In light of the dot-com meltdown, the local Internet entrepreneurs who cashed out last year are looking like financial geniuses.
By contrast, those who for whatever reason held on to their companies and their shares suddenly seem a lot less savvy than they did in 1999.
Is the difference between the two groups a matter of sheer brilliance or just dumb luck being at the right place at the right time to make a hefty profit? It’s most likely a combination of both.
“The most sophisticated investors regardless of whether they are entrepreneurs or not will recognize long-term trends well before the rest of the market,” said Jourdi de Werd, managing director with Greif & Co., an investment bank based in Los Angeles. “They will see changes in the industry two or three years ahead and decide whether they will make the additional investments and adapt to these changes, or instead exit their investments.”
As the Nasdaq was breaking one record after another in 1999 and the valuations of dot-coms skyrocketed, a number of L.A.-based Internet businesses were scooped up for astronomical prices.
In February of 1999, Marina del Rey-based GeoCities was bought by Yahoo Inc. for $5 billion in stock. Later that year, iMall Inc. in Santa Monica was acquired by Exite@Home Corp. for $415 million.
Across town, Pasadena-based EarthLink Network Inc. merged with Atlanta-based MindSpring Enterprises Inc., creating the second largest Internet service provider in the country.
These deals made very rich men out of the companies’ founders and executives, such as GeoCities’ David Bohnett, who netted about $367 million in Yahoo shares through the deal. The moves also made Bohnett, along with iMall’s Richard Rosenblatt and EarthLink’s Sky Dayton seem like visionary entrepreneurs who knew the time was right to cash in their chips.
“You have two types of people here,” said Andrew Kane, managing partner with Big Five accounting firm Arthur Andersen. “You’ve got people who were in their 20s and were in the right place at the right time with a terrific idea. Then you also have investors who have an amazing track record of timing a market and going in and out at the right moment in a variety of industries.”
Long ride down
It’s likely that the big winners saw where the market was going and that the opportunity to sell at such high valuations would not be around forever.
“Everybody involved knew deep down inside that valuations had gotten unrealistically high,” said Barry Hall, chief financial officer with Styleclick.com Inc. “It was only a matter of time before there would be a correction, but most people were caught off guard by how quickly and how soon it happened.”
Styleclick, which provides merchandising services for online retailers, was among the firms that agreed to be swallowed up before the market soured. It initially starting looking for a willing suitor last fall, upon concluding that hard times lay ahead for many e-tailers. Late last year, it agreed to merge with the Internet Shopping Network, a subsidiary of USA Networks Inc. That deal has not yet closed, but it is expected to soon.
Meanwhile, a number of other local companies that didn’t get swallowed by a bigger fish when their value was peaking, now find themselves worth a fraction of what their valuation was a few months back. Consequently, their executives look like they might have missed the boat.
For example, shares of Santa Monica-based eToys Inc. are now going for about $6 each, compared to more than $80 last October. Likewise, Stamps.com, also based in Santa Monica, saw its market value evaporate as its share price plummeted from $98 in November to a little over $9 currently.
However, it might be too harsh to conclude that eToys’ chairman and chief executive Toby Lenk and Stamps.com’s chairman and CEO John Payne blew it, while Bohnett and others timed it perfectly.
“Not everybody had the opportunity to sell,” said de Werd. “The ones who did well sold their company to a bigger player, not their shares on the open market. It would have been viewed very negatively by the Street if the chief executive of a new company starts to liquidate his own holdings.”
And even if they had wanted to cash out, many start-up company executives are prohibited from doing so by “lock-up provisions” that restrict when and how many of their shares they can sell.
Attracting a suitor
In the cases of eToys and Stamps.com, the buyout offers they could not refuse never materialized when their valuations where peaking. If such an offer had surfaced, shareholders probably would have jumped at it.
For the most part, those companies that made deals leaving founders and executives wealthy tended to be started ahead of the pack and built to the point where they were ready to be taken over as the market hit its peak.
“(The companies bought out at the peak) definitely had the benefit of being the first mover,” said Stan Farrar, a partner with the law firm of Sullivan & Cromwell. “They had a buzz about them that they’re going to be the next Microsoft, which made them a lot more sexy than the follow-up companies.”
Indeed, EarthLink, GeoCities and iMall were all started in 1994, when the Internet was just taking off and quite some time before the proliferation of me-too e-tailers.
But it’s not only the entrepreneurs who established their companies first who struck it rich. A number of long-established investors also benefited from their ability to recognize opportunities ahead of the pack.
These investors include venture capitalists such as Brad Jones at Redpoint Ventures, angel investors such as Eli Broad, and entrepreneurial investors such as Gary Winnick and his partners at Pacific Capital Group.
