STUMBLE—High-Profile Failures Often Impede Road to Success

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In literary circles, tragedy is defined by the fall of the great and powerful.

And while the fall of some of L.A.’s richest, most powerful and most talented business leaders may not have reached tragic proportions, several individuals have nevertheless descended from once-lofty perches in remarkable ways.

“What is at trial here is the inevitability of success,” said Rohit Shukla, CEO of the L.A. Regional Technology Alliance. “There’s really no such thing. Holding on to success is really a story that happens more rarely than you would imagine.”

For some, like Idealab’s Bill Gross and eToys Inc.’s Toby Lenk, the fall is seen as simply a stumble along the inevitable (albeit long) road to success. For others, like EarthLink Networks co-founder Reed Slatkin, it may just be the end of the road.

Slatkin, the one-time investors’ darling, was accused this month by the Securities and Exchange Commission of having operated a fraudulent investment scheme since 1985. Investors have filed lawsuits that accuse him of fraud for failing to return $35 million of their money, and FBI and IRS agents raided his Goleta, Calif. office.

Slatkin helped finance Sky Dayton in his creation of EarthLink, now the second largest Internet service provider in the country, building a stake in the company that at one time was worth more than $122 million.

It is alleged that Slatkin was managing $230 million for more than 500 investors through “purported securities-trading accounts in Switzerland,” according to SEC filings. The SEC has also alleged that Slatkin misappropriated investors’ money “in a Ponzi-like fashion.”

Slatkin resigned from EarthLink’s board in late April and filed for Chapter 11 bankruptcy protection, listing debts exceeding $100 million. The SEC said it found less than $30 million in Slatkin’s brokerage accounts.

While it is perhaps not surprising that a fortune based on an Internet business has disappeared in the last year, these circumstances were extraordinary even by dot-com accounting.

More typical of the lost fortunes was the implosion of Lenk’s eToys and the retrenchment of Gross’ Idealab.


On the comeback trail

“It happens in every single economic era,” Shukla said. “You have people like Gross and Lenk who were out there earlier than everybody else, and who fall harder than anybody else. It’s not necessarily a reflection of the individual.”

Lenk and Gross, neither of whom was available for comment last week, aren’t being counted out for good.

Lenk, a former Walt Disney Co. executive, founded eToys in 1997, grew the pioneering e-commerce site rapidly and was worth about $325 million less than a year ago. By the time he shut down the Web site this spring, he had lost it all. The company, which filed for Chapter 11 bankruptcy protection in March, once bragged a market valuation of $10 billion. Now it hasn’t been able to liquidate enough assets to pay off its $285 million in debts.

Lenk, who is just 41, has been keeping a low profile since shutting down eToys a few months ago.

Frank Han, eToys’ first employee and its former senior vice president for product development, was mum on Lenk’s whereabouts and plans, but said his former colleague is no longer dealing with creditors or asset sales and is working on a new project.

At least some investors are bullish on Lenk’s future.

“People like Lenk come back with a passion, a skill set, a Rolodex and intellectual capital gained through pain,” said Kevin Wall, a partner with Shelter Capital Partners. “That helps build strong companies, and they become wealthy as a result. You know they’re going to come back. They’ve got a lot to prove.”

Bill Gross helped hatch eToys through Idealab and was an even greater dot-com celebrity than Lenk.

Widely credited with creating the e-commerce incubator concept, Gross raised a whopping $1 billion in private financing in January 2000. The paper billionaire even lured General Electric Co.’s uber-CEO Jack Welch to the Idealab board.

“Gross is no question a visionary and a pioneer,” Shukla said. “To some extent, he was a victim of the times.”

Like Lenk, Gross made the mistake of expanding Idealab too quickly. He blew through $800 million in eight months on some dubious ventures, many of which have already shut down.

Gross remains undeterred. His company has slashed its monthly cash-burn rate from $10 million to $2.5 million and has cut its bloated staff from 250 to about 100, focusing on a new batch of companies.


Achieving persistent wealth

Whether Lenk and Gross ultimately end up on the list of richest Angelenos is dependent largely on the commercial viability of their ideas, of which there is apparently no shortage.

“It depends on the extent to which they can reinvent themselves and learn from their failures,” Shukla said. “It certainly isn’t clear that they will join the ranks of the forever-rich, like (Eli) Broad, (Ron) Burkle or (Alfred) Mann, who have been able to endure twists and turns and at each turn adapt and redirect.”

If Lenk and Gross and even Slatkin are looking for role models in recovery, they need not look further than Santa Monica.

That’s where former Wall Street financier and convicted felon Michael Milken has set up shop.

Once worth more than $1 billion, which he made off the high-yield junk bonds he pioneered, Milken was convicted of securities fraud in 1990 and served 22 months of a 10-year prison sentence. He was banned for life from the securities business and paid close to $1 billion in fines, penalties, restitution to investors and civil settlements.

Today, Milken rubs shoulders with august titans like Rupert Murdoch, Ted Turner and Yahoo’s Timothy Koogle. He has been honored by a jury of his wealthiest peers.

His wealth is substantial, clocking in at about $800 million, and his philanthropy, which predates his conviction, is acclaimed, especially for its support of cancer research. While he failed in his recent bid for a pardon from President Clinton, Milken is well on his way to making a billion-dollar comeback.

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