Wheres the Loot?

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An excellent read. Full of great insights for entrepreneurs and many timeless examples. As someone who was involved, I can say that this book rings true about many of the main players and events. —DEAN GINGELL, DEPUTY MANAGING DIRECTOR, COMMANDER COMMUNICATIONS LTD (FORMER MANAGING DIRECTOR OF FAIRFAX ONLINE AND GENERAL MANAGER OF ON AUSTRALIA) There are entrepreneurs out there who brainwash the masses into thinking that ‘risk is the key to success’. What they don’t want you to know is that risk is like sex—only those who engage in it can benefit from it. If you want to be rich, do it yourself. There’s no other way. Read this book and you’ll know what I mean. —JONAR C. NADER, DIGITAL-AGE PHILOSOPHER AND AUTHOR OF HOW TO LOSE FRIENDS AND INFURIATE PEOPLE Where’s the Loot? is a refreshing look at the positive contribution made to Australia by its IT entrepreneurs . . . few are as well qualified to comment as Grant Butler, who lived vicariously their ups and downs as a journalist and columnist for the Australian Financial Review. The book is a must-read for entrepreneurs trying to understand why some start-ups succeed and others fail. —ANDREW GREEN, EXECUTIVE DIRECTOR, AUSTRALIAN VENTURE CAPITAL ASSOCIATION A fascinating and informed insight into the players, the highs, the lows and the lessons of the recent technology investment roller-coaster ride in Australia—a must-read for all aspiring entrepreneurs and anyone interested in the entrepreneurial process. —MALCOLM DONNELL, VENTURE CAPITALIST AND CORPORATE ADVISOR

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For Cassandra and Callan

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Where’s the loot?

Who really made the money during the high-tech boom, how they did it and how you can do the same next time

GRANT BUTLER

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First published in 2001 Copyright © Grant Butler 2001 All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. Allen & Unwin 83 Alexander Street Crows Nest NSW 2065 Australia Phone: (61 2) 8425 0100 Fax: (61 2) 9906 2218 Email: [email protected] Web: www.allenandunwin.com National Library of Australia Cataloguing-in-Publication entry: Butler, Grant, 1971– . Where’s the loot?: who really made the money during the high-tech boom, how they did it and how you can do the same next time. Includes index. ISBN 1 86508 464 6. 1. Internet industry—Australia. 2. Entrepreneurship— Australia. 3. Investments—Australia. I. Title. 338.47004678 Set in 11.5 pt Apollo by Midland Typesetters, Maryborough, Vic. Printed by Griffin Press, Adelaide 10 9 8 7 6 5 4 3 2 1

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the relevant copyright, designs and patents acts, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publisher. eBooks Corporation

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CONTENTS

Acknowledgements vi Introduction vii one Interesting times 1 two In it to win it 23 three Seeing in the dark 50 four Other people’s money 70 five Case study: Magna Data (Davnet) 103 six Case study: LookSmart 110 seven Case study: One.Tel 118 eight Case study: Macquarie Corporate Telecommunications 130 nine Case study: Spike Networks 139 ten Lessons from the boom 152 eleven Where’s the loot? 171 epilogue Your next step 179 appendix 1 Opportunities from tax reform 182 appendix 2 Steps in the VC process 185 Notes 187 Index 198

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ACKNOWLEDGEMENTS

This book would not have been possible without the direct contribution of time and effort by many people. Special thanks to all those who participated in interviews, suggested ideas, assisted with research and provided invaluable feedback on early drafts. It was inspiring to find so many business people and other individuals with a genuine interest in and concern for Australia’s future as a prosperous and technologically advanced nation.

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My definition of success is very simple. He who’s happy is successful. He who’s not is unsuccessful. —RENE RIVKIN1

W

hen Sean Howard was eleven years old he spent six months sleeping on a mattress on the floor because his single mother couldn’t afford a bed frame. When I interviewed him for this book he was in the study of a $13 million mansion in Neutral Bay, Sydney. According to the real estate press, ‘Shell Cove’ is 200 squares, sits on 2,800 square metres of land and comes with a tennis court, pool, golf putting green and bunker. Inside, I sat in a deep leather chair below a bookshelf filled with antique books on Fiji. Howard owns land there. A friend of Howard’s laughs when I ask him about the house, saying that he’s lost in the massive place. ‘He’s got this one car parked in like a twelve-car garage, it’s crazy,’ he says. It turns out that there is method to the madness, however. There are few homes in Sydney with deepwater frontage and Howard needed one for the construction of his new yacht. What on earth happened between 1970 and 2000? How did a boy go from the floor in blue-collar Melbourne to worrying about which corner of his garage to park in at night? The short story is that during the 1980s and early 1990s Howard sold vii

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shares in Australian Personal Computer magazine to Kerry Packer for a total of about $8 million. In 1998, he sold his part of Internet service provider OzEmail to American firm UUNET, part of MCI WorldCom, for close to $120 million. The long version is more complicated, involving foresight, creativity, recklessness, marketing savvy, ruthlessness, luck and the odd tantrum or two. This book tells the stories of Howard and other entrepreneurs like him. Having spent most of the 1990s as a high-tech journalist for a range of publications, most recently as IT Editor at the Australian Financial Review, I had the dubious pleasure of watching a lot of people—mainly men, usually in their twenties and thirties—become very wealthy, very quickly, in the Internet boom. In 1997, for instance, I worked at a company called Decisive Publishing, editing a small newsletter with the then novel masthead on-Line. A copy dated 22 April 1997 now seems even more dated than Howard’s antique books. There’s a story about Roger Allen and Roger Buckeridge from Allen & Buckeridge trying to raise their first $100 million high-tech venture-capital fund and the already surpassed prediction that the number of people with Internet access at work would increase from 12 per cent at the time to 48 per cent by 2002. There’s also a breathless story about two companies, AUSNet and Tetherless Access, that were trying without success to deliver high-speed Internet access in city centres. The people who would eventually make their millions by offering wireless data services around town, among other things, happened to be our landlord. Decisive Publishing sub-let an office in Castlereagh Street, Sydney, from the then obscure Internet service provider Magna Data. They liked the place for the same reason we did: it felt vaguely anarchic because the decor was awful and it was over the road from Telstra’s colossal Elizabeth Street headquarters. As far as we viii

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could tell, Magna Data was out of control. Staff bitched, people said their network didn’t work and we waited for the day we’d be evicted because they’d gone broke. What we didn’t expect was that by 1999 the four founders of the company—Jason Ashton, Luke Carruthers, Mark Cramer-Roberts and Vivian Stewart—would all become multi-millionaires before their thirtieth birthdays. Magna was bought by the then even less well known, Melbourne-based Internet company, Davnet, for $16 million in cash and shares. At the time of writing, Ashton, who took more shares than cash, had seen his paper worth reach as high as $47 million. He’d also bought a dark blue Ferrari Mondeo 360. This was something that we, even as industry journalists living next door to the guy, hadn’t seen coming. But he had. And when it comes to getting $300,000 sports cars, it’s foresight that counts. The central question in this book is why did people like Sean Howard, the ‘Magna Boys’, and others such as David and Aidan Tudehope, the hundred million sibling co-founders of Macquarie Corporate Telecommunications, make big money in the dot-com boom while others failed? To use a surfing analogy: how early did they see their waves coming? Why were they ready for them? What risks did they take? How did they know how to ride once they’d been picked up by the swell? In short, how did they step into the multi-million dollar league or even, in the case of Tracey Ellery and Evan Thornley at LookSmart or One.Tel’s Jodee Rich, become billionaires in such a short time? Scratching the surface of these questions will take the rest of this book. The good news is that the outlook for Australian entrepreneurs is improving. The recent reform of the tax system has created new incentives for people to seek capital gains instead of salaries—owning all or parts of businesses rather than just working for them. Ongoing advances in ix

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computing and communications continue to create direct value but are also having a knock-on effect, enabling accelerated innovation and opening up opportunities in many other parts of the economy, such as agriculture, transport, medicine and manufacturing. There is also a renewed interest in, even public warmth towards, entrepreneurship itself. A symbolic high point in this thaw was the release from jail of Alan Bond, the man that did more than any other to darken the word ‘entrepreneur’. Despite having spent four years in jail for defrauding Bell Resources of $1.2 billion and other crimes, he had the front to return to public life by writing a series for the Sunday Telegraph explaining how he would never have been jailed if he had been tried by a jury of peers. Showing he still had his popular touch, he also appealed for a ‘new beginning’ in an extraordinary TV commercial made by Love, Siimon Reynolds’ firm, for the Seek.com.au jobs website. With the dot-com boom in full swing, the mood was such that it seemed the public might just grant it to him. Though, at the time of writing, things had well and truly turned nasty. The scythes were out for many high-tech business people, particularly those presiding over newly listed companies with plummeting share prices. Johnson Wang, the former head of the Edge Group of computer companies who in 1996 received a business award from Prime Minister John Howard, was declared bankrupt in late 2000 after a string of controversies. Damien Brady, the 32-year-old head of Edge’s sister company, Internet-provider Eisa, was under scrutiny after the company’s disastrous attempt to buy OzEmail’s consumer business for more than $300 million. If the OzEmail debacle wasn’t bad enough, Brady really hit the rocks when he couldn’t validate claims made in his company’s prospectus about his academic qualifications. Then there was American-born Chris Tyler, x

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the former chief executive of accountancy software giant Solution 6, whose Australian visit came to a rapid end after revelations in Business Review Weekly that he’d been convicted in the United States fifteen years earlier for owning two garbage bags of marijuana and had once run a listed Canadian educational software company into the ground. Greg Fisher, the boss of Australia’s first gay Internet and property development company, The Satellite Group, also felt the cool blades of public disquiet. In July 2000, the Sydney Morning Herald ran an article pointing out that the company’s shares had performed poorly since floating and claiming that Fisher too was struggling to remember where he got his Masters degree.2 He quit shortly after and began fighting to clear his name in a nasty stoush with the Satellite board. It was all good fun in a way—we still love a public hanging, admit it—and some of the kicks were well earned. Indeed, small investors like a friend’s mum who bought Solution 6 shares at $17 then watched them rapidly collapse to under $1 would probably like to land a few directly. Fortunately, such stories were the exceptions in an overheated market and we can only hope that the word ‘entrepreneur’ survives the 2000 correction. And despite the flameouts, a lasting legacy of the dot-com boom is the notion that it is feasible to get seriously rich in one’s own lifetime. The research for this book involved face-to-face interviews with a number of the tech boom’s main protagonists, from the entrepreneurs themselves to lawyers, technologists, merchant bankers, venture capitalists and others whose fingers can be found in lots of pies including diversified investor Rodney Adler, then One.Tel chairman John Greaves and Telstra chairman Bob Mansfield. Other material was picked up during my six or so years of reporting on the industry. Indeed, I’ve felt Johnson Wang’s gentle handshake, had lunch with both xi

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Damien Brady and Greg Fisher, and was as impressed as any journalist when Chris Tyler dragged Solution 6 back from the brink of insolvency in the late 1990s. One bit of wisdom I have taken away from all this proximity to people making (and losing) fast money is that most of the ones that really made it big began positioning themselves for success during the recession of the early 1990s, if not before. At that time, telecommunications and the Internet presented an obvious high-growth opportunity but few people had the stomach, technical capacity or financial facilities to pursue it. Those that did were well placed when the ‘Big Wednesday’ of business opportunities came—1999’s global surge of money into anything high tech. This was the time for guys like Sean Howard and David Tudehope (who can’t surf, by the way) to get out their metaphoric big-wave boards and ride for their lives. Those that arrived late, like Damien Brady at Eisa and Justin Punch and Alison Harrington at failed ‘e-tailer’ TheSpot, were caught inside the break, often pummelled beyond recovery. Another question is whether entrepreneurs do the rest of us any favours—do these guys and girls really create sustainable wealth? I don’t just mean tipping well at restaurants. Or paying $3,000 for a $20 print of Dawn Fraser like Daniel Petre, ecorp president and $100 million-plus father figure to us all, did at a recent charity event. I think the answer is ‘yes’. It’s a hit and miss affair but those that operate in internationally high-value fields such as computing and medicine are a positive force for economic renewal. Sure, there are some sharks in the water and plenty of flotsam, but any Australian that creates a new and viable enterprise helps to keep the rest of us in the First World. Yes, Jodee Rich is worth up to $1 billion—depending on the market—but he has also helped to create thousands of jobs, here and overseas. As a nation, we love to hate these people but xii

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some of them are the young Frank Packers and Frank Lowys of our time. Without them you can bet that we’ll be riding the proverbial sheep’s back until the Australian dollar reaches parity with the Mexican peso. One of the main reasons I’ve written this book is the hope that it might encourage at least some of you to build great companies so that my baby boy, Callan, might one day work somewhere other than McDonald’s. No one has expressed this need more succinctly than the taxi driver who took me to Sean Howard’s house. It was late summer, 2000. As we wound our way through the narrow and picturesque streets to the harbour, I asked what he thought about the Internet entrepreneurs making millions on the stock market. I expected him to echo right-wing radio, tell me they were all crooks, but he surprised me. Shouting through his plastic security screen he said, ‘These blokes that are good with technology, we need ’em . . . Country bloody needs ’em.’ Finally, I would like to say in advance that some share prices and even whole companies cited in this book may have changed substantially since the time of writing. This was difficult to avoid in such a volatile sector but I hope it isn’t too disorienting. Readers may also feel that I have missed some important figures, such as Craig Winkler, chief executive of software company MYOB, who has quietly built a paper wealth in the hundreds of millions. But the goal was to try to draw wider lessons by concentrating on a small group rather than to produce a comprehensive history of Australia’s dot-com boom or another ‘How to Get e.Rich’ book. The point is that for most it’s too late to get seriously e.Rich. The challenge is to spot the next wave—maybe Business Week will soon be talking about the ‘x-rich’ as the human genome project spawns a new industry. The result is, I hope, some valuable lessons about spotting opportunities and succeeding in what the Chinese might call ‘interesting times’. xiii

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e live in interesting times. More was accomplished (and destroyed) in the twentieth century than any previous 100-year period. The human race is on a roll and things are only going to accelerate in the next 100 years, driven by self-perpetuating gains in technologies and globalisation. The question is: how will you fare? Will you embrace the opportunities or become a victim of the threats? Will these ‘interesting times’ prove to be your very own Chinese curse or a time of extraordinary success? Can you do anything about it? This is a book about doing business and taking risks during periods of high technological change. The central premise is that we can learn a lot from the Internet and technology boom of 1995–2000. This was a period of extraordinary change. All sorts of scientific, social and geopolitical trends converged to create a period of unprecedented opportunity and danger in business. In particular, the world’s stock markets surged out of control, enabling a lot of people to make ridiculous amounts of money in a very short period of time. Others lost vast sums trying. Take, for example, two university professors, David Skellern and Neil Weste at Macquarie University in Sydney, who 1

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collected a large but undisclosed portion of US$295 million when United States company Cisco Systems bought their company, Radiata Communications, in late 2000. Cisco’s target was Radiata’s world-class chip that enables high-speed wireless communication between computers. Or David, Jon and Stephen Shein, the South African-born businessmen who in 1987 founded Com Tech Communications, an information technology sales and training company. By 2000 they had sold their entire share of the company to global giant Dimension Data, realising a gain in the hundreds of millions of dollars. ‘I guess both my brothers and I have done better than we could have dreamt of,’ said David Shein, the 40-year-old chairman of Com Tech who started the business from his car boot. ‘That’s one of the things about Australia—when you are given the opportunities and do a hard day’s work you will be rewarded.’1 On the other hand, investors who backed companies such as would-be retailers dstore and TheSpot lost millions. dstore, for instance, had shareholders including LookSmart, ninemsn, Rebel Sports, the Besen family’s Sussan clothing chain, the Liberman family’s JGL Investments and investment group Hochma, run by Mark Leibler and Michael Naphtali. It was also chaired by former New South Wales premier Nick Greiner, previously on the board of the country’s biggest retail group, Coles Myer. But despite all the big names, it managed to lose around $20 million before being acquired for around $5 million by Harris Scarfe.2 What was it about the winners that made them successful? Why them? And who walked away with the loot? The quick answer is that most of the people that succeeded during the dot-com boom—and I mean really succeeded, not just got their faces in the paper a few times—worked out where the world was going early, committed themselves, then acted as 2

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skilled entrepreneurs in seizing the opportunities that arose. Unfortunately that’s not as easy as it sounds.

