Feb. 12, 2003 -- Anyone who worked at a Web company with big plans and big paychecks will be very interested in J. David Kuo's dot.bomb. And those who merely stood on the sidelines watching hopeful Internet players from afar will also find a thrill in his descriptions of the high-tech gold rush.
Our last featured book club, the Charlottesville Men's Book Club, chose dot.bomb for the next book in Good Morning America's "Read This!" book series. Read an excerpt from the book.
CHAPTER ONE: DREAM WEAVING
The twin-engine puddle jumper circled once above the single-strip airfield, turned its nose down, and dove for the ground below. In seat 3A, Craig Winn gazed out the window at the rich green carpet of maple trees undulating into the distance of the Shenandoah Valley. Seconds later the familiar thump, thump of landing gear meeting runway welcomed the little plane's passengers to Charlottesville, Virginia. It was Independence Day 1996. Craig Winn was arriving at not only his new home but also the new home of his newborn Internet retailer, Value America.
The dense heat and humidity of Virginian summer life socked Winn as he got off the plane. He'd left 70-degree temperatures that morning when he said good-bye to his recently former home — a multimillion-dollar estate in Palos Verdes, California, sitting atop perfectly manicured grounds overlooking the Pacific. Now he was panting and sweating as he gathered his bags from inside the three-gate terminal, looking for the familiar fair-skinned round face of his sandy-haired comrade in computer code, Joe Page.
Each man had something the other needed. Page had a car; Winn didn't. Winn had a home; Page didn't. Winn was therefore confident that Joe would be there to give him a ride, but he wasn't too confident about how Page would react to what he was about to tell him: The moving vans were days away. They were going to have to stop at Wal-Mart to buy camping mattresses, sleeping bags, towels, and kitchen utensils for Winn's vacant McMansion in the Glenmore section of Charlottesville.
Curbside, Page leaned against his old black Jeep and waved to Winn. "Man, I'm sure glad I've got a real bed to sleep in tonight," Page, who had driven out from California, said with genuine relief. "The Jeep hasn't been too comfortable!"
Winn tacked on a big, impish smile and shrugged his shoulders dramatically. He did that at "gotcha" moments like these.
Page, who had been working with Winn on Value America's early programming for several months, knew that look. "What?" he said with alarm.
Winn explained. Page listened, cranked the wheel hard to the left, and headed for the shopping center. The two men plowed through Wal-Mart getting the bare necessities for Winn's house and also for the office they would occupy the next day.
After a night of camping in Winn's new home, the two men headed for State Farm Road and the fine offices of Commonwealth Clinical Systems. Double-fisting bottles of Formula 409, they marched through the front door, climbed up the center stairs and then one more flight of stairs to greet Value America's new world headquarters … an attic full of wires, cables, dirt, strewn files, and upended furniture, all sitting on a carpet Winn preferred to think of as rich burgundy, but everyone else thought was blood-red.
For the next six hours Winn and Page wiped down every square inch of the discarded furniture that would be theirs and the 500-square-foot space that would serve as the office for them and three other men currently inbound from California. As Winn and Page wiped and sneezed and wheezed and vainly tried to open windows to get fresh air into the space, they talked excitedly about the future … about Value America and about how it was going to revolutionize retail, creating a "living store" that would be the "marketplace for the new millennium."
In mid-1996, Winn's Value America vision was arguably the most ambitious Internet retailing vision in existence. While other Internet retailers of the day were building online specialty shops selling books, CDs, and zithers, Winn's goal was not just to sell a lot of one kind of stuff or another. He wanted to use the Internet to revolutionize every facet of retail, creating a one-stop Internet shopping site of unparalleled selection, product information, and efficiency. It would be for the Internet age what Harrods was for the entire British Empire at its height: the shopping source for all things. Winn knew it was an inspired — and possibly psychotically lucrative — vision.
The mid-'90s were an age that no one really knew, but many were beginning to suspect, would be an Age. The Internet and the World Wide Web were without definition but full of wild expectations. While few Yahoo!'d, America Online was just a dorky company in a bland Virginia suburb, and the expression dot.com sounded odd in conversation, there was an expectant sense that those were just temporary realities — that the Internet was going to change the world, and the retail conducted over it would be the engine. What that meant wasn't exactly clear. Only the visionaries could describe the future for everyone else. And few revealed the pixels of the unknown future as well as the brilliant salesman with Ted Koppel-like brown hair, darting brown eyes, slightly doughy cheeks, pudgy hands, and a self-illuminating grin.
