much since she wrote The Internet Report. E-commerce would eventually look like the software business, with one or two dominant players in each market and everybody else extinct. In order to survive this process of digital Darwinism, it was essential to establish a grip on the market before any serious competitors emerged. Priceline.com was trying hard to do this. In addition to subsidizing its customers, it was spending heavily on advertising. In 1998, Priceline.com’s sales and marketing expenditure came to almost $25 million, or about two-thirds of its revenues. To Meeker, this was a sign of strength, not weakness. “This is a time to be rationally reckless,” she explained. “It is a time to build a brand. It really is a land-grab time.”11
Just before Christmas of 1998, Priceline.com invited a number of investment banks to compete for the job of managing its IPO, which was scheduled for the spring. Morgan Stanley and Goldman Sachs both took part in the bake-off, and Meeker’s reputation was the deciding factor. “We just think Mary is the best—that was the distinguishing reason we chose Morgan,” Richard Braddock said.12 “She has the credibility.” Given the febrile state of the IPO market, there was never any doubt that Priceline.com’s stock offering would be well received. Analysts were already comparing the company to eBay. Like eBay, Priceline.com didn’t have any inventories, and it employed fewer than two hundred people. Moreover, its business model seemed to be adaptable to other markets. In the past few months, it had experimented with selling cars, hotel rooms, and mortgages.
On March 29, 1999, the day before Priceline.com was due to go public, the Dow closed above 10,000 for the first time, a timely reminder that the Internet stock mania was part of a much wider phenomenon. In January 1993, when Marc Andreessen had posted the Mosaic browser on the Web, the Dow was at about 3,000. In the summer of 1995, when Netscape went public, it was still under 5,000. Now that the Dow had reached five figures the Wall Street bulls saw no reason for it to stop there. “What we are looking at is confirmation in the stock market that the U.S. economy is in excellent condition,” Abby Joseph Cohen told The Washington Post.13 “I believe the bull markets continue until economic deterioration. I see no economic deterioration.” Ralph Acampora was equally ebullient. “It’s no longer a ceiling; it’s a floor,” he declared of the 10,000 threshold. “As time goes by, we’ll be looking down at it.”14
After the markets had closed, Morgan Stanley’s IPO team got together to price the 10 million Priceline.com shares that would start trading the following morning. In the company’s prospectus, the issue price had been estimated at $7 to $9, valuing Priceline.com at about $1.15 billion. The road show had been so successful that the price could now be increased substantially, but deciding how much to raise it wasn’t easy. Since Priceline.com had no earnings, and revenues of only $35 million, the valuation formulas that the bankers had learned in business school were of no use, and neither were the new methodologies that Meeker, Blodget, and other Internet analysts had invented. The latter techniques depended on estimating the size of the total market and guessing how much of it the company in question could dominate. But in Priceline.com’s case, the potential market was difficult to define. If it was restricted to airline tickets, it was too small to justify a billion-dollar valuation. If it was extended to hotels, mortgages, and cars, and maybe other goods, there was no way of knowing how much of the market Priceline.com could garner. The only obvious guideposts were the valuations of other Internet IPOs, but even these were of little help. Six months earlier, eBay had gone public at a value of $700 million; now it was worth almost thirty times that figure. One person who took part in the Priceline.com pricing meeting likened the process of valuing Internet companies to throwing darts. The aim was to set the price high enough for the company to be satisfied but low enough for investors to make a decent return. In the end, Morgan Stanley simply doubled the issue price, to $16. At $16 a share, Priceline.com would have a market capitalization of $2.3 billion—the highest value yet for an Internet IPO.
The next morning, when Priceline.com’s valuation jumped to $10 billion, Mary Meeker was on a 7:35 A.M. flight to San Francisco. She was due to make a pitch for another IPO that afternoon, then meet a second Internet company in the evening and a third the following morning. After landing in San Francisco, she checked in with the office and learned what had happened. A couple of days later, she found a few minutes to mull things over with a reporter. The demand for Internet stocks was so frenzied that it now reminded her of tulipmania. “The difference is that the real values are being created. Tulip bulbs did not fundamentally change the way that companies do business.”15 But with every successive IPO Meeker’s level of nervousness had increased, and the Priceline.com IPO had heightened her fears. The Internet stock boom was like a crescendo; it couldn’t go on indefinitely. “I think we will have a big correction in Internet stocks sometime this year,” she said. “I think a big correction would be very healthy. I personally would welcome it.”
IV
Two days after Priceline.com’s IPO, Yahoo! agreed to pay $6.1 billion for Broadcast.com. Appropriately enough, the deal was announced on April Fool’s day. The previous summer, Broadcast.com had gone public at a valuation of $300 million, and its business hadn’t changed much since then. It still didn’t own any content. The sound on its audio feeds was still tinny; the pictures on its video feeds were still small and blurred; and its financial losses were still mounting. In 1998, Broadcast.com lost $16.4 million on sales of $22.3 million. The price that Yahoo! agreed to pay was about 275 times these revenues. It wasn’t real money, of course. Yahoo! was paying for the deal in stock, just as it had paid for its $3.6 billion purchase of GeoCities earlier in the year.
The flood of Internet IPOs continued. On April 8, Value America, an online retailer based in Charlottesville, Virginia, went public at $23 a share, and the stock closed at $55, valuing the company at more than $2 billion. Craig Winn, Value America’s founder, was a former salesman who had already led one public company into bankruptcy. These days, he flew around in a private jet and saw himself as a possible candidate for president in 2008. He promoted Value America as the Wal-Mart of the Internet, but a Wal-Mart without any inventories, a truly “frictionless” company. In Winn’s vision, whenever a customer bought a television, or a personal computer, or even a bottle of aspirin, on Value America’s Web site, the firm would pass the order onto the manufacturer, which would ship the goods to the customer direct. In reality, most manufacturers had neither the capacity nor the inclination to ship individual items. Winn and his backers, who included Paul Allaire, the cofounder of Microsoft, didn’t seem disturbed by this discrepancy, and neither did investors.