The highway I grew up in a place called Hornsby, in Sydney. It had some schools, banks, a couple of shopping centres, a pool, its own police station and post office and other features of a mediumsized, suburban centre. At one point in the 1980s it hosted an adult bookshop until the conservative locals shooed it away. For most of my childhood Hornsby’s most distinguishing feature was the Pacific Highway—the main road connecting Sydney to northern New South Wales and Queensland. It cut the place in half, creating the ‘old side’ and another, more developed, area that for some reason was never called the ‘new side’. The road was massive and dangerous, delivering a constant stream of cars and heavy trucks. It was always blocked at peak hour and around holidays. To most Sydneysiders, Hornsby was a bottleneck with a pub (The Blue Gum), two McDonald’s restaurants and a KFC. But to many businesses, from the Repco motor parts store to Video Ezy, Keith Lord’s furniture and the petrol stations, the concentration of traffic made Hornsby a good spot for passing trade. In the 1980s, the Roads and Transport Authority built a new freeway connecting Sydney to Gosford in the north. The road bypassed Hornsby and when it opened the place was reborn, suddenly quiet. Areas near the highway were habitable again. Apartment complexes sprang up along the edges of the once rancourous road. At least one petrol station and shops like Keith Lord’s closed, but the change hasn’t killed Hornsby—just altered it dramatically. The tale of Hornsby might be compared to the much larger construction project going on quietly around us: the creation 3

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of the broadband Internet or, as US former Vice President Al Gore likes to call it, the ‘information superhighway’. Like the F3 to Gosford, it will deliver great benefits to some but alienate others. It will make the economy faster and more competitive. It will also thrust Australia one step further into the fast lane of the global economy as the protection (not tyranny) of distance declines. The flipside to this, as Telstra chairman Bob Mansfield is quick to point out, is that ‘if anyone does develop anything in Australia, whether it be a good or a service or software or anything else, your market’s the world. So it’s a positive and a negative.’3 One of the most stunning examples of this small world principle in action comes from South Africa. In December 1999, software developer Mark Shuttleworth became one of that country’s ten richest people when he sold his company, Thawte Consulting, to American giant Verisign for US$575 million. What made the deal extraordinary was that Shuttleworth was 25 years old and had started the company in his mother’s garage in Durbanville, Cape Town, in 1995 as a way of reducing tax on his freelance work. When he sold it, Thawte still only employed 50 people and Shuttleworth, who had studied Business Science at the University of Cape Town, owned almost 100 per cent of the company. What made Thawte so valuable to Verisign (now owned by Network Solutions, the company that registers dot-com and other Internet addresses) was that it had about 40 per cent of the global market for ‘digital certificates’. These are used with the Secure Sockets Layer (or SSL) technology that secures Internet sites for electronic commerce. Microsoft and Netscape had also embedded Thawte’s technology into their web browsers, effectively making it available worldwide. In buying the company, Verisign made itself the undisputed leader in the field.4 4

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Beyond the incomprehensible numbers, what I like about the Thawte story is that it shows what a powerful concentrator and leveller the Internet can be. The computing technologies that make up the Internet represent the first truly global standard for communications and commerce. The telephone network and, to a lesser extent, the English language, come close but the Internet is the first truly universal system to be employed by mankind. You can go anywhere in the world and the Internet will work the same way. And if you have something central to that process, like Shuttleworth did in the form of his company’s Root Key, or ‘Thawte Certs’, then you have something of potential value to more than six billion people. Get a dollar from each of them and suddenly you’re Kerry Packer. Also, because the Internet really is universal, it didn’t matter that Shuttleworth was in Cape Town or Silicon Valley. If your product or service is truly Internet-based, and you have a good connection to the network, then it quite literally doesn’t matter where you are.

Life in the fast lane History reveals that those caught up in revolutionary change rarely understand its ultimate significance. —BOUTROS BOUTROS-GHALI, UN SECRETARY GENERAL5

Microsoft founder Bill Gates, like Boutros-Ghali above, has commented that people tend to overestimate the significance of new technologies in the short term but underestimate their long-term impact. I believe that the Internet will definitely conform to this rule. Along with the rest of the media, I’ve published thousands of words about the potential benefits 5

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of the Internet. I’ve gushed about the ability to buy your cornflakes from any corner of the earth and talk dirty with American housewives. But when it comes to developing a clear vision of the future, it is important to recognise that the network is also very, very dangerous to many established organisations. We are seeing the introduction of big, businessoriented systems that use Internet technology. While less glamourous than Amazon.com, even boring, these will have a profound impact, and not always for the better. The Internet is a juggernaut fuelled by at least four factors: the doubling every eighteen months in the power of computers; the annual doubling of telecommunications capacity; the sheer usefulness of the Web, electronic mail and other network applications; and, more generally, globalisation. According to Australian research group Paul Budde Communications, the number of people using the network has risen from next to nothing in the 1980s to about 180 million in 1999 and reached 400 million in 2000.6 Notably, many of these people are under eighteen years of age—tomorrow’s consumers. Canadian author Don Tapscott has dubbed this group the N-Generation, (‘network generation’) estimating that in North America and Canada alone there are 88 million children aged between 2 and 22 who are ‘growing up digital’.7 The network really is the first truly global system. Holding it together is a single computer at the Internet Assigned Numbers Authority, an incredibly powerful academic organisation with a really bad website in Marina del Rey, California. This holds the master address book for the Internet and contains numbers like 123.123.12.11 that relate to easy-toremember ‘domain names’ like CNN.com. If a computer isn’t in that address database (which, for security and functionality is replicated in other parts of the world), it isn’t part of the ‘domain name system’ and therefore not on the Internet. Two 6

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other things that make ‘the Internet’ the Internet and not just another computer network are the use of the Internet Protocol (IP) for basic data transmission and HTML, the HyperText Markup Language that makes the World Wide Web possible. I like to compare the Internet age to the Pax Romana. From the reign of the Roman emperor Augustus in 27 BC through to that of Marcus Aurelius up to 180 AD there was a prolonged period of tranquility known as the Roman Peace. The Romans, in their wisdom, set rules for and protected the empire as a whole but allowed each individual province to administer its own laws as long as they accepted Roman taxation and military control.8 This is a bit like a company that allows groups to dress down or enter new markets as long as they meet their sales quotas. To me, the Internet is much the same. Geeks and the American Government have, like some benign dictatorship, defined some basic rules that permit the entire system to function. In turn, individuals and companies worldwide remain exceptionally free to innovate and create value within the relative calm that this wider framework provides. It isn’t just the raw growth of the Internet that’s interesting. In fact, the network is, according to Garage.com president Bill Reichert, being adopted more slowly than radio was.9 What is powerful is that people are making it an everyday part of their lives. They are finding information, doing their shopping, talking to each other, trading shares, getting counselling, checking bank balances and many other things online. And because the Internet is an international system, they aren’t necessarily doing these things in Australia. Research firm www.consult estimates that Australians spent $253 million online in 1998 and $650 million in 1999, and says this sort of growth can be expected to continue. At the same time, the average amount spent by online shoppers rose from $355 per annum in 1998 to $630 in 1999. What’s most frightening, 7

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from the point of view of Australia’s balance of trade, is that www.consult’s survey showed that Australian web surfers spent about half their time on US commerce sites, particularly Amazon.com.10 I wouldn’t go so far as to say that Australian business is going to be totally wiped out by such net-enabled multinationals. Indeed, many stand-alone Internet players are failing and seeking the support of traditional ‘bricks and mortar’ companies. High profile companies like Buy.com.au, CDNow, dstore, Living.com and Pets.com have already hit the wall or been bought out by established players. But every time someone buys a book from Amazon or books a flight to Europe through a British website, for instance, they’re spending money overseas, not here. That hurts. Equally, of course, people from overseas are buying from Australian websites. Unfortunately though, it appears certain that more money is leaving the country through the Internet than coming in. The opportunities and dangers are even greater at the level of trade between businesses. The Internet and related electronic commerce systems make it possible for companies to trade goods and services with an ease and efficiency approaching that with which people trade shares on a stock exchange. Because the system is global, they can do this on an international scale as easily as they could within a country. These systems also make it very simple for companies to see how much other companies are paying for common items, such as stationery, and also allow them to increase their buying power by combining their orders. The promise of these systems is so great that many major corporations have begun spending millions to develop industryspecific trading environments. For instance, DaimlerChrysler, Ford Motor Company, General Motors, Nissan and Renault have teamed up to form a single electronic marketplace called 8

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Covisint (www.covisint.com). They are seeking to centralise the buying and selling of common parts and services used by all players within the auto industry. This totals more than US$250 billion per year.11 In their words, ‘Covisint will harness the power of Internet technology to create visibility within a company's supply chain—transforming the linear chain into a far more productive and efficient networked model.’ Australia’s largest retail group, Coles Myer, has also teamed up with GlobalNetXchange, a group of massive retailers whose members buy $350 billion worth of goods and services from 70,000 suppliers per year. The other members include Sears Roebuck of the US, Carrefour of France and Germany’s Metro group.12 Domestically, the biggest initiative is CorProcure, a proposed purchasing group put forward by fourteen of the country’s largest companies including AMP, ANZ Bank, BHP, Coca-Cola Amatil, Coles Myer, Foster’s and Telstra. The plan was to team up on the purchasing of common items such as stationery, fuel and cleaning supplies.13 The goal with all these initiatives is to reduce by billions of dollars the amount that major companies pay for production inputs, from petrol to door handles and hops. Where are all these billions in saving going to come from? Internal efficiencies and supplier profit margins. What remains unclear is which will generate the most savings and the real intent behind the exchanges. Are they giant purchasing cartels designed to aggregate purchasing with the goal of squeezing suppliers on price? Why else would archrivals such as Ford and DaimlerChrysler, for instance, be prepared to cooperate? Or are suppliers’ margins already very low and the exchanges will actually help to reduce waste by getting everyone in the industry to use identical procurement systems, for instance. As a Covisint executive has said, ‘The prices are already pretty damn low. But the waste is still in the system, and the waste can only get 9

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out if we standardise our communication with our suppliers.’14 Whatever the truth, it’s all about reducing ‘friction’ or, to put a finer point on it, ‘people’. The Internet drives economic efficiency and efficiency often destroys the value of businesses. As Warren Buffett, the famous value investor and America’s second richest man, has commented, ‘[The Internet] will make American business, in aggregate, worth less than it otherwise would have been.’15 Buffett’s contention is that the more automated things become, the less jobs there are for people. An example that may have sent shivers down his spine is an advertisement published by Internet auction operator FreeMarkets.com in The Economist magazine.16 FreeMarkets is an independent e-marketplace operator with the slogan, ‘Redefining purchasing power for the Global 1000’. The ad said that at 8.30 a.m. a Global 1000 company was being asked to pay US$24 million for an order of printed circuit boards. Instead of paying, it posted its order on the FreeMarkets website. Twenty-four hours later it had a quote of just US$14 million for the same boards. ‘In one day, the FreeMarkets process reduced prices on printed circuit boards by 42%,’ the ad crows, ‘leveraging a global supply base, and creating savings of $10 million.’ This is economy-shattering stuff. Companies will have to be very large, and have massive economies of scale, to win orders in the face of such brutal, real-time commoditisation. The problem for Australia is that, outside natural resources and agriculture, we’re not known for scale. While the e-markets process may open up some opportunities for Australian suppliers that were previously excluded from major overseas markets due to distance, we should be nervous. Though, not half as nervous as countries that are yet to be computerised or networked and therefore can’t access these new virtual marketplaces at all. 10

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The quick or the dead Australia is, I believe, getting harsher. I have done no empirical research to prove this but years of economic rationalism, exposure to international competition, improved reporting systems within companies and other changes appear to have left both workers and executives with few places to hide. Our business and social systems have become much more open and cutthroat. More American. Such international meritocracy is good for people who are good at what they do but potentially dangerous for those whose success depends on dubious factors such as family connections, schoolmates or government licences. The US might crow about its economic strength and low unemployment but median wages have been static or even declining in the US for about twenty years.17 Indeed, one of the reasons the rich do so well in America is the abundance of cheap labour. Even in San Francisco, heart of the hightech boom, you still get run-down bus stops and beggars on the street. One of my favourite urban myths is the story of the World Trade Organisation meeting in downtown New York. The Americans spent all day brow-beating a group of European officials about how they should adopt the US free market system. For the most part, the officials listened, took notes and nodded. At the end of the day they all went outside and the European delegation said that they would walk back to their hotel. The US officials said, ‘No, please, take a car, it’s not safe to walk on the streets,’ to which the Europeans replied, ‘Our point exactly.’ Buried within these statistics, however, is the fact that educated professionals have been enjoying much stronger wages’ growth than their less educated peers. Since 1979, average weekly earnings of college graduates in the US have 11