Craig Winn had been waiting for a revolution like this almost his whole life. He'd predicted it in the early 1980s, while a young manufacturer's representative in southern California selling household goods. Someday, he'd said, technology would change retail forever. It was, he argued, a historical inevitability that retail underwent a revolution every decade or so. During the Eisenhower era in the 1950s, department stores took off, replacing mom-and-pop shops. Then the real '60s revolution came, in the form of discount chains, which were amazingly efficient retail outlets. In the '70s, enclosed malls gave consumers unprecedented convenience, and they reigned supreme. The warehouse concept popularized by Price Club and Wal-Mart took over in the 1980s, again by selling quality goods en masse at a value, effectively transforming warehouses into stores and collapsing costs.
At some point in the future, Craig Winn had prophesied in those years before the Internet, retail would be dominated by technology, obviating the need for traditional retail stores or warehouses. Someday, Winn knew, there would be a single device that combined the information-conveying potential of television and the communication-efficiency of the telephone, allowing consumers to shop for everything from the comfort of their homes or their offices and manufacturers to ship the products directly to those consumers. This device and the retail world it ushered in would be the ultimate retail solution.
Winn knew his life had been created to make this inspired vision real. His father had been a manufacturer's representative with an office in their southern California home — right off the kitchen. Dad used to bring home new products, put them on the couch, and ask his son to critique them. After graduating from the University of Southern California in 1977 and spending a single day in law school (it occurred to him in the middle of the first day of classes that he'd never met a lawyer he really liked, and therefore he probably shouldn't become one), Craig Winn started selling for a living. His father was still a manufacturer's rep, and he gave his son the chance to call on his worst accounts. The stores to which Craig tried to sell his plastic cups, fly swatters, smoke alarms, toaster ovens, and other housewares had either already turned down the Winn Company or demanded under the table payoffs to take products. They weren't exactly blue-chip prospects. After those stores rejected him in his first week of work, Craig had to find new sales targets. By combining a list of all the retail stores that sold housewares and a very good map, Winn plotted stores by geographic location and started making cold calls. His efficiency didn't lead directly to success. His first year, he worked eighty-hour weeks, got rejected more than five hundred times, sold two accounts, and made $12,000.
The next year, Craig Winn earned nearly $300,000. The year after that, he made $500,000. The sudden success wasn't the result of better products, a dramatically better economy, or being given much better accounts. The difference was Winn. He'd done what he discovered he liked to do best — invent an entirely new way of doing business.
Winn's father was the consummate salesman — gregarious, a back slapper, smooth, and polished. Craig Winn was shy. He couldn't sell simply by the force of his personality or through the strength of lifetime relationships. So he decided he wasn't going to sell. Instead, he was going to present people with what he knew they wanted. This could work because, after his failed first year, Winn realized he had an otherworldly intuition about what other people needed and wanted. That insight, combined with his own painstaking research into the products he offered for sale and the stores he wanted to buy his products, made it exceptionally easy for Winn to craft his presentations — he stopped using the term sales calls — to his audience. And it worked. Between 1977 and 1981, Craig Winn helped the Winn Company grow to a $40-million-a-year business. A nice life accompanied his business success — a house on the Pacific coast, a sailboat, country clubs, nice cars, a family. In 1983, the younger Winn bought out the older Winn and grew the company even faster. But even as he became a better and better rep, learning more and more about the products he represented, the brands that paid his commissions, and the retail market in general, he was restless for the next thing — the new arena he could revolutionize.
In mid-1986 he found his next something — lighting. In a casual conversation with two Price Club buyers, he discovered retailers' frustrations with their lighting suppliers. Their complaints, he was told, were that prices were prohibitively high and quality was embarrassingly low. In addition, lighting products were merchandised poorly — their containers were bad, their packaging was bad, their displays were bad.
Within weeks, Winn had $1 million in initial funding for Dynasty Lighting Classics, a company that would create and sell high-quality lighting merchandise for less. Instead of plain brown boxes, Dynasty's boxes would be white, with four-color pictures and lots of information about the lamps on the outside. There would be in-store displays highlighting his products. And in this business such things were revolutionary.
