Cramer: Viable Dot-com Models

Reading an interview with Gabelli Growth fund’s Howard Ward, I came across a bit of prose that has become gospel: “You had all of these dot-com stocks without any earnings, and in many cases, without any business model to get you to the earnings.”

No one would question that judgment now. But it sticks at me — and should stick at you — because no matter how much of a mania it was, it is inconceivable that the market embraced companies with no business models.

In truth there were business models. In fact, there were honest, well-thought-out business models that were passed on by the brightest people in the nation and the world. They were vetted by smart venture capitalists, CEOs, board members, corporate finance chieftains and analysts. They made a world of sense at the time.

Must’ve Been Something in the Water

Put simply, everyone agreed to the wrong thing at the wrong time.

And don’t I know it. I was smack in the middle of the debate on the Net business model and lately I have been feeling mighty vindicated. When Marty Peretz and I started Inc. in 1996 we agreed we had to charge for our services. We didn’t believe the advertising market was going to be enough to sustain a business, given that there were no barriers to entry and sites proliferated like yeast infections. Plus, we are writing professionals, and we don’t like to give away our services. That’s what amateurs do. Professionals get paid, no matter where their wares are plied.

Almost immediately we received tremendous resistance from everyone about our paid model. Venture capitalists, analysts, potential stockholders all said the same thing: “You will kill the growth if you charge.”

What’s Wrong With Wild, Viral, Organic Growth?

The Net was about wild, viral, organic growth and we were gating that growth. We were slowing it down with our fee structure. Remember, this was well before the Net stock boom. It was when Marty Peretz and I were footing the bill for the whole enterprise. Without a fee, we had no hope of ever breaking even, we reasoned. If we don’t charge we would go out of business, because neither one of us was about losing money endlessly in order to grow. Grow for what? Grow so we could lose even more money? Grow so we could lose money hand over fist instead of with moderation, against a certain revenue stream?

Encouraging us, of course, was that we could charge. And people did pay. Lots of people. Thousands and thousands of people. I would read article after article about how people wouldn’t pay for anything on the Web and I would say to my wife, “Do people think we are making our numbers up? Don’t they know we charge?”

We Were Perceived a Failure Because We Charged

We were always a perceived failure because we charged, while others were a perceived success because they didn’t.

I felt like I was wrapped up in some sort of weird, bad Joseph Heller novel, where our success bred our failure while the failure of others equaled success!

Sure enough, the people who brought us public, as well as the people who were running the company and the people who wanted to own the stock were all adamant that the founders were dead wrong about the subscription fee. Marty and I took so much heat from everyone about those fees that we could barely stand to discuss with management.

But we wouldn’t give it up. Sure it slowed our growth. Sure it made it tougher to link to other sites. Sure it wasn’t “the way the Net was going.” But it provided us with revenue, real revenue, and made for a real business model because it spotted us money while the advertising cycle kicked in. When I think about what Howard Ward said in his interview, I think about those tense discussions when everyone wanted us to drop our fee and I would say “But we have no business model without it!” We could have given it up and pleased everyone! Instead we browned off everybody and kept it.

We Have Money in the Bank But No Respect

Now, when I look at the landscape of littered dot-coms I notice that the ones that couldn’t charge are winding down to oblivion. Us? We have plenty of money in the bank and a real revenue stream and a real business model.

Amazingly, we still don’t get much respect for having that model, but we are worth a lot more than those in our space that don’t charge, even though they have much bigger partners backing them.

The point, of course, is that the “market” didn’t want business models, it wanted growth at any price. Turns out, though, that the market didn’t want the right thing, that the market was just plain wrong. Of course, the judgment now is that there never was a business model and that everyone who started a dot-com or abetted a dot-com based on no business model is an idiot.

To which I say, I wish it were that simple.

In fact, the incentive to do the stupid thing may never have been greater in the history of business, and I am just glad that Marty and I didn’t succumb.

James J. Cramer is manager of a hedge fund and co-founder of His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.