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risen by more than 30 per cent relative to those of high school graduates—the widest gap for 60 years.18 As First World economies become more and more information-powered, it’s not just the rich that are getting richer, the smart and the internationally oriented are also doing well. This process is self-perpetuating as well-educated people are more likely to use the Internet, which is in turn the most information-rich environment the world has ever known. Even TV is getting depressing, and not just because there’s nothing on but repeats of The Benny Hill Show. One night I watched a union leader who was saying that a couple of hundred people at an Australian plant that made fridges were about to lose their jobs. It seemed that the company could save $5 a unit—or about $2 million a year—having the wire bits at the back made somewhere in Asia. These people were stuffed, basically. Their whole town was stuffed. The item seemed to follow an endless succession of such stories: canneries, car factories, clothing manufacturers and farmers. One of these tales featured an ‘Australian’ call centre being operated out of New Delhi. Finance company GE Capital planned to save money by sacking 70 workers in Sydney and having its calls routed to a group of English speakers in India. This was now possible due to the dramatic declines in the cost of international telecommunications. In what the Sun-Herald described as ‘a bizarre twist’, the foreign workers were expected to use names reconstructed from the first and last names of the former Australian staff members.19 ‘Hi, this is Dawn Freeman, welcome to GE . . .’ Sad as it sometimes is, this is globalisation in action. Further, some people—I won’t say the majority—thrive in this flatter, faster, more efficient and merit-based system. The abolition of red tape and the introduction of free-market strictures has made it possible for many of the entrepreneurs in this book to 12

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achieve quantum leaps in wealth and social standing in their own lifetimes. The new world is even more democratic in a perverse sort of way in that it takes only money, rather than lineage or social standing, to buy votes. Even better, anyone can make money. Since this is a book for would-be entrepreneurs rather than Labor Party policy makers, I’m not about to try to propose any solutions. There is also evidence to suggest that even though the world is becoming more competitive, there has been a very real increase in wealth and well being over the past century. US historian Robert Fogel argues that it’s untrue to say that the world is becoming more unequal.20 Despite the fact that about 400 people control as much wealth as the bottom 2.5 billion,21 there has been stunning material progress in many countries, particularly the US when measured by spending, time use, calorie consumption, life expectancy and height.22 Whatever the statistical reality, you’re only as rich as you feel. You could be worth $1 million but if everyone else has $2 million you’ll feel poor. So I would advise people to be pragmatic. Powerful forces are at work and unless you get out of harm’s way you’re in danger of becoming a historical footnote. I think I started developing this pessimistic view many years ago in Europe. I was hitchhiking in some picturesque corner of Switzerland, admiring the lush green pastures leading to snow-capped alps as people zipped by in their small, unleaded petrol cars. Finally, an aging rockabilly guy pulled up in a monstrous old Cadillac. It was long and brown and propelled by a six-litre, lead-belching engine. After a few miles, I asked him whether he felt irresponsible driving such an environmental hazard through the pristine surrounds. He said, ‘No, the world is over, anyway. You think anyone else is really going to stop wrecking it? No. I’m not having kids and I’m driving this car and I feel okay about that.’ 13

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The guy was cynical, even selfish, but he had a point. He’s going to keep driving his Cadillac. The fridge manufacturer will keep using those factories in Asia. The call centre will probably remain in India unless bums on call-centre seats become cheaper in Bhutan. Another factor is that Australian companies, like most, have become less loyal to staff, firing people if it will help to achieve short- or long-term goals. This breeds cynicism and mistrust which further undermine the ability of companies to hold good people. I call this the ‘get them before they get you’ principle. The result is that talented people are identifying their unique value and setting up as independent operators or starting whole new businesses. In turn, this is leaving large companies full of the leftovers, causing internal weakness and increasing the motivation to outsource key functions to external individuals and organisations. A complementary trend is that of increased specialisation, where companies are focusing more and more on doing a small number of things well and delivering their services to a nationally or even internationally dispersed client base. Notably, the Internet is encouraging all these trends by dramatically improving the quality of communications between companies and subcontractors, within countries and internationally. Again, there is nothing inherently wrong with this process. Indeed, British economist Adam Smith might have quite liked the way it promotes the potentially efficient distribution of work from the people that need things done to the people most capable of doing it. But it is threatening both to substandard people that are currently protected within large organisations and even the apparent beneficiaries, external consultants and other third parties. The danger for the latter is that in essence ‘outsourcing’ allows companies to devolve the risk to their subcontractors. The reason here is that the 14

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most dangerous situation for a large company is to be caught with a lot of people, and therefore a big salary bill, during a business downturn. This is particularly true today where listed companies are expected to show very steady earnings (profit) performance, quarter by quarter. By outsourcing key functions, from accounting to public relations and computer programming, companies may have to pay a premium in the short term but they can quickly shut down many expenses at the first sign of trouble. For the external party, however, that can mean gut-wrenching income fluctuations. At a geopolitical level, the world might be seen as splitting into the people that run things and the people that do things. Much of the pain you see in the First World today comes from the fact that, as in the fridge assembly example above, the people that run things are increasingly located in rich countries like Australia and the US while the people that do things are in countries like China and Mexico. This means that people in manufacturing, particularly, are seeing their jobs going offshore while the salaries earned by people that organise things, like executives and management consultants, continue to increase exponentially. The latter group are also becoming part of a global elite that have more in common with one another— the magazines they read (Business Week, The Economist), the language they speak (English), banks they deal with (Citibank, HSBC), and even the places they go on holidays (New York, France) and so on—than with the ‘working class’ in their own countries. Notably, there are pockets of people within even the poorest countries that are part of this global elite23 This is a very simple sketch of a complex situation that has been dealt with in far more detail by authors such as Thomas Friedman in The Lexus and the Olive Tree24 and Hans PeterMartin and Harald Schuman in The Global Trap.25 I raise it simply as a way of introducing this question: to which group 15

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do you belong? And to which group would you prefer to belong? If the answer is the latter, then you need to at the very least think and operate internationally, speak English and know how to use the Internet. Fortunately, this comes naturally to many Australians, despite our reputation as yobbos who swim well. The upshot is that the world is changing fast but presenting a lot of opportunities for talented, entrepreneurial people capable of creating new, specialised products and services that can be delivered across a wide range of locations. It also means that if you’re waiting for your company or government to save you from globalisation—whatever that really means—then you’re in trouble. Maybe you should run that Asian fridge factory or develop technology that makes it easy for companies like GE to manage remote call-centre staff. Or perhaps you should start an online counselling service for aging Swiss nihilists—that guy in the Cadillac may need some warmth and encouragement one day.

Finance first If you want to see where the world is going, look to the financial markets. There you will find the most potent mix of money, power and technology. Given the almost complete autonomy of the financial system from any national government, you’ll also see how all business would behave if there were no laws. In other words, you’ll see the future. Money and the Internet suit each other. One is a virtual commodity, the other a virtual network. Because money is an abstract concept it is, in effect, pure intellectual property that can be shuttled around the world as digital information. Long before the Internet arrived, the world’s major financial institutions had taken to exchanging numbers rather than boatloads 16

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of cash and gold. With the Internet, more and more people are joining this system, particularly in the area of share trading where almost anyone can now not only trade shares but also access related information with almost the same ease as market professionals. This is in turn changing the system itself. For instance, the world’s stock exchanges are consolidating. In 1998, I interviewed the vice president in charge of the New York Stock Exchange’s (NYSE) international and research operations, Georges Ugeux.26 In his palatial offices within the NYSE at 11 Wall Street, he said that the world really only needed three stock exchanges: one in the Americas, one in Asia and one in Europe. This, he said, would be enough to enable 24-houra-day trade in at least large securities such as financial services giant Citigroup and software maker Microsoft. British authors Patrick Young and Thomas Theys support Ugeux’s view. In their terrifying book about the forces at work in the financial markets, Capital Market Revolution, they say: In the nineteenth century more than 200 stock exchanges opened in the USA. The invention of the telegraph permitted liquidity to flow to a few fixed marketplaces. The telegraph killed all but a handful of US stock markets. In the Capital Market Revolution the capacity of digital technology to bring together all fixed points to another fixed (or indeed floating) point means that technology of the Internet generation will decimate the world’s existing stock exchanges. Fewer than five major stock markets will remain worldwide by 2010. Perhaps two or three of these will be entirely electronic markets which have not yet even been created.27

In a process that is likely to be repeated in many other parts of the economy, this consolidation of the world’s stock exchanges is already underway. Driving the process is the desire to enable investors to trade any security on any exchange or network, in 17

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any currency and at any time. Sounds a bit like Amazon.com, doesn’t it? Buy any book, any time, from anywhere. The challenge for a small country like Australia operating in a global, electronic marketplace is to maintain relevance. Despite being the eleventh largest exchange in the world, the Australian Stock Exchange (ASX) accounts for only about 1 per cent of world stock market capitalisation.28 Moreover, a small number of companies such as AMP, News Corporation and Telstra make up the bulk of the market. Many of these companies have assets around the world and could easily decide to follow industrial conglomerate James Hardie, for instance, in moving to overseas markets where there is greater liquidity and better market research. ‘My big worry is, if you look at a profile of listed companies in Australia, you find that the top 75 businesses represent 98% of the total value of the market,’ ASX chief executive Richard Humphry has said. ‘My job is to say how do I find a way electronically to make these people happy so they will stay? And how do I give them access to what’s happening offshore as well?’29 Fortunately, the ASX and the Sydney Futures Exchange (SFE) saw much of this coming and operate two of the most efficient and well-managed exchanges in the world. Australia also remains a key centre of expertise for trade in mining and agricultural stocks so it’s unlikely to lose its role overnight. But, given the relative lack of local companies and related analytical talent, will we remain, or indeed even become, an attractive place for high technology stocks, for instance? And as the Internet spreads, will we lose all relevance in industries where we have no inherent expertise or competitiveness, like manufacturing cars, making watches or producing clothing? Today we largely have only distributors and resellers of other people’s goods in these areas. Even in cars, which we 18

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do ‘manufacture’ locally, we typically only assemble complex components made overseas. Tomorrow these companies will either have to be competitive participants on the global network, like ASX and SFE are trying to become, or go out of business.

Centre of the world The catchcry of the financial revolution, and a pun by Young and Theys on France’s liberté, egalité, fraternité, is ‘Liquidity! Accessibility! Transparency!’30 Ugeux says that the rationalisation of global exchanges would create markets of immense depth and liquidity.31 The obvious implication is that the NYSE, by far the world’s largest share market, would be one of those, most likely operating in concert with London and Tokyo to cover the world’s time zones. At first glance this would seem indisputable. The NYSE represents the pinnacle of global capitalism. It is over 200 years old and home to more than 3,000 listed companies, including giants such as Exxon, GE and IBM. In 1999 it had a combined market capitalisation of US$16.8 trillion, easily eclipsing the next two largest exchanges, National Association of Securities Dealers Automated Quotation (NASDAQ) and Tokyo, at around US$5 trillion each. Behind the NYSE’s imposing facade of Corinthian columns surges the famous trading floor, complete with its chaotic array of screens, booths and brokers in their brightly coloured jackets. Upstairs the executive suites are quiet, the corridors wide and lined with oil paintings of august members. The wood is dark, the carpets deep. Even so, the place is under serious threat from more efficient markets and alternative trading systems. The NYSE is a private club where all trading is handled by 1,366 members who have either inherited or bought their membership. Unlike the 19

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Australian Stock Exchange and other exchanges that have fully automated their systems using computers, trade on the NYSE is still handled manually by real, live people who pass pieces of paper to each other! A tour guide once assured me that this process results in better treatment of stocks because the humans on the floor play an important role in smoothing the rise and fall of share prices. However this process is as antiquated as the American affection for imperial measurement. Many companies are instead opting for faster, cheaper, heavily computerised exchanges with different trading rules, such as NASDAQ. NASDAQ is America’s second largest exchange and home to most leading hightechnology stocks. Some of these, such as Internet network equipment maker Cisco Systems and software leader Microsoft, are as large as the biggest stocks on the NYSE. Cisco’s market capitalisation on NASDAQ has been around US$500 billion which was the same as GE’s, the largest stock on the NYSE. The venerable IBM has a capitalisation on the NYSE of about US$200 billion. Quality information is now also far more freely available to ordinary investors. Punters like you and me can find a large amount of information about listed companies on any exchange in the world, 24 hours a day, through official stock exchange websites such as nasdaq.com, nyse.com and asx.com.au. Indeed, that’s where I found the market capitalisations of Cisco and GE on a Sunday afternoon in Sydney. They can also get additional official information, news items and outright gossip through share-trading sites. For a small fee, punters can also access almost all the same real-time market information and execution capabilities as professional investors. Moves by newspapers such as the Australian Financial Review, the Financial Times and the Wall Street Journal to make their archives available online have only added to the wealth of information 20

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that is now available online. Online share trader E*Trade once described this as, ‘An Investor’s Dream. A Broker’s Nightmare’.32 Another act of liberation is the move by the Australian Securities and Investment Commission (ASIC) to stop companies holding private briefings for market analysts. Instead, ASIC is urging companies to treat all investors equally by making statements via the Internet. This is yet another example of the world becoming more egalitarian with technology. In this case, entrepreneurial small investors have an opportunity to profit from better information. At the same time, market professionals have lost another piece of unfair advantage. One by-product of all this Internet-enabled awareness is that amateur investors, particularly the millions of ‘day traders’ around the world, are waking up to the fact that they are second-class citizens in the world’s financial markets. They are also pushing for change in what might be seen as the twentyfirst century equivalent of the French Revolution.33 A key target is the private trading networks, or electronic communications networks (ECNs), such as Reuters’ Instinet. These enable the world’s financial institutions to trade securities with each other at any time, even when the stock markets on which shares are listed are closed. They also now account for around 30 per cent of the business on NASDAQ and the NYSE, for instance.34 In other words, there’s one market environment for the institutions, and one for the small investor. But the punters are rising and Instinet, for one, is in the process of launching trading services for consumers that would access this virtual ‘trading floor’ from their PCs. In fact, it appears most likely that mergers such as iX, the proposed joint venture between the London Stock Exchange (LSE) and Frankfurt’s Deutsche Boerse, will prove impossible due to national pride and more mechanical problems such as harmonising share trading laws. Instead, the neutral, global and highly 21

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efficient ECNs may quickly become the world’s major markets and even buy out traditional exchanges such as the LSE. What’s happening in the financial markets is all about increasing information flow and economic efficiency. In the absence of international rules, the sector is doing the most logical thing. It’s opening for business at all hours, becoming global and cutting out intermediaries that do not add value. No matter how many Living.com’s go out of business, the Internet will, like the telephone network that it runs on, remain very, very good at delivering information and, in turn, efficiencies. This is, as Bill Gates likes to say, ‘friction-free capitalism’.35 Unfortunately, next to regulations, friction from things like geography and customer loyalty is one of the few elements protecting many Australian companies from competitors. For instance, our top four banks hold around one million credit cards each. How will they compete with Internet-enabled mega companies like HSBC and Merrill Lynch providing tens of millions worldwide? Or what if you could get a home loan from any bank in the world? Would you be patriotic and pay more to get it from an Australian bank or would you go to a very large, global institution with the scale to provide lower rates, fixed for 25 years? The question can easily be extended to all manner of goods, from airline tickets to books. But if you’re a would-be entrepreneur, you shouldn’t be paralysed by fear. You just need to consider whether you could be crushed by such shifts or if they represent opportunities. Yes it’s a smaller, faster world but if you have a good idea, like Mark Shuttleworth with his Internet security tools, you can also benefit enormously. The trick is to work out where value is being created and where it is being destroyed and move appropriately. Again, that is no simple task.