Dynasty's fundamental business insight centered on Winn's favorite word, value. There were, he believed, two kinds of value. First was what he called perceived value. That is what causes a consumer to buy a product in the first place. It is what the consumer thinks he or she is buying. Perceived value is enhanced by packaging and display and underscored by a reasonable price. If consumers think they are getting a great product and are surprised by the low price, they are going to be happy consumers. The second type of value was actual value. There were, he knew, a lot of things initially transparent to consumers that, in fact, were very important to them in the long run. Actual value was about creating the best possible product, engendering the best possible feelings from consumers who used that product, and believing that positive feeling would translate into future sales.
All of Winn's innovations — packaging, easy access to information, high-quality products at reasonable prices — were about driving value. And value paid him back. Dynasty's sales rocketed to $30 million by the end of the second year. By 1989, sales hit $65 million.
In the early 1990s, with the help of Morgan Stanley and Salomon Brothers, Dynasty went public at $12 a share and started expanding. The stock went up 44 percent right after the offering. Winn then expanded into Christmas lights, wall art, mirrors, and ceiling fans. But the expansion ate up money, and sales were slow, and by early 1995, Winn was discovering all the things about retail that manufacturers hated. Increasingly, his products were displayed only by massive retailers like Wal-Mart. Those retailers, he felt, tried to rape manufacturers with burdensome rules and regulations about how they could ship and label products, take returns, and the like. It became clear to Winn after one particularly financially devastating run-in with Wal-Mart that it was time for him to leave the manufacturing business.
So in November 1995, after bringing in others to run the now foundering Dynasty, Winn left the company and looked to a future with a lot of questions. He was in his early forties, with millions of dollars, a beautiful wife, and two great little boys. But beyond that, life was not promising. Unless the world somehow changed, he was done with business forever. Value, he now believed, was a lost business art.
Then a former lighting colleague called him. Like most people in the housewares industry from the '80s to the '90s, Linda Stevens had heard Craig's retail revolution pitch. She wanted Winn to help her build something she called an Internet store. It was, she assured him, his ultimate retail vision. Winn listened as she described how new companies were popping up to sell things "online" over the "World Wide Web."
Winn hung up the phone, spun around in his chair once, and looked out at the Pacific Ocean stretched out before his home office. Maybe, he thought, the world had changed.
Thus, in late 1995, Winn dug into what little Internet research existed and began exploring whether the Internet was the missing link for his retail revolution. The Internet, he learned, had the potential to wire and interconnect the entire world. It was already a communications device and an entertainment device, but its potential as a retail device was untapped.
Winn found that Jupiter Communications, one of the world's first Internet research firms, forecast online consumer sales would grow from about $90 million in 1995 to more than $4 billion by 2000. In 1995, about half of all Internet sales were from airline tickets. Another 10 percent came from a pair of fairly successful online grocery delivery companies — Peapod, based in Chicago, and Harvest America, in Las Vegas. The rest of the market was fragmented into stores where shoppers could buy clothes, shoes, CDs, books, pens, pizzas, and Amish quilts. The online Amish quilt shop was especially delicious … a technophobic religious sect from central Pennsylvania selling their wares online. It was precisely this kind of incongruity that was getting people hot and bothered when they contemplated the Internet's future.
But Winn saw nothing on the Internet retail landscape that would dominate the retail market. Sure, there were Internet malls. There was I-mall. Internet Gallery. Internet Plaza. Internet Shopping Galleria. InterShop. Net Mart. Net-Galleria. There was NetMall. Web Mall. Webmart. CyberMall. eMall. eShop. Each grouped together smaller Internet shopping sites, the places that sold the Amish quilts and zithers and things. But to Winn the idea of an Internet mall was madness. It was clear to him that no one would succeed in Internet retail by taking traditional models and putting them online. A new medium required something totally and completely new, something no one had ever done before. Something stunningly radical. Winn knew the next retail revolution had arrived. He also knew he was just the revolutionary to lead it. So, tentatively at first and rabidly thereafter, Craig A. Winn set about putting on paper the perfect company. There could be only one name for it: Value America.
