The valuation of Netscape divided investors. As Professor Burton Malkiel of Princeton University in his A Random Walk Down Wall Street stated, there have always been roughly two schools in the valuing of companies. Those in the first use a method that Malkiel calls the ‘firm foundation’, which tries to anchor a share price in the intrinsic value of the corporation. In a manufacturing industry, this is roughly calculated by considering the assets of the company, the possible market, the cost of the machinery, the land, and the investment in patented processes combined with the size of the revenue and the profits that can be returned to investors.
To those belonging to this school, the Netscape corporate valuation was almost incomprehensible. Throughout the years of the Internet boom, Warren Buffett – arguably the greatest American investor of his generation – diligently followed the ‘firm foundation’ approach, only buying into companies such as furniture retailers and utility businesses, ventures that he could understand and that could reasonably be expected to make a profit. As the market ballooned, Buffett was derided for not being clever enough to second-guess the exploding share prices of the fashionable Internet businesses.
The second method of calculating value is what Malkiel calls the ‘castles in the air’ theory, which does away with any analysis of a company’s intrinsic worth. Instead, investors consider how the hordes in the marketplace are likely to react in the future. The successful investor calculates what situations are likely to lead to rising share prices, then buys before the crowd and sells before the fickle market has got bored. No less an investor than the twentieth century’s pre-eminent economist John Maynard Keynes advocated this approach, and became a millionaire as a result. He wrote that most people are ‘largely concerned not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.’ He stressed that investors should concentrate on the behaviour of the market above the insular world of the company.
Some investors and commentators tried to argue that the value of Netscape and of the other Internet companies that soon followed suit were in fact based on a firm foundation. In the New Economy there were to be New Rules which would benefit a different sort of corporation. By giving away their product, Netscape had come to dominate the browser market – surely this would prove to be incredibly valuable in the future. In addition, Netscape had a thriving corporate culture, the loyalty and satisfaction of its customers and the power of a brand; enduring market-dominance and profit would surely follow. But Netscape’s firm foundation was built in virtual reality, and its Initial Public Offering was mostly a triumph for the castles-in-the-air method of valuation.
Jim Clark said that his Initial Public Offering proved that the market saw the future through his eyes. ‘People started drinking my Kool-Aid. Netscape obviously didn’t create the Internet. But if Netscape had not forced the issue on the Internet, it would have just burbled in the background. It would have remained a counter-intuitive kind of thing. The criticism of it was that it was anarchy. What the IPO did was give anarchy credibility.’ From 9 August 1995, the capital markets were pitched into chaos, uncertainly gyrating as belief in the Internet wavered. The Netscape IPO was the Internet’s breakthrough as a commercial medium. What had been a playground for researchers and idealistic online communities became a dreamscape for entrepreneurs.
The IPO had profound consequences for the coming years. The capital markets were now ready for a new kind of business, one that hadn’t yet made a profit but had loudly staked its claim and would presumably make a mint in the years to come. From then on the investment community was happy to rely on the unfamiliar rules of Net economy and leave reality behind. ‘There was an unbelievable frenzy,’ one important investor remembers. ‘You [might get] these four kids who didn’t even finish college, [and] they would say, “We know how to sell insurance on the Internet” or “We can sell pet food, or toys”, and me and Kleiner Perkins and Soros, we were rushing to sign huge cheques to these kids. And everybody said, “They won’t make money for twenty years, but you have to get the space”. It was incredible.’
The Netscape Initial Public Offering took place on Bill Gross’s thirty-seventh birthday, and only added to his general excitement about the possibilities offered by the New Economy. His own online venture CitySearch was about to be launched, and elsewhere the first of the online merchants were embryonic. In the middle of July 1995, amazon.com had been launched in Seattle by thirty-year-old entrepreneur Jeff Bezos, who touted it as ‘Earth’s Biggest Bookstore’. Legend has it that Bezos wrote the business plan on a laptop while being driven west from New York by his wife; he chose the book industry because it was large, fragmented and had an already well-established distribution system. The company’s debut came with no great hullabaloo and no anxious editorialising about this being the future of business. Yet in its first week amazon.com took more than $12,000 worth of orders; within only a couple of years it was worth hundreds of millions of dollars, and later billions. More importantly, it spawned a series of copycat businesses, in various areas of retail, from groceries to toys.
Gross was well aware of the new companies springing up across the Internet, and was keen to jump on the bandwagon. Soon he sold Knowledge Adventure, which by then was valued at $100 million and his stake in that at a little less than $20 million. Free and with money in the bank, Gross was now able to concentrate full time on his new baby, the Spielberg-inspired ‘idea factory’, which he christened Bill Gross’s idealab!.
His radical innovation was to create something like a movie studio but which turned out new businesses rather than films. Some of them might fail; but if a few were ‘blockbusters’ and could be sold to the ravenous capital markets, then he would be made. His challenge was to bring a touch of brilliance to new corporations – just as Spielberg did to films. ‘I don’t compare myself to Steven Spielberg,’ he said. ‘But in the same way he has this expertise about what things should ultimately look like onscreen, I have a very good vision for pure business concepts.’
The new project Gross described as an ‘incubator’, like those that had been around for years, particularly on university campuses, as the ‘nursery slopes’ of company formation – providing office space and a little advice to aspiring entrepreneurs. One particular role model for Gross was George Hatsopoulos, founder of the Thermo Electric conglomerate, who had created and then taken public nineteen companies, keeping an interest in each. Gross’s insight was that a slow-moving and conservative institution could be re-focused as a speedy engine for the creation of Internet companies. He said, ‘I felt if someone else could make this work with the physical processes, it would work way better on the Internet.’
Bill Gross’s core skill, and the one he most prized, was creativity. A great brainstorming session, he once said, was ‘a little bit like having sex’. Characterising himself as the everyman fixer, he wandered around the world spotting problems and trying to fix them. He has described how, in order to properly contemplate problems, he meditates to the sounds of Yosemite’s Merced River or listening to classical music. As Steven Spielberg said, ‘He’s kind of like a mad genius. His brain works like a roundhouse in a train station, spinning off ideas in seven directions at once, yet not losing its focus on any one of them.’
Having formulated the idealab! business plan, Gross approached and seduced a number of investors and asked each to put up at least $500,000. As one of them remembers, ‘[Gross] talked to us about the Internet; I didn’t know what the Internet was, zero, but he got money from me.’ Oscar-winning actor and producer Michael Douglas was among those to put money in, as was Jean Pigozzi, the heir of the Simca car-manufacturing fortune. Steven Spielberg also came along for the party, having