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two IN IT TO WIN IT

The Entrepreneur is our creative personality— always at its best dealing with the unknown, prodding the future, creating probabilities out of possibilities, engineering chaos into harmony. —MICHAEL GERBER1

O

ne of my favourite books is Burn Rate by US author and one-time Internet entrepreneur Michael Wolff. Subtitled ‘How I survived the gold rush years on the Internet’, it’s a hilarious account of Wolff’s transition from simple journalist and writer to chairman and chief executive of Wolff New Media—and back again almost as quickly. The company published the pioneering NetGuide and NetBooks series of Internet guides and in the early 1990s was briefly valued at US$150 million. At one stage, Wolff looked like entering a deal that would deliver him a paper worth of US$100 million. His banker suggested, with complete sincerity, that he give his old university a new building. ‘It’s interesting how seamlessly you can move from being an ordinary middleclass working person to being a person with Medici level of wealth,’ Wolff wrote. ‘It doesn’t feel like there’s been an error; it feels, in fact, like there’s some logic in the world. If you work hard, you will succeed.’2 23

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Among the legacies of the dot-com boom will be, as outlined in the introduction, the notion that it is actually possible to get rich in your own lifetime, or even in a few years. Preceding decades had sex, drugs and rock’n’roll. The nineties and noughties seem to have business itself as a cultural movement, with all the same delusions regarding risk and the likelihood of success. Like most of the great fashions of the post-World War II era, this idea that doing business is inherently fun and easy, even cool, has been created in the US and exported worldwide. The hub of this movement has been Silicon Valley, along with some other key centres such as Austin, Boston and New York. Magazines that mix entrepreneurship and high tech, such as Industry Standard, Wired, Fast Company, Business 2.0, Red Herring and Upside, have not only sidelined yesterday’s icons such as Playboy and Rolling Stone but have also grown so rapidly, and attracted so much advertising, as to resemble telephone books. According to The Economist, in the year to March 2000 these six titles had a combined monthly circulation of 1.6 million copies and generated collective ad revenues of more than US$270 million.3 At the same time, the top-selling business books on Business Week’s paperback list centred almost exclusively on personal wealth, investment or self-improvement. They included: The 7 Habits of Highly Effective People by Stephen Covey, Robert Kiyosaki’s Rich Dad, Poor Dad, The Millionaire Next Door by Thomas Stanley and William Danko, The Roaring 2000s by Harry Dent, and Eric Tyson’s Investing for Dummies.4 Another indicator that a global trend has arrived is that the Japanese have gotten into it. It used to take an average of 34 years for a Japanese company to float on the stock exchange. Buoyed by the hype, Japan has been going through a miniboom in initial public share offers (IPOs) as twenty-something 24

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executives popped their companies onto the Mothers, an exchange opened by the Tokyo Stock Exchange for new highgrowth companies. In 2000, almost all of the companies on Mothers were Internet stocks enjoying very silly valuations, just like their American counterparts on NASDAQ.5 Australia has been right into all this. We read the magazines, bought the books and held parties with names like First Tuesday, Last Tuesday, Second Monday, Inner Circle and Domain, where entrepreneurs could mingle with venture capitalists, service providers, media, and otherwise dig the start-up trip. Wolff once despaired at what America had unleashed: There isn’t anyone with a modicum of conventional business experience who doesn’t appreciate the weird and comical precariousness of the new economy, who doesn’t understand that the entire playing field of Internet businesses depends upon the stock market’s willingness to pour good money after bad.6

The defining moment of the dot-com boom was arguably Tinshed’s Kickstart for Startups conference in Sydney in March 2000. Tinshed was created by Janusz Hooker, the grandson of real-estate mogul L.J. Hooker and a former manager at the Asian Infrastructure Fund in Hong Kong, and Vivian Stewart, one of the founders of Internet company Magna Data. Their big coup was to win the participation of a group of wealthy business people and heirs to fortunes in Australia and Asia, including Rodney Adler, David Greatorex, David Lowy, James Packer, John Singleton, Norman Smorgon and Kevin Weldon. The conference was a copy of the Bootcamp for Startups operated by American investment group and Tinshed ally Garage.com. It attracted about 900 delegates who each paid up to $995 each to hear one of the slickest pieces of financial 25

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marketing this country has ever seen. The organisers flew in speakers from around the world and even got former Prime Minister Bob Hawke to address the audience—though he decided to speak about foreign policy rather than the art of schmoozing, as scheduled. I should confess that I also spoke in one panel about the media. For two days the Lyric Theatre in Darling Harbour was transformed into a sort of church, whose god was the pursuit of fast money. Most sessions focused on how to raise venture capital and there were occasions when entrepreneurs would have a minute to ‘pitch’ for money. I describe it as financial marketing because the subtext was that to survive you need venture financing, and the coolest money around was Tinshed money. The conference party was held in a club called Home. Tinshed paid for drinks and put on a fashion parade. Older venture capitalists (VCs) could be found in quiet corners trying to work out how much money the young Turks were burning. The moment that sticks in my mind was the sight of the then 28-year-old Jason Ashton walking through the crowd, wearing a broad silk tie and sharp suit, surrounded by attractive women. I stopped him to ask if I could interview him for this book. He smiled down—somehow he’d even become taller than me—and said, ‘Sure.’ As the dance music pulsed through the room, he asked if I knew what price shares in Davnet, the company that bought Magna Data and in which he owned eight million shares, had closed that day. I didn’t. ‘Five dollars ninety,’ he said. By the time I’d done the sums—8,000,000  $5.90 = $47,200,000—he was halfway across the dance floor, blondes in tow. He was what everyone wanted to be: suddenly and inexplicably wealthy. I’ve been trying to think of a theme song for this generation—my generation—that drinks decaf soy lattes, works all the time and doesn’t dance: some turn of the century 26

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equivalent to Elvis’ ‘Blue Suede Shoes’ or the Doors’ ‘Light My Fire’. The track that seemed most appropriate was Vonda Shephard’s ‘Searching My Soul’. This is the theme song to Ally McBeal, the show featuring quirky but overworked and ultimately unfulfilled lawyers. U2’s ‘I Still Haven’t Found What I’m Looking For’ might also do for all those people who joined dot-com startups and traded salaries for stock options. If it makes you feel better, Davnet shares fell below $1 within months of the Tinshed event. Then again, Ashton would still have been worth more than most people in that room. There was also the irony that Magna Data did not use venture capital, but I digress.

The game rolls on These opportunities are like the thickness of a hair. They are barely definable. Throughout life there are moments like this when crucial decisions are made or missed. —FRANK LOWY7

Many high-flying Internet and technology stocks have crashed and the word ‘entrepreneur’ is once again in danger of becoming a dirty one. However, there are valuable leftovers from all this irrational exuberance. Smart people should change the title on their business cards to ‘business builder’ or something even more innocuous and get on with creating companies because the changes in the tax system, business openness and the Internet still present a once-in-a-lifetime opportunity. Professor George Foster, an expatriate Australian at Stanford University’s elite Graduate School of Business, argues that there is plenty of genuine entrepreneurship occurring. He teaches on management systems for startup and entrepreneurial companies 27

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Amount of venture capital invested in Australia by year 900

Amount invested (A$ millions)

800 700

New

292.4

Follow-on

600 500 400

56

300 119 200 100 0

38 16

52

49

90

90

103

1993

1994

1995

148 1996

31

539.5 349

190

190

1997

1998

1999

2000

Fiscal year end 30 June

The amount of venture capital available to Australian companies has soared since the early 1990s recession. Source: Venture Economics/Thomson Financial

within the Business School’s Center for Entrepreneurial Studies in the heart of Silicon Valley, and says: I actually disagree with a lot of people who say that the dot-com is sort of the end of entrepreneurship as we used to know it. I think that it was a period in which there were some pretty unrealistic expectations in general but there will still be an ongoing sense that if things really are winners then you can have a 60 or 70 times return (on investments).8

Foster points to the fact that, if nothing else, large amounts of money were continuing to flow into new Internet and technology businesses even after the crash of early 2000. According to PricewaterhouseCoopers, in the third quarter of 2000 28

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Number of Australian VC funds by year of fund formation

Number of funds formed

45 40 35 30 25 20 15 10 5 0

’84 ’85 ’86 ’87 ’88 ’89 ’90 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 Year of fund formation

The Australian venture capital sector is now an industry in its own right, boasting more than 40 professional funds management groups in 2000. Source: Venture Economics/Thomson Financial

venture capitalists in the US invested US$17.6 billion in new or expanding companies. This was even more than double the US$8.9 billion they committed in the third quarter of 1999, the height of the dot-com mania, and light-years beyond the US$1.7 billion invested in the third quarter of 1996, for instance.9 In Australia, the amount of money invested by VC funds and other private equity investors alone increased from $221 million in 1998 to $405 million in 1999 and $831.9 million 10 in 2000. A study by PricewaterhouseCoopers and the Department of Industry released in mid-2000 forecast that this strong growth would continue after a survey revealed that institutional fund managers—the group that supplies around 90 per cent of VC funds—expected to increase the amount of money that they invested through VC funds by 130 per cent over the following three years.11 29

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

681

658

Q3

1997 Q2

755

Q4

671

Q1

712

Q4

732

Q1

999

Q4

Source: www.pwcmoneytree.com

Q1

Q2

2000 Q3

1,004 1,278 1,413 1,434 1,283

Q3

1999 Q2

2,870 2,997 3,660 6,786 8,062 13,887 15,954 18,822 16,927 1,004 989 1,948 3,887 5,098 9,008 10,808 11,896 10,030

3,789 3,684 4,313 7,648 8,910 14,683 17,095 19,813 17,624

707

Q3

1998

760

Q2

1,466 2,044 2,070 2,477 2,212 2,717 313 622 503 565 489 935

575

Q1

$1,183 1,631 1,138 1,362 $178 235 227 372

556

Q4

2,250 2,988 2,939 3,306 3,032 3,753

440

Q3

1996

551

Q2

$1,692 2,451 1,714 2,148

472

Q1

American venture capital investment may be receding after the Internet boom but remains strong.

Total dollars invested Technology companies Internet-related companies

0 Total no. of deals

$ millions

20,000

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Weeds in the street I once read an article that described Internet companies as like weeds growing through cracks in the footpath. These gaps were open anywhere that there was inefficiency, deregulation or existing companies hadn’t exploited new business opportunities presented by technological change. The mental image has stuck with me. It seems to capture much of what entrepreneurship is about: you’re always looking for the cracks in the system. And if you’re small and weak, you’re unlikely to survive long on a fast moving freeway. But if there’s the equivalent of an earthquake that causes the traffic to stop long enough and opens up enough cracks, then you just might be able to grow through. As big dot-coms fall from the sky, there is plenty of debate about whether the Internet really is such a ‘disruptive’ technology. Whatever the pundits decide, the network is helping drive a much wider trend that is opening up significant opportunities for entrepreneurs. This is the deregulation and internationalisation of just about everything. That might sound vague, but it’s a profound trend. Prodded by the World Trade Organisation and other forces, national governments worldwide are opening key sectors of their economies to competition and trying to reduce red tape. Advances in communications, including the Internet, and the harmonisation of systems from passport controls to accounting standards, are greatly simplifying cross-border movements and trade. The formation of the European Union and the establishment of a free-trade zone between Australia and New Zealand are just two examples. These shifts create cracks in the system. David Tudehope at Macquarie Corporate Telecommunications might still be working for Westpac if it wasn’t for the deregulation of 31

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Australia’s telecommunications system. LookSmart’s Tracey Ellery and Evan Thornley would be nowhere if the Americans had outlawed foreign ownership of Internet addresses in the way that a country like China might have. Sean Howard wouldn’t have a big house on the harbour if the Australian government had forbidden US company UUNET from buying OzEmail due to foreign investment concerns. Sydney’s Spike Networks could not have launched Spike Radio in Los Angeles if the US government had restricted online media in the way it has Internet gambling. When it comes to sectors experiencing periods of rapid technological change, a key opportunity may in fact be a lack of rules. Sometimes you can get away with anything while society catches up with reality. One group that used this to great advantage during the Wild West days of the Internet was cybersquatters. In the absence of related laws, these opportunists simply registered web addresses such as Rolex.com and forced the companies to buy them back. A Sydney Internet industry figure named Brendan Yell, for instance, is rumoured to have got around $50,000 from AOL for the address aol.com.au. It seems he may have settled for less when it came to selling another name in the year 2000, CDNow.com.au, because the World Intellectual Property Organisation had finally begun to release rulings that made it easier for companies to win back their names through legal action.

The system matures An interesting aspect of the Internet boom is the way it has transformed the idea of the company. A company used to be a group of people who organized themselves for fairly well-defined tasks. The U.S. stock market now indulges a new, looser definition. 32

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A company is now a group of people who raise capital to do whatever they want to do. —MICHAEL LEWIS

Michael Lewis wrote the above passage in a column for Bloomberg News. He was commenting on NetJ.com, a company that in early 2000 enjoyed a market capitalisation of US$22.9 million on NASDAQ but which said, unashamedly, that it conducted no business. Indeed, it said it didn’t even plan to conduct any business. Cashed up and without operational considerations, it was, in Lewis’ words, in a state of ‘pure possibility’. The days when you could float an Internet address or beat professional investors by using a monkey and a dartboard to choose net stocks, as Monkeydex.com did, have passed. However, it is still easier to raise money today than in the recession of the early 1990s, for instance, because key structural changes have been made. At an educational level, there are now courses in entrepreneurship at institutions such as Swinburne University in Melbourne and Murdoch University in Perth. The government has also been actively seeding innovative sectors of the economy such as information technology and Internet through a range of initiatives. Lobby groups such as the Australian Services Network (ASN) have also raised awareness in the big end of town. ASN represents many of Australia’s leading services companies, including AMP, IBM and Telstra, and recently published a report titled The New Entrepreneurialism: Opportunities within Australia’s reach.13 The report’s key message, according to executive director Judith King, was: ‘We think that now it’s absolutely imperative for the services sector to be acting in a creative, risk taking manner because that’s where the businesses of the future will come from.’ 33

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The Australian Stock Exchange also did its part by opening a sort of secondary, and ultimately temporary, meeting room for new and high growth companies and investors called Enterprise Market. More a matching service than an exchange, this venture was designed to provide a virtual arena in which private investors can identify companies seeking investment of up to around $5 million. In mid-2000, Enterprise Market boasted that $20 million had been raised through its system in two months.14 The most significant change, however, was the reform of the tax system by the Howard Coalition government in 2000. This should substantially increase the capital available to highgrowth businesses in Australia by increasing incentives for investors and encouraging the growth of the domestic venture capital industry.