It would be the perfect store, the ultimate one-stop shopping destination ?the one online spot where people could furnish a house, buy a car, get groceries, find a dress, do Christmas shopping, make vacation plans, equip an office, or die. Well, not die exactly, but get the stuff necessary to die — caskets, flowers, a nice suit.
It would offer not only unparalleled selection but also state-of-the-art multimedia product demonstrations, so that consumers could virtually touch the products, learning more about them than they could in any "normal" store. There would be an animated personal shopper on the site to guide people. There would be voice recognition, rendering a keyboard and mouse moot. Purchases would be delivered straight to consumers' doors. It would be perfect.
As much as Value America would appeal to consumers, however, Winn's real targets were manufacturers. From all his business experience Winn knew exactly the problems they faced. The warehouse super-stores had squeezed them dry, forcing them to sell quality products too cheaply. All the manufacturers Winn knew wanted a new place to sell their products. Second, they wanted more consumer feedback. Third, they wanted to be able to market their products on the basis of quality, not just price, and increase the perceived value of their products. Finally, they wanted to operate more efficiently. Winn's Value America would meet every one of their needs. It would be a vast new retail outlet. It would gather information about consumers' needs and behavior and share that information with manufacturers. If consumers saw that for a few dollars more they could get something far superior, they would pay extra for it. It would make selling much more efficient. It was the return of value.
Perfection came at a price. In return for giving the manufacturers everything they needed, Winn had two requests. First, the manufacturers had to pay for the multimedia product presentations featuring their products. That wouldn't be too hard, Winn figured, because they could highlight the merits of their products rather than just the prices. Second, the manufacturers had to ship directly to the consumers. Value America would pay for the shipping but never hold any inventory at all. With no inventory, Value America would never concern itself with warehouses, shipping, insurance, theft, damage, returns, or anything else. Bottom line? Whereas inventory ate up 10 to 20 percent of revenue in overhead, Winn's store would enjoy overhead in the low single digits. Value America was going to charge less and make more than anyone else.
The challenge, he knew, was how to get there first. Within a week Winn had completed a 250-page business plan. Shortly thereafter, he picked up the phone and dialed his buddy Rex Scatena in his San Francisco law office. "Rex," Winn said in a breathless monologue, "you've been telling me for three years to help you get out of your boring law practice. Well, I've got a proposal for you. We're going to start a technology company. I know you don't know a thing about technology. On top of that, it is going to be a retail company. I know you don't know a thing about retail — in fact, I'm not sure you shop ... except for Ferraris ... we won't have those ... well, at least not right away. It can't be based in California. I refuse to base anything in California. It will, probably, be based somewhere in the South. You don't like the South. You won't make a salary for at least the first two years. In fact, not only won't you make any money, you'll actually be dropping several hundred thousand of your own dollars on the deal. Oh, and by the way, we may not make it."
Rex Scatena was no dummy. He was an accomplished lawyer. He lived in San Francisco. He'd heard the rumors about Internet riches. He'd even watched as a company called Netscape had gone public in August. The stock went up 150 percent its first day of trading. If his old buddy was onto something hot in the Internet space, Scatena knew this could be a once-in-a-lifetime deal. He also knew that if there was anyone in the world who could sell a story, it was his buddy Craig Winn. He said immediately, "I'm in."
With one phone call, Craig Winn had his founding partner and president. Next in were two other friends, Ken Power and Joe Page, to help with creative design and technology. Winn and Scatena each plopped down $150,000 to get the company started. Winn owned about 70 percent, Scatena about 25 percent, and Power and Page each shared a few percent. Within months they had all relocated to the sleepy little town Thomas Jefferson had called home — Charlottesville, Virginia.
By Labor Day 1996 — two months after the exodus from southern California — the Value America team was up and running. Much was good. Winn had a great CD-ROM to present his vision, early support from a few key housewares brands, a powerful business strategy, and the programmed beginnings of an online storefront. One thing was bad — there was nothing behind the store. There was no technology infrastructure. None of the Web companies of the day — Netscape, Oracle, Broadvision, or Open Market — had anything to support Winn's inventoryless retail solution in the manner Winn wanted.
As much as he wished otherwise, Craig knew he and his Value America team would have to write the code for the entire store — or find something else to do in rural Virginia. Winn gathered his team, told them the facts, and let them make the decision. They looked at each other, wrinkled their noses a bit, shrugged their shoulders, and said, "OK, let's write the code!" That several of them didn't exactly know how wasn't too important.