Between the start of 1999 and the middle of April, the Dow Jones Internet Composite Index doubled. In its issue of April 12, 1999, The Industry Standard captured the mood of the moment with a cover featuring Priceline.com’s Jay Walker and Mark Cuban, the founder of Broadcast.com, next to the headline “THIS WEEK’S BILLIONAIRES.”16 Inside the magazine, an article pointed out that America Online, which had been added to the S&P 500 at the start of the year, now had a market capitalization of $137 billion. A hundred thousand dollars invested in the stock eighteen months ago would now be worth $1.3 million. In a column entitled “I Want to Believe,” Michael Parsons, the Industry Standard’s executive news editor, pointed out that investors were “wagering billions of dollars on complex business stories, and many might as well be putting their money on red or black in Las Vegas.” Parsons continued: “A skeptic might find that a sad testament to human folly. A believer will point out that Las Vegas is the fastest growing city in America.”17
On April 26, The New Yorker published its profile of Meeker, complete with her prediction of a big fall in Internet stocks sometime in the next year. The correction started immediately, with the Dow Jones Composite Internet Index falling more than 50 points, or almost 19 percent, to 224.85. Over the next two months, most of the big Internet stocks fell sharply. Amazon.com went from $209 to 110 3/16; eBay went from 209 1/2 to $136; and America Online went from $151 to 102 13/16. At this stage, however, the mania for Internet stocks was too far advanced to be halted even by a sizable correction. Most investors regarded the sell-off as an inevitable hiccup. Unlike during previous corrections, the flow of IPOs continued.
Four days after the Meeker article appeared, Razorfish, a New York–based Internet company, went public. Credit Suisse First Boston issued 3 million shares at $16, and the stock more than doubled, to 33 1/2. Razorfish made most of its revenues designing Web sites for companies like Charles Schwab, CBS, and Time Warner, but it described itself as a “global digital communications solutions provider.” Craig Kanarick, the firm’s cofounder, saw himself as a visionary. Speaking to New York magazine, he once described himself as a “Jewish guy with a lot of guilt, slightly misunderstood, trying to change an industry, somewhat brilliant.”18 Kanarick was one of many people, in New York and elsewhere, who were confusing good fortune with genius. During the following weeks and months, many more Silicon Alley firms went public. They included Star Media Network, which was trying to become the America Online of Latin America; Juno Online Services, which offered free e-mail; and Fashionmall.com, which sold clothes and beauty products. Few of these companies satisfied Meeker’s criteria for a promising Internet start-up, but they all found willing investors, and so did another firm that Meeker had wanted nothing to do with: TheStreet.com.
James Cramer’s financial news site was a case study in Internet economics. After two and a half years, it had gained just 50,000 subscribers, a good number of whom were lured in by cheap subscriptions. In 1998, TheStreet.com had racked up losses of $16.3 million on total revenues of $4.6 million. In the first quarter of 1999, things didn’t improve any: TheStreet.com lost $7.2 million on revenues of less than $2 million. Parsing the numbers didn’t help. During 1998, TheStreet.com spent more than $9 million on a marketing campaign that brought in about 20,000 paying customers, which meant it was paying $450 to acquire each of its $99.95 subscribers. The Web site also attracted some advertising, but almost half of it came from one company, Datek Online, the day traders’ favorite online brokerage. When Meeker looked at TheStreet.com, she decided, sensibly enough, that its audience of investing enthusiasts was too narrow to support a viable business.
TheStreet.com’s biggest asset was Cramer, who had turned into a garrulous emblem of the Internet era, despite a few scrapes along the way. Toward the end of 1998, a number of investors tried to pull their money out of his hedge fund, Cramer Berkowitz, which was having a bad year. Even Marty Peretz, TheStreet.com’s cofounder, questioned Cramer’s recent investment performance. About the same time, Cramer’s media career stumbled. Shortly before Christmas, CNBC suspended him after he told viewers he wanted to sell short WavePhone, a tiny Dallas company, whose stock promptly collapsed. It turned out that Cramer hadn’t actually shorted the stock, and eventually he was allowed back on the air. (The incident finally prompted CNBC to introduce stricter disclosure rules for its guests.)
Through it all, Cramer kept trading and writing at a frantic pace, and many traditional media companies remained eager to associate themselves with him. In January 1999, The New York Times Company paid $15 million for a minority stake in TheStreet.com. A couple of months later, Rupert Murdoch’s News Corporation agreed to invest $7.5 million in a deal that included plans for a TheStreet.com television show on Fox. The investments gave TheStreet.com the credibility it needed to do an IPO, and Goldman Sachs agreed to underwrite the issue. On May 10, 1999, 5.5 million TheStreet.com shares started trading on the Nasdaq. Issued at $19, they shot up to $73 and closed at $60, a rise on the day of 216 percent. At the closing price, TheStreet.com was valued at $1.5 billion. Cramer’s shares were worth $203 million. Peretz’s stake was worth $182 million. Dave Kansas, the former Wall Street Journal reporter who was TheStreet.com’s editor in chief, was worth $9.1 million. Cramer’s sister and father came up from Philadelphia to help him celebrate. “I’m thrilled,” he told USA Today. “TheStreet.com is like the people’s choice. People vote for stocks these days. And they’re buying into both the Web and the pioneers of the future.”19