Opportunities in tax reform The capital gains tax changes are huge. It’s going to encourage people to take a bit more risk because if you take a bit more risk and you benefit from it, you pay half the tax. It’s a pretty encouraging environment, compared to what was there. —BOB MANSFIELD15

When it comes to getting rich, the only thing more important than making money is keeping it. Fortunately, the government has introduced a range of measures designed to make Australia’s tax environment much friendlier to both business builders and investors. As part of the overhaul of the tax system in 2000 which saw the introduction of the goods and services tax (GST), the Federal Government introduced six key reforms aimed at 34

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stimulating investment and improving the lot of entrepreneurs. These centred on lower company tax rates, reductions in capital gains taxes and improved incentives for foreign superannuation funds to invest in Australia (see Appendix 1). OzEmail founder Sean Howard believes that the new tax system will help Australian entrepreneurs both to raise money but also to exit their investments. Since leaving his Internet company, he has become a director of a company called FTR Holdings which is chaired by Malcolm Turnbull’s wife, Lucy Turnbull. It is also one of Australia’s few listed venture capital funds, a status which Howard argues will make it attractive to entrepreneurs under the new tax system: The new tax regime that allows rollover relief provides more flexibility to the entrepreneur, because if the entrepreneur is successful in his or her enterprise but is not sufficiently successful to become public, they are sort of locked into a private company situation and they’ve got no exit. So, if in ten years they want to take a bit of dough out, there’s no natural exit for them. But having an investment from a public company they can then roll some or all of their private shares into a public company, get public company paper and then sell some or all of those shares in the public company.16

Society: open for business Friendship opens the door, friendship will get you through the door, friendship won’t get the money into the company. No one’s a charity. —RODNEY ADLER17

My wife, Cassandra, thinks I have a chip on my shoulder about private school education. I went to a public school, Normanhurst Boys’ High School in Sydney. It was a nice public 35

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school—all boys, strict discipline, prefect system and blazers, leafy part of a quiet suburb—but an outlying public school all the same. A science teacher once told us that he’d recently visited a wealthy private school up the road, Knox at Wahroonga, and discovered that we had better classroom facilities for chemistry. We were lucky, he said. We felt good about that at the time but even then, as teenagers, figured that all the education in the world wasn’t going to help us beat the old school tie business networks that schools like Knox create and perpetuate. It has been refreshing to be proved a little wrong in adulthood. Yes, a lot of the business people featured in this book came from wealthy backgrounds. Jodee Rich, for instance, was the son of Traveland founder Steven Rich. Even when he was ‘down and out’ after the collapse of the Imagineering Group in the early 1990s, he lived in the opulent Sydney suburb of Vaucluse and was worth a couple of million dollars. He also went to one of Australia’s most exclusive schools, Cranbrook in Sydney’s eastern suburbs, as did a number of other figures in this book including James Packer and David Tudehope. But according to Rodney Adler, also a former classmate of Rich’s, family wealth and connections might get you through the door but after that you’re on your own. ‘Sure, it didn’t hurt that Jodee came from a wealthy background, that he had wealthy friends and well-connected friends. But that’s not a hindrance, it just makes it a little bit easier,’ he says, pointing out that people like Malcolm Turnbull have risen to the top of the tree in Australia without rich or connected parents. ‘You don’t have to be rich and you don’t have to be connected. You have to work very hard and have a good idea.’ The son of high-profile entrepreneur Larry Adler, founder 36

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of FAI Insurances, Rodney Adler speaks from personal experience. Indeed, he’s living proof that people who inherit wealth face their own set of challenges as they try to establish independent reputations. Now a diversified investor, Adler has around $100 million invested in a wide range of companies, from big outfits such as One.Tel to startups like businesstraining company Business Thinking Systems and NetX, a web development firm. Despite being born into a wealthy family and graduating from Cranbrook, he argues that many ‘eastern suburbs, son of lord of such-and-such’ lack the mettle to succeed and that he’d usually put his money on tougher, hungrier entrepreneurs. ‘I like the people who are rougher; gutter fighters who have done it the hard way. Most of the people that I’ve invested in, that I’ve done well with, have not been from Cranbrook. Most of the people I’ve backed have been hard yakka, putting in the hard work,’ says Adler, naming Stan Sarris, who started as a McDonald’s manager and now runs Adler’s exclusive Banc restaurants, and Brad Cooper, the head of FAI Home Security who left school at fourteen and started out selling Encyclopaedia Britannica door-to-door. ‘They’re hardworking, honest; they have a vision and they want to build something and they become friends. I don’t care where they’re born,’ says Adler.

Staying power Adler might find an affinity with Tracey Ellery at LookSmart who comes from the other side of the tracks but agrees with his views on grit. She spent most of her childhood in the workingclass suburb of Geelong, Melbourne. Her parents together never earned more than $23,000 a year. Ellery’s father was a fitter and turner and her mother worked as a waitress and 37

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a receptionist. Her husband, Evan Thornley, also came from a ‘very, very modest’ background, being raised by his single mother in the coastal town of Gosford, near Sydney. ‘I think that growing up in an environment that is not that easy actually builds part of the character and the tenacity that you need later in life to be able to get through difficult times,’ says Ellery.18 ‘I’ve often seen some of my friends who have had very, very comfortable middle-class backgrounds and I just don’t think the fight is in them.’ I happened to speak to Ellery on 19 April 2000. Keen dotcom watchers will know that this was two days after one of the nastiest days for Australian tech stocks and that by then LookSmart had listed its shares on the Australian Stock Exchange as well as on NASDAQ. Despite LookSmart shares having just fallen from around $5 to less than $2 on ASX that month alone, and with no bottom in sight, she seemed calm and in control.

Change at the top When you’re successful in any environment . . . you’re noticed, and when you’re noticed, you’re sought after because success breeds success. —RODNEY ADLER19

Success has its own momentum, one that is today turning the tables on the country’s establishment. The landed gentry and offspring of former politicians are being outclassed, or at least out-earned, by business people emerging from highgrowth industries such as the Internet and telecommunications. Even more importantly, these figures are reinvesting and pulling their friends and associates up with them in an environment where speed, intellect and technical know-how 38

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mean a lot more than family connections or your ability to speak French. You may be thinking of Alexander Downer, our lacklustre Foreign Minister who found his way to office via a political heritage and the South Australia Club. Or perhaps Former NSW Premier Nick Greiner who thought he was onto a good thing when he decided to chair online advertising company BMCMedia.com, gaining options to buy 375,000 shares at 60 cents each. These were briefly worth more than $2 million but worthless by the time of writing. In early 2000, when BMCMedia’s shares were flying like pigs ($6.45), I asked Greiner whether he thought the stock was overvalued. He was noncommittal but encouraged investors by saying that the company was trading ahead of prospectus forecasts. The company later announced a loss of $6.87 million on sales of $2.2 million for six months to 30 June 2000. The shares closed that day at 63 cents. My favourite exercise is to compare the dot-com boom experiences of Nick Whitlam, son of former Labor Prime Minister Gough Whitlam and high-profile former chairman of NRMA Insurance Group, and the co-founders of Sabela Media, Gour Lentell and David Turner.

The running men Gour Lentell, 39, and David Turner, 38, co-founded Sabela Media in June 1998. The company was created to commercialise online advertising technology that the pair had originally created for OzEmail. Lentell and Turner were working at the Internet service provider in 1996 when chief executive Sean Howard invited them to the boardroom and suggested they develop technology for putting ads on websites. This was heresy at the time as the Internet was still a largely non-commercial environment. But Howard, with his background in computer 39

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publishing, was sure that online advertising would eventually become big business and wanted a seat at the table. Lentell and Turner had previously worked for the world’s top database company, Oracle, and had the expertise to complete the task. They came back with an ‘ad-serving’ technology that worked, placing them at the cutting edge of the field internationally alongside US giant DoubleClick Inc. and a small number of other players. OzEmail took the service to market through a new company called Web Wide Media, which shortly entered into an international joint venture with Softbank and became Softbank Interactive Marketing. Then came the stroke of luck that would enable Lentell and Turner to make their fortunes. Softbank Interactive Media was sold to a US company called Zulu-Tek, renamed Zulumedia shortly after. Under the terms of the deal, Zulumedia provided them with exclusive rights to their ad-serving technology in Asia in exchange for providing technical services to the company. They also gave the pair non-exclusive worldwide rights to the technology should Zulumedia go under—which it promptly did. This enabled the Australians to regain control of their system and make it the basis for Sabela Media. Lentell and Turner began running—building up Sabela, opening offices in London and New York, and otherwise getting down to business. They funded the company’s growth through cash flow and by selling OzEmail shares they had gained. But they soon had more than 50 staff and needed more money to catch up to the likes of DoubleClick. In April 1999, they raised US$2 million in funding from their new American chief executive James Green and Japanese company Tokad in exchange for 20 per cent of the company’s stock. By December 1999, they had pulled together a much larger second funding round, organising to raise US$14 million from a wider group of investors. 40

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The week before the funding deal was to be closed, Sabela’s world caved in. DoubleClick, then the largest ad-serving technology company in the world, was suing it for infringing patents it held in the United States. The next day it offered to acquire Sabela, a move that would have given it control of the only other company in the world with comparable advertising technology. If Lentell and Turner had been running for two years, they now had to sprint. Their potential venture capital investors wouldn’t give them the US$14 million while the legal suit hung over their heads and they otherwise couldn’t afford to keep the company going for more than a few months. Desperate, Lentell called the OzEmail foursome: Sean Howard, former president David Spence and key investors Trevor Kennedy and Malcolm Turnbull. It was a good time to call. The group had just taken away $237 million by selling OzEmail and agreed to stump up US$750,000 on the same terms as the earlier US$2 million investment, giving them 7.5 per cent of Sabela. Two other investors, Neville Miles and Simon Tripp from MTM Funds Management in Sydney, who had been involved in organising the larger capital raising, also chipped in. Granted a brief reprieve, Lentell and Turner flew to New York to see about selling the company. Intending to see what DoubleClick was offering, they then had their second piece of good luck in as many years. Through a business contact in New York, another major US Internet advertising company called 24/7 Media became aware of the situation and made a counteroffer for Sabela. The company wasn’t as high profile as DoubleClick but had a market capitalisation on NASDAQ of around US$1 billion. It also lacked its own ad-serving technology. If 24/7 Media could buy Sabela and its technology it would be on almost level terms with DoubleClick, which had both ad sales and technology operations. This would mean a 41

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continuing role for both the technology and Lentell and Turner. And it would mean they might have a way out of the headlock that DoubleClick had put them in with its legal suit. The Sabela founders spent a manic few days in New York, meeting DoubleClick while at the same time negotiating secretly with 24/7 Media. DoubleClick’s opening offer was for slightly more than US$40 million worth of its shares. 24/7 Media was also offering shares but, after discussions, was prepared to offer US$70 million in shares. After a few crazy days, the pair did the 24/7 Media deal, walking away with shares worth around US$25 million each and flew home to see their wives. Proving just how easily the rich get richer, Howard and the other investors got seven times their money back in a month. Lentell and Turner had technical expertise and commercial acumen but became wealthy by believing in themselves when the opportunity arose to regain control of their invention. They also understood their business at a very deep level. It’s a shame they were eventually taken out by the Americans, one way or another, but they ran the gauntlet better than most and emerged with their shirts and then some, even if their 24/7 Media shares have since lost significant value. At the time of writing, they also continued to work within 24/7 Media Technology Solutions Australia.

No such thing as easy money I had to do my due diligence, I checked out the company, and I found it to be in good shape. What I bring to this company is a large amount of corporate and administrative knowledge from a wide variety of companies. I have a PhD in corporate governance. —NICK WHITLAM20 42

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It’s artificial to do this, but compare the Sabela story with Nick Whitlam’s troubled tryst with that other Internet company, LibertyOne. Whitlam became chairman of LibertyOne in November 1999. At the time, the company was expanding rapidly and was valued by the stock market at more than $600 million. Management also talked about listing on the NASDAQ. Making the picture even prettier, LibertyOne had the rights to market Excite, the US online directory service, across parts of Asia Pacific and had holdings in web design and other Internet-related ventures around the region. This should have made it an easy sell to US investors which were so desperate to get ‘exposure’ to the Internet in Asia, the world’s most populous region, that they were bidding up the price of shares in US-listed Internet companies such as Chinadotcom to stratospheric levels. Whitlam decided to join the company, even though it was already mired in controversy and had lost two chief executives in a year. The former prime minister’s son was so confident in the company’s prospects that he chipped in and bought a million shares for a total outlay of about $1.2 million. As the LibertyOne story fell apart during 2000, the value of these shares plummeted to less than $100,000. Indeed, less than a year after Whitlam joined, LibertyOne had made it to what has been dubbed ‘the 10 per cent club’, the group of listed companies (like Solution 6) with shares trading at less than 10 per cent of their all-time highs. He then oversaw the resignation of company founder Graham Bristow and the sale of a controlling stake in the company for just $2.6 million to Hong Kong’s iReality Group. What went wrong? As a reporter I followed the company closely and there was always plenty of controversy surrounding it.21 At the end of the day, it appears to have failed by biting off more than it could chew then failing to raise the money 43

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needed to get over the line. Bristow had a kaleidoscopic vision that saw the company enter into web design, online auctions (uBid), search engines (Excite), website creation for celebrities like Greg Norman, and many other projects and joint ventures. Ultimately it was a house of cards that blew over in the first chill wind from the capital markets. But it was also a sexy story and the volume of media coverage generated in the good times made the stock a hit with speculative ‘day traders’, who had in turn been liberated by low online brokerage fees. It was a potent, self-perpetuating mix; a case of the Internet feeding on itself in an almost beautiful cycle of apparent wealth creation. Another problem was that LibertyOne only had one business that had worked: Zivo, the Sydney-based web design firm that was acquired by the LibertyOne juggernaut, then found itself providing most of the company’s revenue. LibertyOne’s inability to make money became horribly apparent to investors in late 2000 when it announced a staggering loss of $58 million for the six months to June 2000. Revenue for the period was $14.6 million, of which Zivo kicked in $10.2 million. The company’s shares closed at 12.5 cents on the day of the announcement, down from an all-time high of $2.70. The process was rather the opposite of embourgeoisement—the gradual shift of the working class into the middle class—which Whitlam once claimed to have delivered through the demutualisation of the NRMA.