Writing code didn't mean just deciding what the store was going to look like. First it meant writing the software they would eventually program to create the store. Then it meant writing the technological support structure to make the store run. They had to do it all. The upside was that they could use a commercial Microsoft program as a foundation for some of the work, but for the inventoryless system to succeed, they had to program everything consumers needed to complete an order: take credit-card information, provide digital receipts, route orders to the appropriate brand manufacturers, arrange for shipping — everything. In addition, the technology had to handle everything that could possibly go wrong: partial orders, back orders, mismatched orders, shipping delays ... The list of problems, it seemed, was almost limitless. Programming and planning consumed their lives for the rest of 1996 and early 1997.
Almost every day at State Farm Road from September 1996 through spring 1997 began with a bunch of apples (Winn had heard they were power brain food) and ended with a gaggle of comatose men stumbling out of the cramped attic, hoping they had enough brainpower left to find their way home. In between the apples and the stumbling were blurry interludes of light and dark when Joe Page and a small techy team would "sling code" — write the store. Winn, eyes shut, leaned back in a chair, dictating every pixel of his vision to them. Winn described not only the Value America world; he drew from his retail memory to describe every scenario the code needed to address. Then all hands worked furiously to make it come to pass. Winn knew this was going to work — there was no other option. It was ironic to him, however, that the Internet he thought was his silver bullet the year before, when he wrote the plan, now was his Achilles heel.
In the momentary breaks they took during their days, the little team let themselves dream of the future. Craig tried to bolster the sometimes flagging crew by describing what it felt like to build a company from nothing, to sell part of it to the public, to watch the stock get traded, and to see your net worth fluctuate daily. It was a high. It was a rush. It was the businessman's Super Bowl. The other men sat intently listening, inspired by the man who saw the future they wanted. Then, full of adrenaline and excitement, they roared back to work.
As Value America was being built one line of code at a time, Craig's mind wandered to his other near-term challenge … getting more household brands into the store. His original plan called for a systematic roll-out of key categories, beginning with items used most often by small businesses and home offices. That was the niche Sol Price exploited with Price Club and Fedmart and where Winn figured he needed to begin as well. But what Winn discovered in late 1996 was that getting computer, electronics, and office-supply manufacturers to pay him $15,000 to $50,000 a pop for online multimedia product demonstrations for a store that didn't exist was … challenging. The near universal response from everyone from Apple to Zenith was, "No." Many times, "Hell, no." Winn didn't believe he was wrong in his fundamental business proposition -manufacturers did want what Value America offered, hypothetically. They just had a hard time trusting that an anonymous company operating out of rural Virginia was their retail Messiah. Winn knew he needed a big break. After diligent research he acquired his target — Hewlett-Packard. HP was the leading maker of home and small-business PCs, one of the most respected brands in the world and eager to increase its market share. Winn's meetings with low-level regional sales reps began in November 1996 and extended into winter and eventually spring 1997. His pitch was always the same: HP and Value America would be perfect partners. And HP's response was always the same: Possibly, but not right now. Winn closed every meeting by asking if there might be someone else in the HP family to whom he should speak.
In April 1997, after more than thirty meetings, Winn and a couple cohorts were sitting in a Las Vegas hotel room with a group of HP's sales, marketing, consumer products, and development managers. Winn once again walked them through the seven things consumers wanted from an online store, the five things that brands needed, and the five key principles of e-commerce, as Internet retailing was now widely known.
And suddenly he could see it in their eyes. For the first time in an HP meeting, Winn saw he had made the connection. HP's general manager told Winn he'd hit at the core of HP's nascent e-commerce strategy — the need to reap the benefits of selling directly to consumers via the Internet without taking the Internet risk all on its own. For HP, the risk in selling directly to consumers online wasn't so much the financial risk of building an online store as it was the danger of pissing off current vendors and hurting bottom-line sales. After huddling for a few minutes, the HP team offered Value America a big prize — HP would grant Value America a test program to sell printers online. Rex Scatena started bouncing ever so slightly in his chair, beaming. Another colleague, Bill Hunt, saw success unfolding before them.