Death of the club Another feature of today’s more open and merit-based business environment is the growing irrelevance of old school tie networks and Australia’s traditional clubs such as the Melbourne Club, the Australia Club in Sydney and the South Australian Club. 44

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‘[The old school tie system is] very much close to being all over,’ says Bob Mansfield, the ocker 49-year-old chairman of Telstra who went to school at Barker College, a mid-tier private school on the upper North Shore of Sydney. ‘I don’t say that critically . . . there was definitely a Melbourne establishment, there was definitely a Sydney establishment when I first started work and they were factors . . . Now, it’s totally irrelevant . . . Today, it’s very open. It’s much more cutthroat.’22 While clubs tend to be old-fashioned, often even sexist, they do offer privacy and a place for members to retreat while in the city and mix with the powerful. The Australia, for instance, counts the Packers as members. In the British tradition, it is frowned upon to do business in such Australian clubs, placing them a world away from places like Baby, the new-style club for dot-commers in Amsterdam.23 Not being the right sort of chap, I can’t tell you much about these clubs. However, I was once invited to a luncheon at the exclusive Union Club in Sydney to hear Bill Ferris, the executive chairman of Australian Mezzanine Investments, speak about the fund’s investment in LookSmart. The club is within a multistorey, dark brick building that wraps around the corner of Bent and Phillip Streets in the heart of Sydney’s financial district. The entrance is so discreet that it doesn’t have so much as a brass sign out the front. The idea is that if you don’t know what it is, you shouldn’t. The room featured a lot of wood and dark leather. Bill, a member, delivered an inspiring speech about LookSmart and the need to back more high-tech innovation in Australia. The food, wine and company were splendid. It wasn’t until a few months later that I realised the irony of the situation. Flicking through a Sunday paper I saw a piece that said that the Union Club’s members had voted against providing full membership to women. I wondered what Tracey 45

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Ellery at LookSmart might think of that. Partly thanks to Ferris, she now had a paper wealth that would enable her to buy the Club’s building but wouldn’t be allowed in the door as a full member because she was a woman!

Time to go Lenny didn’t understand how the Valley thinks about risk and failure. Instead of managing business risk to minimize or avoid failure, the focus here is on maximising success. The Valley recognizes that failure is an unavoidable part of the search for success. —RANDY KOMISAR24

Bob Mansfield says that he learned one thing above all else while studying commerce at university: profit is a reward for risk. ‘Profit’s a reward for risk,’ he repeats with intensity. He really wants people to understand this. This is the key, he believes, to the whole system. In recounting this exchange to someone, I found myself paraphrasing Mansfield, saying, ‘If you don’t take a risk, you won’t make a profit, so every day you have to ask yourself, “What risk can I take today? Because I’m going nowhere if I stay inside my comfort zone.”’ More words of advice from Bob: I often say to people, ‘If you want to join the queue of life, your turn will probably come up for a promotion, your turn will probably come up for a certain salary or a certain level and don’t complain if you’re just in the queue of life waiting for your turn to come up. But if you want to take a risk and in trying to jump the queue you might go back a few places then you’ll take another risk and get ahead of them, the guy that’s still in the queue not doing anything shouldn’t complain.’ 46

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For many people, the risk that they’re itching to take is to tell the boss to sod off and start their own company. A recent poll by American firm CareerPath.com found that 40 per cent of 1,400 workers surveyed planned to change jobs within a year.25 The advice from the experts seems to be in tune with Nike and the heavy rock star, Henry Rollins: ‘Just Do It’. If the thought makes you too nervous, there’s a good chance that you’re not the right type of person to become an entrepreneur. Charles Handy, the social philosopher and business writer, argues that there are entrepreneurs and administrators and that, to a certain extent, the twain shall never meet. His advice is to find something you care about and learn through immersion. Learn by jumping in rather than going to school. The alchemist [entrepreneur] goes to business school to select someone to help with the business, to keep the accounts, for example. The paradox is that MBAs want to be entrepreneurs, but if you go to business school you probably aren’t an entrepreneur.26

Don’t panic if you are an MBA though. Australia needs all the entrepreneurial talent it can get and should even give management consultants a go. And, as above, the conditions for entrepreneurs are only getting better. But we also face real challenges. For starters, expenditure on research and development (R&D)—the source of the raw intellectual property behind many high-tech ventures—is declining to dangerously low levels. The Federal Government has put in place tax rebates for R&D but official numbers released with the May 2000 federal Budget show that the number of companies using this facility fell 32 per cent to 2,530 in the year to March 2000, down from 3,700 in the year to March 1996. The Australian Bureau of Statistics has found that all business R&D spending 47

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fell 4 per cent to $4.04 billion in the 1997/98 financial year, following a 7.4 per cent fall in 1996/97. It was also projecting a further 10 per cent fall to $3.6 billion in 1998/99.27 We also face the problem of brain drain, both at the obvious level of good people leaving to work overseas and also through the Internet. During a trip to Silicon Valley in late 2000, I was shocked at the high calibre of Australian business people I met there. They were seriously sharp, well-informed and switched on—and not in Australia. Then there is the more subtle form of brain drain where foreign companies are employing people based in Australia via the Internet. An article in the Australian Financial Review, with the memorable title ‘Internet headhunters leave bodies behind’, describes how two Australian computer scientists, Paul Mackerras and Andrew Tridgell, quit as researchers at the Australian National University to work for the San Francisco-based IT startup, Linux Care. The twist was that they worked from a new office 200 metres away from the ANU campus rather than catching a plane to the States. The author didn’t know by how much the pair increased their salaries in making the move, but noted that Australian academics often earn less than $60,000 a year while top-class IT talent in the US might garner $190,000.28 An unpleasant fact about the high-technology multinationals with major offices in Australia is that they also contribute to brain drain. They do this by identifying top talent through their foreign operations then transferring those people to their mother ships, usually in the US, to join global product development teams. As above, these talented individuals almost always go because they get paid two or three times, if not more, what they might earn here. They also get to work with the best people in their fields. Though as figures such as Daniel Petre, the former chief executive of Microsoft Australia and now executive chairman of PBL Online, have 48

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shown, some do return and put their experience back into the local industry.

The ball’s in your court What can you do about it? Become an entrepreneur. Innovate. Create some wealth. Save my son from a career at McDonald’s. That goes for individuals as well as people within large companies that have the resources to support such projects. As the Australian Services Network has said: Australia can no longer support one of the highest standards of living in the world on the strength of its natural endowments of fertile land and natural resources. Nor can it rely upon the investments of international corporations to build its infrastructure. Innovation that is driven by entrepreneurship will increasingly dictate Australia’s fortunes.29

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three SEEING IN THE DARK

The blokes like Sean Howard and those guys like Jodee [Rich] went out and saw what the hell was going on, picked up the drift of the wind and said, ‘Bugger it, I’m going to have a go’ . . . If you don’t have awareness, you’ll never have vision. —BOB MANSFIELD1

T

he most important attribute you can have in high change environments is a clear view of the future—or ‘vision’. Vision is research. No short cuts, no secrets, no transcendental moments. Just hard work and the ability to read the clues and work out where the world’s going. Most of the people featured in this book achieve this by reading widely and talking to a lot of people. Bob Mansfield, for instance, reads major business magazines such as Business Week and tracks numerous smaller titles. Sean Howard tries to read for at least an hour a day, taking in both the major business titles but also wandering obscure corners of the Internet in his quest for knowledge. They also build and use business networks. Mansfield’s energy, upbeat personality and famous memory for names make him a master networker. Through his thousands of business and social contacts here and overseas, he has built an intelligence network that the CIA would be proud of. 50

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Whichever method you use, the important thing is to keep your ear to the ground. You’re waiting for that lurching sound as a crack in the pavement opens up, allowing you to grow a new business. Others describe this as finding a vacuum then 2 filling it. Whatever your metaphor, the idea is the same. At any point in time, the valuable parts of the economy—those that provide the staples like food, shelter, transport, communications, entertainment and sex—are pretty much stitched up by large companies. If you’re looking to become a major company yourself, then you have to either find and exploit a chink in the armour of an established player or help to create an entirely new industry. This takes two very different types of entrepreneur. The first is like media tycoon Rupert Murdoch or Australian retail king Gerry Harvey. Both have been able to walk into established markets and, through exceptional talent, nerve and sheer brute force, beat the incumbents. Murdoch, for instance, arrived 40 years late to the US television industry and still managed to do the impossible: establish a fourth major network. For a feel for how he achieved this, try William Shawcross’ biography, Murdoch: The making of a media empire.3 At the time of writing, Murdoch had seen his personal wealth soar as high as $17 billion. He was also the first person that most interviewees for this book mentioned when asked to name Australia’s top entrepreneur. Gerry Harvey has, through his Harvey Norman retail chain, carved out a $400 million a year hole in Australia’s highly competitive retail sector. He has also seen his personal wealth rise to the billion dollar mark. Even more impressive is that Harvey Norman, founded in 1982, is Harvey’s second big retail success. The former vacuum cleaner salesman and real estate agent previously built Norman Ross into a national chain in the 1960s and 1970s. 51

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‘There are some people who can move into established markets and make a bundle—they are the really, really talented people,’ says Sean Howard. But I couldn’t do that and most people can’t. If you want an easier path, then focus on the next wave and establish yourself early and then defend your market position like crazy and you’ll find that your market share might not increase but your market value will. It’s terribly hard, in my mind, to establish and grow a business in a mature market. The best opportunity you’ll have to grow a business is to be there first—there’s the early mover advantage—and then grow with the market as it grows and it will carry you along.

Spotting the ‘next wave’ means looking for strong growth curves. These are the economic equivalent of the swells that roll into a beach, starting small on the horizon then taking shape before crashing on the shore. But Howard also adds a note of caution. You’ve got to come up with a product that isn’t just clever but that’s going to work in a practical sense, taking into account all the factors, such as existing players’ ability to change their spots slightly and crush you.4

Bill Gates has played this game perhaps better than anybody. Not only did Microsoft correctly guess, then helped to ensure, that the personal computer would become big business, it also managed to slip past IBM without getting swatted like a fly. I won’t seek to add to the volumes written about Microsoft but it’s a perfect case study in how to spot a new market early— though not invent it—then control its growth so as not to lose control. This is a very delicate balancing act. Gates does, of course, have a better spin on this. 52

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‘We did start the PC industry,’ he told the Australian Financial Review Magazine in 1998. ‘We had a vision that there could be a thing called the PC and at the time it was a silly idea. There were no companies thinking about that and the notion that we would just focus on software was even crazier . . . Because of timing and our foresight, we’ve been lucky enough to be at the centre of this thing.’5

Blood on the beach Even if you start a company with a clear ‘vision’ the waters can quickly muddy. According to David Tudehope, co-founder of Macquarie Corporate Telecommunications (MCT), Australia’s second largest supplier of telecommunications services to corporate customers after Telstra, it’s pretty hard to maintain an articulate vision when you’re fighting in the trenches. I guess I always had the vision of Macquarie being a great Australian telecommunications company but it wasn’t articulated in a lot of detail. When you’re fleshing out that vision, in a scene not far different from Omaha Beach in Saving Private Ryan, the idea of arriving in Berlin is an objective but the exact vision of how you’ll arrive in Berlin is somewhat vague. You’re pretty much ducking and weaving bullets.6

Most successful entrepreneurs also have, or develop, a very high level of understanding about the field they work within. One of the myths of the dot-com boom was that the entrepreneurs that made it big were ‘overnight’ success stories. The reality is that almost every success story had at least a tenyear history in their field. There’s a great passage in The Monk and the Riddle, a book by Randy Komisar, a Silicon Valley businessman turned venture capitalist and mentor, about entrepreneurs seeking cash for pet-related Internet sites: 53

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The disconcerting thing about these pet shop boys, all sharp go-getters, was that none of them, they confessed when asked, owned a pet, had ever owned a pet, or—so far as I could tell—had ever wanted to own a pet.7

Komisar’s point is that in that late 1990s, the foyers of Sand Hill Road venture capital firms at the heart of Silicon Valley were full of people that wanted to make money quickly, rather than build businesses that they had any interest in or were inherently more likely to succeed at. He calls this The Deferred Life Plan, saying that you can tell when you’re following one if you can’t honestly say that you’d be happy to do what you’re doing now for the rest of your life. An even better test is whether you’d be prepared to do it for free. Too many times, unfortunately, I have seen this attitude lead to a lifetime of successive bets, all heading away from [the entrepreneur’s] original dreams. It is too easy to get lost in the hype and swallowed up by the casino economics of it all. It bothered me to see talented young people give up, or defer, their ideals in the hope of a fast buck that was unlikely ever to arrive.8

It is also risky because without deep knowledge in a field, or so-called ‘domain experience’, you’re likely to get creamed by someone who understands your chosen business much better than you. In a roundabout way, Komisar is saying the same thing that many others have before: do something you’re passionate about and good at, otherwise you’ll fail. Or as your grandmother might say, ‘stick to your knitting’. The laws of economics might have been suspended during the dot-com boom, allowing all sorts of consultants with PowerPoint presentations to get millions of dollars in venture financing, but you’re unlikely to see such blind greed and 54

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stupidity often. The surfers that get the great waves not only see them coming on the day, they know what time of year to be at the beach. They also know what the weather is doing a day or two out and choose which beach to go to, which board to take, which wetsuit to wear to avoid being too hot or cold, and the chances of the place being crowded with other surfers or full of bluebottles. If surfing can be that complicated, imagine how much you need to keep in mind to run a successful company.

Right place, right time The greatest legal creation of wealth in the history of the planet. —JOHN DOERR, KLEINER PERKINS CAUFIELD & BYERS,9 ON THE INTERNET BOOM

Most success stories seem to involve somebody being in the right place at the right time. But having just read bucketloads of success stories and seen a fair few for myself, I would argue that luck has very little to do with it. Take for example Pierre Omidyar, the French-born founder of online auction house eBay. The company seemed to burst out of nowhere, carrying its founder, his partner Jeff Skoll and many others to seemingly instant and staggering wealth. The popular myth is that Omidyar was inspired to start eBay after thinking of a way to fuel his then girlfriend’s passion for collecting Pez dispensers. However, by then he was already well advanced on the idea of creating a global level playing field for buyers and sellers of just about anything—a sort of egalitarian exchange for the little guys. The first manifestation of the idea was AuctionWeb, an online auction service that Omidyar operated part time from his apartment in 1995 and that would become eBay. 55

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In fact, the story starts even earlier. As David Bunnell recounts in The eBay Phenomenon,10 Omidyar was born in Paris in 1968 and taken to the US by his parents as a young boy. He was into computers early and ended up studying computer science at Tufts University, near Boston. He became a pioneer of Internet commerce in 1991 when he founded Ink Development Corporation, an early online retailer that was later renamed eShop and sold to Microsoft. In other words, his vision for an Internet-based ‘people-to-people’ marketplace followed at least four years of thinking about online commerce. His lucky break, if you like, was that his parents took him to America. Another person that put himself in ‘the right place at the right time’ was American David Perry, the founder of Chemdex.com, now Ventro Corporation (see www.ventro.com). Chemdex was founded in 1997 and very quickly became the world’s largest online marketplace for specialty chemicals, biochemicals and reagents. That might not sound very sexy but the worldwide market for these products is worth more than US$4 billion. Specialty chemicals themselves are sold as physically small but expensive packages, making them suitable for mail order or courier distribution. The market was also very inefficient, with more than 300,000 scientists in 28,000 research institutions and laboratories around the world typically ordering via catalogues owned by major distributors. Not only were these printed infrequently—once every year or two— they would be several inches thick, filled with microscopic type and impossible to search quickly. Distributors were also exploiting weak supplier and buyer market power to mark up products by 40–200 per cent. Finally, as academics and professional researchers, potential buyers for these goods were already heavy Internet users.11 The Internet may have lost some of its allure when it comes 56

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to retail sales but it was, and remains, highly suitable for this sort of industrial application where large numbers of buyers and sellers want to come together to trade specialised goods. Chemdex was one of six such industrial ‘vertical markets’ operated by Ventro. The company has also raised more than US$400 million from venture capitalists and the public markets and seen its value on NASDAQ soar above US$10 billion in the craziness of March 2000. It was back to about US$100 million at the time of writing after the company announced a second quarter net loss of US$119.6 million on revenue of $25.2 million after a period of aggressive expansion. Ventro had also said it would close Chemdex, along with other initiatives, and lay off staff as it shifted its business model. History is proving unkind to Perry, but there is still a lot to learn from his entrepreneurial experience. First, why was Perry the person to start this business? Surely there were plenty of people that understood the specialist chemicals market and the Internet? Maybe. But in many ways Perry was unique. As Laurence Katz from Harvard Business School describes in his paper ‘Chemdex.com’, Perry grew up in Harrison, Arkansas, a town of 8,000 people where his father ran a business selling crushed limestone and fertiliser. When it came time to go to university he enrolled in the Air Force Academy because he couldn’t afford a private education. Forced to leave after sustaining a football injury that cost him his pilot’s licence, he transferred to the University of Tulsa and studied chemical engineering. At the same time, he worked twenty hours a week as a lab assistant at oil company Dowell Schlumberger. After graduation, he worked as a process engineer at an Exxon oil refinery near San Francisco. He quickly became the youngest Refinery Operations Manager in the history of the plant, supervising a US$200 million operating unit and 57

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30 people. In 1995, after five years at Exxon and aged only 27, he quit to study business at Harvard. ‘The expectation at Exxon was that I would be a career guy. But if I stayed, the next 30 years of my life were laid out for me like dominos,’ Perry told Katz. He later added that he had always expected to run his own business because his father had. In his first year at Harvard Business School, Perry got a part time job at Booz Allen & Hamilton in the management consultancy’s energy and chemicals practice in San Francisco. He also began working with some fellow classmates on a business plan for a company called Immutech that sold HIV-related antibodies and antigens to researchers. And he immersed himself in entrepreneurship, taking every course he could: entrepreneurial management, entrepreneurial finance, entrepreneurial marketing, venture capital and private equity, and running and growing a small company. ‘At Immutech, I was in a unique position as both a supplier and buyer of specialty chemicals to witness the inefficiencies of this market,’ Perry told Katz. By early 1996, Perry was actively searching for ideas for a new business. Based on his experience, he came up with an Internet exchange for the chemicals industry. The idea was crystallised in the form of a business plan that won second prize in the First Annual HBS Business Plan Contest. Among the seven contest judges was Henry McCance, a partner at the prestigious venture capital firm Greylock. McCance’s interest encouraged Perry to try to start Chemdex. The rest is entrepreneurial history. According to Upside Today,12 Perry got US$25,000 in credit by signing up to three credit cards. He also sought funding from his business school classmates and professors, eventually getting US$25,000 from a man in Nebraska he’d never met in return for 1.1 per cent 58

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of the company (eventually worth more than US$5 million). Finally, he loaded his belongings into his 1987 Nissan Maxima (with 198,000 miles on the clock) and joined the pilgrimage to Sand Hill Road where he eventually won investment from CMGI, Kleiner Perkins Caufield & Byers and other American VC royalty. Let’s hope that Perry is still in business when you read this. With such steep losses and a share price capable of swinging between US$240 and US$2 in a year, it’s possible he won’t be. But his is a great story. It illustrates how the people that make it usually have relevant specialist knowledge that pre-dates the innovation that enables them to rise above the pack—in this case the Internet. Perry’s story is also one of cumulative experience. He was obviously smart enough to pass his chemical engineering degree and good enough to be put in charge of a US$200 million business before his 30th birthday. He also kept a foot in his industry while studying. By quitting Exxon and running up his credit cards, Perry also freed himself up to take advantage of any opportunity that presented itself. If this makes Perry a ‘visionary’ then so be it. The only piece of ‘luck’ I can see in Perry’s story is that the opportunity that came along was the Internet—the engine for what KPCB partner John Doerr is fond of calling ‘the greatest legal creation of wealth in the history of the planet’. Let’s hope Perry managed to sell some shares before the company started for the cliffs.

The OzEmail vision A visionary is someone who sort of creates the idea for the future—I’m very good at nicking it once they’ve created it. —SEAN HOWARD 59

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Sean Howard’s vision was that people would use electronic mail to communicate between companies as well as within them. It seems extraordinary now but when email was first introduced around 1990 most companies used proprietary systems such as Lotus’ cc:Mail. People inside a company could message each other but they couldn’t reach people at other companies. At that time, Howard was working at Australian Consolidated Press, managing the computer publications division which he had founded a decade earlier. He took a punt, sold his remaining 40 per cent share of Australian Personal Computer magazine to ACP for around $7 million and in 1992 founded OzEmail, the company that would ultimately make him fifteen times richer. ‘I could see that the world was going to deliver information electronically,’ he says. ‘That might sound self-evident today but at the time email was a new phenomenon and there were plenty of doubters. I remember very well an editor of one of the computer magazines . . . saying to me, “Why do you think this business is going to work? Who wants to send email to each other, between companies? I mean, I can see it working within a company but who are people going to send email to?”’ Another doubter was ACP itself which agreed to let Howard take his email-related research and development work with him as part of the separation of the two companies. Howard says he was driven on by the speed with which people at computer publications had embraced the new electronic messaging system. He noted that not only did it drive down telecommunications costs, which would make it a hit with business, people seemed to prefer it to the phone. During 1992, OzEmail’s main activity was to create systems that enabled companies with different corporate email packages to exchange messages. This quickly ceased to be necessary as businesses shifted to using email systems based on the common 60

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Internet standards used by the world’s academic community. However, OzEmail stayed in business by embracing open standards and adding Internet access to its product line. Notably, Howard wrote some of the key software that gave the company its competitive advantage at this time. By 1994, OzEmail had plenty of customers but Howard was rapidly burning through his ACP nest egg. In two years, he’d poured around $3.5 million into the company and was considering calling it quits rather than sliding back into poverty after fourteen years of hard work. ‘I remember saying to a mate of mine on the golf course one Saturday, “Oh stuff it, I’ll close the thing down on Monday. I’m just not going to lose any more dough,”’ says Howard. ‘By Monday I got cold feet and couldn’t bring myself to fire everyone and close the business.’ In retrospect, that looks clever but Howard says that continuing was an act of blind faith and recklessness. Asked if at the time he had put money aside, he says, ‘If I’d burnt five [million dollars] on OzEmail and I had the choice of continuing to burn—and hopefully succeed—or putting the two million away, I’d do the former. A bit like one of those pathetic gamblers who are sitting beside the roulette table at three o’clock in the morning having lost almost all their money, determined that the last few dollars they have in their pocket will recover all of their losses.’ Many people in the Internet industry see Howard as something of a cowboy that got lucky. There are also mutterings around town about sharp deals or broken promises, the most common being the oft-repeated claim by the owner of another ISP that he set up OzEmail’s entire network and was never paid. Howard is familiar with this story and says it’s ‘bullshit’. The more you drill into the Howard story, the more you get a sense of someone that had a good eye for which 61

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technologies and industry trends had value, the drive and creativity to act on his instincts, and a clear understanding of his own limitations. I’m absolutely not visionary. Visionary sounds pretty grand to me. I suppose if I’ve got a talent . . . it is spotting the next wave. . . . You’ve got to say to yourself, ‘Where is the market going and where are the big opportunities’ and have confidence in your decision to go for it. You’ve also got to have sufficient guts, if you’re wrong, to call it quits. That’s one of Kerry Packer’s great strengths, I think—knowing when to call it quits.

Asked why he thought he had been successful, Howard cringed, saying he hated that sort of question, but replied: A bit of a talent for picking those [ideas] that are going to have some merit, and throw in a bit of recklessness and preparedness to spend money that I either have or haven’t got, and then thirdly a lot of hard work. I do work very hard.

OzEmail was the first Australian Internet company to list on the NASDAQ exchange in the US, back in 1996. This was only one year after Netscape floated and long before the Internet craze hit Australia. However, Howard also presided over a number of unsuccessful ventures such as OzEmail Phone and an online advertising venture called Web Wide Media—though the latter would prove to be the starting point for Anthony Bertini, founder of BMCMedia.com and Gour Lentell and David Turner, co-founders of Sabela Media, all of whom have become very wealthy in their own rights. According to David Spence, the former president of OzEmail and savvy accountant who kept OzEmail’s finances straight (Howard admits that even today he still struggles to read a balance sheet), there were times when OzEmail tried too many new things. He attributes this to boredom, conceding they would have probably built a 62

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better business if they’d just stuck to connecting people to the Internet access. But they would have had a lot less fun, he says, with a twinkle in his eye.

Blue sky mining In times of rapid technological change, vision takes on a value all of its own, one that can often be realised in the form of very large amounts of cash. If you type the words ‘Chris O’Hanlon’ and ‘vision’ into the news database at John Fairfax Publications you get an extraordinary 38 results. In the Australian Internet scene at least, he owns the word. O’Hanlon, the 45-year-old founder of web design firm Spike Networks Ltd, understands better than most that in uncertain and dangerous environments people look for visionaries. Like people lost at sea, the public desperately wants someone to climb a mast and shout ‘I can see land’. In one interview O’Hanlon said, ‘If you feel strongly driven by your own vision, the chances are that with a bit of personality you can compel others to see it with you. And to follow it into complete darkness on the faith that you see something that they don’t.’13 This was his genius. Like many of the best entrepreneurs, O’Hanlon learned how to sell his vision, or ‘blue sky’, to staff, clients and, ultimately, investors for tens of millions of dollars. While others were charging basic hourly rates to make pretty web pages, O’Hanlon, the son of famous novelist Morris West, was selling something far more seductive: corporate transformation. Not glorified desktop publishing but a gateway to the untold riches of cyberspace. Big companies like Toyota paid hundreds and thousands of dollars for web pages that they could have had done elsewhere for a fraction of the cost. 63

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‘He’s got the art of the gab and the schmooze,’ industry analyst Ramin Marzbani says. ‘There was a time when this industry didn’t exist. Chris was the first person to go out there and say, “Give me $400,000 to build a site.” No one else had the balls to do that.’14 O’Hanlon’s vision for Spike as a creative, anarchic environment also defined its culture. Michael Mesker, one of the company’s earliest web designers, says: ‘This was a time when you could walk into a meeting at say Hewlett Packard, or Zurich, or Mercantile Mutual wearing a Nine Inch Nails T-shirt, tattoos out, ripped jeans and multiple facial piercings, to advise suit-wearing fifty-somethings on their online strategy . . . So many big corporate companies wanted so desperately to flirt with Spike’s “coolness” and perceived edginess—and we brought life and daring to the corporate Internet world.’15 A key part of the Spike story—one that you can find repeated, almost word for word, in various press articles—is the moment of epiphany at O’Hanlon’s family home in Palm Beach, Sydney. O’Hanlon spent the afternoon with Andrew Eordogh, a computer technician that first showed him the Internet in late 1994. A couple of hours quickly turned into a whole day and O’Hanlon says his life changed forever. It was literally like a bolt of lightning hit me. I could see the connections. I could see where it was going to go. I could see what it was going to become. It sounds immensely provocative to say that, but I just totally saw everything that it is now and more. I was almost choking with the excitement of it.16

Spike’s first web page featured only a logo. There were no contact details or sample sites or anything, just a black page with the word ‘Spike’. By helping to explain and define the Internet and online marketing during the mid to late 1990s, and Chris’s own affinity with journalists, the company gained a 64

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very high profile. When he was really fired up, O’Hanlon could out-spin Shane Warne. Spike will be the next News Corporation. You are now looking at a company such as Spike considering acquisitions in traditional media of a size that would not have been credited in the past. We are not deterred by any idea that something is too big or too complex. There hasn’t been a generation even remotely like this since the Rockefellers and the Morgans were conceiving skyscrapers and throwing railroads across the United States, seeing developments far ahead of the pack.17

Amidst this sort of hype, Spike floated on the Australian Stock Exchange in early 1999 at an extraordinary valuation of $120 million. The high price tag was based largely on the potential for SpikeRadio to become a global media outlet. By mid-2000 however, O’Hanlon had left the company, the radio operation was haemorrhaging cash, and the services side of the businesses was being taken over by Hong Kong’s Pacific Century CyberWorks. Nor had Spike made the transition from being a supplier of corporate production services to being a media company like News Corporation. Reflecting this and as a result of its ongoing losses, its shares had fallen as low as 20 cents, valuing the company at less than $20 million. O’Hanlon still owned about a quarter of Spike, or 26 million shares, worth around $5 million—a fraction of the $100 million they had once been worth. While O’Hanlon’s vision of the Internet has been proven remarkably prescient—Spike’s Internet radio station, SpikeRadio, was one of the most interesting and cutting-edge sites on the Internet—his business foresight was myopic by comparison. He missed all sorts of big, dangerous objects that were lurking in the dark room that his business had become by early 65