Craig Winn looked sadly at the sales manager and apologized he hadn't communicated better. What Value America wanted, he informed them, was the whole line of HP products. HP, he told the assembled team, gave Value America the credibility it needed to succeed. The HP team looked at each other and then at Winn. No way were they giving over the entire line of products to a store that wasn't even a store yet. Winn left without a deal. Scatena and Hunt waited until they were inside the elevator to berate Winn. Then they both pounced. How could he have done that? HP was giving Value America what it wanted! It would have meant credibility! It would have meant more money! Instead, the team was going home empty-handed.
Winn didn't even hear them. He had just seen the promised land. He knew, he just knew, that HP would agree to his terms. He had seen what they wanted to do, and he knew Value America alone could give them what they wanted. He also knew Value America had a solution unique to the entire Internet space. If HP was as smart as Winn believed them to be, they'd be back. They wouldn't have a choice. Within a month, HP sent out a team to do due diligence on Value America. By the end of that trip, HP agreed to sell its entire line of consumer and small-business products through Value America — even though Value America didn't have a store. Winn had his break. Because HP recognized Value America didn't have a store and wasn't likely to be driving millions of dollars of sales right away, it gave Value America the option of purchasing HP products through any one of five major distributors instead of having HP ship directly. It wasn't exactly what Winn had envisioned, but it presented him with a new opportunity.
Each of the five big distributors — Merisel, Tech Data, United Stationers, New Age, and Azerty — wanted the HP contract. As with all things Internet in mid-1997, it wasn't about the actual dollars the contract represented, but rather the dollars it would represent once things got rolling. Winn knew this. He contacted each of the distributors, telling them he'd won the contract to sell HP online and he must choose one of the five distributors HP used. There was, Winn told each company, an easy way for Value America to make up its mind. Whichever distributor did the most to help Value America get more brands in the store Winn would select for the HP contract.
Azerty stepped up to the plate first. Within a week of Winn's call to them in May 1997, they had arranged for more than fifty brand partners to come in to hear Winn's Value America presentation. By the end of that day, more than twenty new brands, including Canon and Zenith, came on board, each plunking down between $15,000 and $20,000 for the multimedia product demonstrations and committing to placing their products in the Value America store. United Stationers was next, renting out a ballroom in one of Chicago's grandest hotels and filling it with their vendors. Winn left that day with more than thirty brands and more than $400,000 in financial commitments. Ultimately, however, he didn't choose either Azerty or United Stationers. He chose New Age, the smallest and least connected but, Winn thought, the most responsive to his vision. And while using distributors wasn't part of the original Value America plan, Winn placated himself by emphasizing that distributors might ship more quickly and be more responsive until Value America scaled to an appropriate size. Besides, distributors were bringing more brands. Winn had never built an Internet company before, but neither had anyone else. Everyone was winging it.
Meanwhile, the technology was progressing. Value America still didn't have a functioning store, but Ken Power's graphical efforts combined with Joe Page's technology prowess provided Value America with a rough draft of a store by early summer of 1997. On the functionality side, Page couldn't figure out a way to do a lot of what Winn originally wanted. There wouldn't be, for instance, an animated shopper to guide customers through the store. No voice-recognition capacity had been built in either. Significantly more important technically, the system couldn't process credit-card orders, and it had more bugs in it than a New York City sewer. But it was a start.
As Value America gained brands, added staff, and scrambled to finalize its storefront and technology in the middle of 1997, the world around them was ablaze with Internet and especially e-commerce wonder. People who didn't know a thing about the Internet, the World Wide Web, or the difference between the two were driven to the dot.com world by the voices they heard around them whispering — or for that matter shouting — two words: "easy money." It was not too different from the mid-nineteenth century, when a bunch of scraggly guys were hanging out at a creek near a place called Sutter's Mill. There they stood, probably jabbering about new advances in horse-manure technology and railroads while betting who could piss further into the river. Suddenly one of them pipes up, "Hey Ned, you pissin' glitter, or is that thar' gold in the water?" Kabam! The California gold rush.
By mid-1997, the Internet gold rush was under way, rapidly rejiggering the entire U.S. economy. Suddenly the business world was being divided into the old (people who manufactured tangible products or offered traditional services) and the new (anything that used the Internet for any part of its business). It was becoming a winner-take-all search for alchemy, as young and old, rich and poor, educated and uneducated raced to turn sand into gold. The growing conventional wisdom was that anything Internet gave huge payouts and was therefore worth huge risks. That year Forbes issued its list of the hundred richest people in technology. The entry point for the list was a net worth of $49 million. Several people on the list had had net worths of maybe $49,000 the year before.
Taking advantage of Internet mania, Winn raised nearly $1.5 million in private investments from some Richmond friends, including Value America's lawyer, Gary LeClair, a whippet of a man with a perpetual sunlamp tan, thick black hair, and a penchant for thin Ferragamo ties with stylized leopards, elephants, and such. The Richmond contingent bought nearly 100,000 of the Value America shares (for $1.50 a share) — though they wouldn't be able to sell any until and unless Value America went public.
At about the same time Winn was raising his first outside money, he began hiring the core components of an executive team. The biggest addition was the new CFO, Dean Johnson. Johnson was a grown-up version of The Andy Griffith Show's Opie — but with an attitude and wild blue eyes. He'd received his M.B.A. from the University of Virginia, worked at Lehman Brothers doing corporate finance, helped found a successful wireless cable-television company, and done business development for a semiconductor manufacturer. As soon as he sat down with Winn, he saw the entrepreneur's wild-eyed vision and bought in...literally. Johnson invested $100,000 in the company (also for $1.50 a share) at the time of his hiring.
Winn's second Internet funding experience came in early October '97 when he toured Goldman Sachs, Morgan Stanley, Alex Brown, Union Bank of Switzerland, and several other large investment banks. Winn's funding desires were simple. He wanted about $10 million to help launch Value America into the Internet big leagues. Winn was operating by the same business rules he'd learned when growing his manufacturer's rep firm and lighting company in the 1980s: aggressive but manageable growth capped off by a public offering to elevate the company to the next level of growth. He foresaw profitability in a year or two.
Wall Street in the early stages of its Internet love affair had a different perspective on how all Internet-related businesses should grow. The Internet business world was first defined by the success and public offerings of Netscape, Yahoo!, and AOL — companies that were either Internet service providers or portals to the Internet and that accrued value based primarily on how many people they attracted to their sites. In the equivalent of Nielsen ratings for the Internet age, Wall Street kept track of how many people visited each particular site. The higher the "Web traffic," the more valuable a given piece of Internet property was. The nascent e-commerce industry based evaluation of a company's growth not on traditional retail metrics of advertising-to-revenue ratios or gross sales or even profits but on Internet media terms … page views, unique visitors, and customer-acquisition costs.
Winn discovered during his New York funding trip that Amazon. com, the first big Internet retailer to go public, had used the same metrics to measure its progress. Since Value America wasn't built for those metrics, the Wall Street community wasn't very interested in Value America. The bankers at Goldman, Morgan, and elsewhere loved the vision. They just didn't think Value America understood it needed to be grabbing Internet land as fast as possible, staking its claim to cyberspace and becoming the leading brand in the electronic retail space. To grow like they needed to, the bankers informed Winn, Value America would need hundreds of millions of dollars, not the ten million Value America was purportedly looking for.
Instead of valuing his company based on actual or next-year revenues as Winn had been planning, the Internet experts demanded the company be valued based on revenues two years out, assuming the appropriate funding had already been secured. In other words, if Value America got $50 million of funding in 1997 and believed it could use that money to get $100 million in revenues in 1998, which would in turn allow it to raise another $50 million and therefore generate $200 million in sales in 1999, the company would be valued at at least two times those 1999 forecasts — or, according to this scenario, at $400 million. With the new Internet math, companies were valued at a multiple of forward revenue. To Wall Street's thinking, this was the only way to value unprofitable but potentially revolutionary companies.
The single goal was to build scale, build the brand, and become the Internet behemoth...overnight. Winn had more competitors than he had imagined. In Silicon Valleys, alleys, and corridors, retailers, technologists, and bankers were creating dot.com companies that would sell pet food, lingerie, books, electronics, discount items, luxury items, home-improvement items, furniture, and everything else imaginable. All those companies were already operating on new Internet math. Winn had to catch up.
Shaken and stirred, Winn went back to Charlottesville, looked at numbers that called for profits at the end of 1998, and scrapped them. Instead of relying on direct marketing to attract customers, Winn decided to refocus his firepower on both online advertising and offline print and broadcast advertising. He increased his marketing and ad budget 200 percent, projected greater quarterly revenue, and decided for the first time in his business career to not even think about achieving profitability. He had to get Value America to more than a billion dollars in revenue as quickly as possible, damn the losses. Value America couldn't be an attic operation anymore. It had to be huge immediately.
Winn gathered the team of fifteen or so employees around him and told them what he'd discovered. "The New York banks," he relayed to an increasingly wide-eyed team, "want to take us public … soon. They think we'll be huge — that Value America will be worth hundreds of millions of dollars very, very soon. Everyone here … everyone here … will be a millionaire!" Everyone was well pleased with the news.
As Winn assimilated these new realities, Value America opened anonymously in early October 1997. As Winn had been forced to accept, the site wasn't the store of his dreams. It didn't have all the bells and whistles — definitely no animated personal shopper, no ability to have consumers talk to each other or even write reviews, and no voice-recognition software. Customers entering www.valueamerica.com into their Web browsers were greeted by a clean, crisp storefront with a column of little square buttons, each representing one of the approximately six product categories Value America offered. Customers who clicked on the desired button would be taken to another screen, featuring the products. As Winn had always envisioned, users could rearrange the store according to their tastes. If they wanted to shop by brand, they clicked on a shop by brands button on the left side of the screen, and the list of a hundred or so brands popped up. Likewise, if customers wanted to shop by best buys, they could click on a best buys button, and the greatest deals popped up.
Now all Winn needed were customers and investors, and not in that order. And as if in answer to his prayers, almost out of the blue came the union boys.
ULLICO, the Union Labor Life Insurance Company, was a $4.5 billion financial-services powerhouse owned by the AFL-CIO. Originally created by the American Federation of Labor to provide death benefits to the families of union members, ULLICO had gradually grown to become a holding company for a panoply of financial services ranging from life insurance to medical insurance to financial planning. Mike Steed, brilliant, shrewd, and quietly known inside ULLICO as "the screamer," was a redheaded financier brought onto ULLICO's team with a mandate to go where the unions had never gone before — into aggressive capital investing. Steed understood the world was sprinting toward the Internet and believed ULLICO needed to get running. On November 13, 1997, he met with Winn. To Steed, who had heard hundreds of pitches in his life, this one seemed perfect. He couldn't find any apparent flaws.
Right there, Steed offered Winn a deal. ULLICO would invest $10 million for 10 percent of the company. Never mind that Value America had a grand total of about $10,000 in revenue at that point. Winn's perfect company was suddenly valued at $100,000,000 — ULLICO was doing Winn's Wall Street math for him. By new math standards it made a hell of a lot of sense. In the preceding eight months, Amazon's stock had increased in value nearly five times. Yahoo!'s ten times. Value America's story beat Amazon's and Yahoo!'s with a stick. Why wouldn't it be worth that much money?
Craig thought it was stunning. A company with no revenue was now worth more than Dynasty Lighting Classics ever had been.
For Winn, however, the $10 million investment wasn't the best part. Steed also wanted a sixty-day option to purchase an additional 75 percent of Value America for $250,000,000. Considering Winn and Rex still owned about 85 percent of the company, it would be a hell of a payday (especially for Winn — Rex owned only about 19 percent).
At virtually the same time ULLICO became a player, another financial institution stepped up and wanted to become an important part of the Value America world — Union Bank of Switzerland. UBS wanted to take Value America public in early 1998. At the end of one of their meetings, one of the bankers looked Winn in the eye and said, "I will crawl on my hands and knees over shards of broken glass to get this deal." Everyone at Value America took that to be a very positive sign.
Going public was a fairly cut-and-dried process. Assuming Value America's S-1 registration statement with the Securities and Exchange Commission went through in late December, they'd have their road show for investors in early February 1998. They would go public in March.
Realistic valuation expectations were between $160 and $190 million, with an anticipated increase of 20 percent within three months — conservatively. That would mean a trading valuation of $225,000,000. So, whether it was the union boys from ULLICO or the Union Bank of Switzerland, Value America was going to be a quarter-of-a-billion-dollar company before the crocuses broke the spring ground in Charlottesville.
Craig Winn was getting very comfortable with the dot.com world.
Excerpted from dot.bomb, copyright© 2001, by J. David Kuo. Posted with Permission of TWBookmark.com.