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2000. The good thing about O’Hanlon is that he will admit as much. Asked what he’d learned from Spike, he has said, ‘That I was a great revolutionary leader and a lousy head of state.’18

Jim Clark If selling blue sky sounds like your cup of tea, then you should study at the feet of the master: American serial entrepreneur Jim Clark. I’ve only met Clark once. It was early 2000 and I was in Auckland for a conference timed to coincide with the America’s Cup. Along with several other billionaires, Clark was there as a spectator with his US$50 million yacht Hyperion. If you have read Michael Lewis’ The New New Thing,19 you’ll know that Clark spent a couple of obsessive years building this tub in a Dutch shipyard. When it hit the water it had the tallest mast of any sloop in the world at 189 feet, was 157 feet long and had 25 big computers onboard. The funny thing about Auckland—to me, at least—was that not only had some American shopping mall developer built a taller yacht, he’d parked it next to the Hyperion. Still, for a guy that grew up dirt poor in regional Texas, Clark had come a long way. He was also building a bigger yacht. Clark’s entrepreneurial successes are legendary. He made his first fortune as the founder of the high-end computing company, Silicon Graphics. He made his first billion when he floated his second company, Netscape Communications, in 1995. ‘I had this basic instinct that the Internet was going to be a big opportunity,’ Clark told a dinner audience in Auckland, ‘so I bet about a third of my net worth on Netscape.’ He won and also changed the rules of high finance. The Netscape float is taken as the start of the Internet stock market craze because the company had little revenue and no profits but was experiencing massive growth. As Lewis puts it: 66

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In the frenzy that followed, a lot of the old rules of capitalism were suspended. For instance, it had long been a rule of thumb with the Silicon Valley venture capitalists that they didn’t peddle a new technology company to the investing public until it had had at least four consecutive profitable quarters. Netscape had nothing to show investors but massive losses. But its fabulous stock market success created a precedent. No longer did you need to show profits; you needed to show rapid growth.20

Before the boom was done, Clark had generated another multi-billion dollar IPO, creating the health care infomediary Healtheon. Clark’s idea was to position this company at the centre of the US$1.5 trillion health care industry. By using the Internet, Healtheon could reduce inefficiencies, Clark argued. And by taking just a small cut on those savings, the company would very quickly become a multi-billion dollar enterprise. Clark sketched this dream out on a piece of paper and it formed a diamond cornered by Doctors, Payers, Providers and Consumers. He then sold this ‘magic diamond’ to the investing public at more than US$1 billion and eventually saw the shares rise to levels that valued the company at more than US$10 billion. After Healtheon, Clark started yet another company called myCFO. This idea was even bigger than Healtheon. Clark had come to realise that one of the downsides to being really rich is that it becomes tricky to manage your personal finances. He’d also discovered that 50 per cent of the world’s private wealth, or about US$25 trillion, was controlled by just 1 per cent of its population. Enter myCFO.com, a website that would provide financial services to and, just as importantly, aggregate purchasing power on behalf of the world’s rich. In its first six months of full-scale operation to February 2001, myCFO 67

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claimed to have won 75 clients for its wealth advisory services, representing US$12 billion in net worth. Its overall client base, it said, was 310 individuals, worth US$44 billion.21 Elsewhere, Healtheon had merged with another Internet health company called WebMD and seen its market value cut back to about US$2 billion. Netscape had been bought out by AOL but, in terms of Internet browsers at least, was being obliterated by Microsoft. Rather than help pick up any of the pieces, Clark had moved on to the newest thing, biotechnology, and launched his fifth startup, DNA Sciences. In a sense, Clark has become something between an entrepreneur and a venture capitalist, an almost pure creative force rather than a manager. Clark discovered that he wasn’t cut out for senior administration at Silicon Graphics, which he founded in 1982 after being a lecturer at Stanford University. Like many entrepreneurs, he became bored and irritable once the company had become a large corporation and clashed regularly with other senior executives. As The Economist has said, ‘Jim Clark is very rich because he learned what he is bad at, as well as what he is good at: he can start companies, but he can’t run them.’22 For all his wit, Lewis’ portrait of Clark is also harsh. The New New Thing leaves the reader with the impression of Clark as difficult, manic and obsessed by wealth. I asked Clark what he thought about Lewis’ character sketch. He said that while the book was largely accurate it was ‘kind of hyberbolic’ and ‘narrow’. He didn’t elaborate but you could tell it was true; Clark is obviously technically gifted and more complex than Lewis gives him credit for. He has proven himself to be a genius at creating big ideas for a market prepared to dream. He helped to create, then rode, the popular belief that the Internet would change the world. If nothing else, he has perfected the art of building to flip—creating concept companies that don’t 68

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necessarily work but are attractive to investors23—and gained a personal wealth of around US$3 billion. That’s not necessarily morally defensible but, like I said, this book is largely designed to help you improve your station in life, not fix the world.

69

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four OTHER PEOPLE’S MONEY

It has forced us to build a business model instead of an Internet story. —MIKE JEWELL, CO-FOUNDER OF BIRTHDAYEXPRESS.COM AFTER ITS IPO FAILED1

I

f you want to make serious amounts of money, you need other people’s money (OPM). Jodee Rich never really had one-billion dollar coins lying around Craigend, his $14 million Darling Point home, or his new pad in Paris. No one showed up to Anthony Bertini’s house with a van and dumped $230 million on his front lawn when shares in his company, BMCMedia.com, hit $7.75. The public markets give you inferred wealth only where the suggested value of your holding in a company is based on the latest price some sucker paid for a single share. The ability of this system to get out of whack was amply demonstrated during the Internet boom when all sorts of suckers paid some really stupid prices for stock. For a few crazy moments, this gave people like Wayne Passlow, chief executive of Open Telecommunications, an inferred wealth of $1 billion. This was enough to get him on the cover of the Sydney Morning Herald as Australia’s fastest ever billionaire. It was also enough for him to get rid of his kids. 70

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During a post-float media lunch, Passlow, a happy, unassuming guy who reminds you of Santa Claus, laughed that he couldn’t get his children out of home so he’d left them there and bought another one. He must have had some of that money in cash. The other, more appropriate, reason to look to the public markets is that you need capital to grow your business. Sometimes, no matter how hard you work or how effectively you respond to change, you will find that there is a gap between the money coming in the door and the amount you need to spend to develop a product, meet payroll, build a new facility or otherwise grow. This is most pronounced in high-tech companies that must conduct months or years of research and development work to create a product to sell. At this point— and, old-fashioned types would argue, not before—you should consider hitting your family and friends for money, borrowing from a bank, seeking to sell a share of your company to a private investor, joining a business incubator, raising venture capital (VC) or listing on the public share market.

Raising cash Built to Flip. An intriguing idea: No need to build a company, much less one with enduring value. Today, it’s enough to pull together a good story, to implement the rough draft of an idea and— presto!—instant wealth. —JIM COLLINS2

There’s nothing better than a rented car, right? They go faster, don’t need oil and can handle speed humps at 90 kilometres an hour. Well, money is much the same. There is nothing better than other people’s money. OPM. Caviar capital. The good stuff. Yes, whether you get it from your parents, a venture capitalist 71

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or Joe Public, when you’re building a business it’s almost always better to spend OPM than your money. Why? Because you might lose it, and there’s only one thing worse than the fleeting shame and regret associated with losing OPM and that is the irreversible pain of losing your own money. Fortunately, lots of people have more money than they need and like to give it to other people if they think they’ll use it to create even more. One of the revelations that came with working for the Australian Financial Review was just how many loaded people there are in Australia. With the exception of the occasional rogue like Alan Bond, who shouldn’t be allowed near OPM, this system tends to lead to the efficient reallocation of capital from people who have it to people who know what to do with it. Venture capitalists, for instance, take money from massive superannuation funds and channel it into small, potentially high-growth companies. In theory, the money will work like fertiliser, the small company will become large, and the VC will return the money plus some profit to the fund. If you’re a new player entering this system then your challenge is to create a compelling enough story to persuade people to give you their money. I say ‘story’ because if you’re trying to raise money to fund something that hasn’t yet happened then you are by definition operating in the realm of fiction. The trick is to make your sketch of the future more plausible than the next person’s. You should also have some sort of plan for using that money effectively once you get it. But, as the dot-com boom illustrated, this is optional. One of the common myths of the late 1990s was that venture capitalists and other professional investors, including so-called ‘angels’, would invest in bright ideas alone. I was duped by this. Believing I had a good idea, I once had a conversation with top Australian venture capitalist Roger Allen over coffee at a conference. It went something like this: 72

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‘Roger,’ I opened as he gazed around the room, probably hoping that I wasn’t going to ask him for funding. ‘I’m thinking about leaving the paper to do my own startup. But I’m nervous that if I take on venture capital too early it’ll distort the growth of the business and that I won’t know how to handle such large amounts of money.’ ‘I wouldn’t worry about that,’ he growled, his neck bent slightly forward like he spent too much time talking to short people at functions. ‘You think I’ll be okay then?’ ‘No,’ he muttered, seemingly relieved that we had to make our way back inside. ‘It’s just that no VC is going to give you money “too early”.’

Between that and a few ‘you should know better than to believe that Fast Company magazine crap’ glances, I learned that VC money was going to be extremely hard to come by. These guys didn’t become rich by being stupid so the chances of one accidentally giving me money, let alone too much, was up there with life on Mars. The reason that investors like to perpetuate the myth that they supply money freely to very early stage companies is twofold. First, it sounds good at parties. Second, it increases the number of people that might approach them for money and therefore ‘deal-flow’. Even if they think the entrepreneur is not ready or the business too small, at least they’re on their radar from the first time they walk into their granite and glass foyer. But as Paul Davis, the respected technology fund manager and chief executive at Tech Invest, has said, there is a wellestablished and largely immutable feeding chain. In Australia, this sees people approach friends and family for up to $250,000, wealthy individuals or ‘angels’ for $250,000 to $1 million, and VCs for $1 to $5 million. Beyond that, most entrepreneurs look 73

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to the public markets, though VCs have been known to invest tens of millions, particularly when funding management buyouts as opposed to early stage companies.3

Friends, family (and fools) The most common source of early capital—that first $25,000 to $250,000, depending on your social circle—is friends, family and ‘fools’. The Internet service provider Magna Data, for instance, was started with $100,000 from the fathers of two of the company’s four founders. The nice thing about friends and family money is that it’s normally given as debt rather than equity. In other words, someone who wants to see you get on gives you the money you need and asks you to pay them back when you can. This can save a new company the trouble, and legal expense, of giving the investor a defined share of the company and preparing an associated shareholders’ agreement. ‘Fools’ is the term applied to a third party investor that hands over money without making you sign up to a strict term sheet or otherwise protecting themselves. It’s also known as ‘dumb money’ in private capital circles and, in a public setting, ‘the share market’.

Angels Angel investors tend to invest similar amounts as friends and family but want a share of the company in return for their money and mentoring. As above, they typically invest between $250,000 and $1 million in new companies. In return, they’ll usually seek about 30 per cent of its shares. Angel investing is not new but has become a lot sexier following the arrival of groups such as Tinshed, the investment network of rich and powerful business people in Asia Pacific 74

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brought together by Sydneysiders Janusz Hooker and Vivian Stewart. Hooker and Stewart, both under 30, act as talent scouts, reviewing business plans, meeting entrepreneurs and eventually lining up meetings where entrepreneurs pitch their ideas to as many of the group’s wealthy backers as can attend a meeting. If these ‘angels’, including figures such as James Packer and Rodney Adler, like what they hear, they’ll invest between $500,000 and $3 million then go back to the polo field or whatever it is that rich people do. Past investee companies who have benefitted from Tinshed’s services include online retailer dstore, Internet grocer ShopFast, and media and games production house Imagination Entertainment. Another angel network coordination group is Sydney’s Harbour Angels, run by former merchant banker Nick Mount and Australian-born but Silicon Valley-based entrepreneur David Doust. Doust is building a company called Softwaremarkets.com and is one of those frighteningly smart Australian expatriates. Together, Mount and Doust seek to coordinate investment into new companies by a group of 40 or so wealthy friends and associates. In 2000, for instance, they invested $1.2 million in Digital Media Group, an online share trading discussion website and technology company. Groups like Tinshed and Harbour Angels are the tip of a much larger iceberg. Angel investors are estimated to invest more than $1 billion each year across all sectors of the economy.4 Much of this money is supplied through well-established networks of private investors that review deals presented by coordinators such as the Australian Business Angels (ABA), run by Australian Business (the former NSW Chamber of Commerce) and VECCI, the angel network run by the Victorian Employers’ Chamber of Commerce & Industry. ABA, for instance, has 600 investors with $200 million in available capital. The organisation works to bring entrepreneurs 75

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and investors together at monthly forums. Its services range from advising entrepreneurs on their business plans to helping potential investors learn about the process of putting money into expanding companies. ABA supports its operations by charging investors an annual subscription but is aimed at developing the business community as a whole. From the entrepreneur’s point of view, the key challenge is getting the organisers of these angel groups to consider your business proposition. If you can persuade them that what you are offering is valuable, you will have to stand up at one of the above forums and present your idea to potential investors. But don’t be intimidated. Having been to some of the these sessions, I can tell you that some very average people with even more average ideas get as far as presenting. In many cases, they even got money. Finally, one of the biggest complaints from people that have taken angel investment is not that investors try to exert excessive control over the company but rather that they ignore it altogether. According to Alex Adamovich, the Australianraised head of Equity Partners Asia in Hong Kong and a Tinshed investor, many angels will kick in money but rarely speak to an entrepreneur until there is a major issue to deal with, such as an acquisition or a capital raising. He says that he tries to do better but the problem is that angels are typically, and almost by definition, busy and successful people who can only spend so much time with the companies that they invest in. Because angel investments tend to be relatively small and entered into on a personal basis, they are the easiest to neglect. Here’s his advice to entrepreneurs: The biggest pitfall is having expectations of involvement and assistance which don’t materialise. This is the biggest complaint I have, that is, once the money is in they aren’t contacted again 76

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by angels in any meaningful way. This is an area where I try to be more active than most. Often it’s too late. Therefore in an ideal world expectations should be clearly expressed. Best of all speak to other investees. Most don’t as they need the money. Also, they should be very clear on meeting hurdles and budgets. If they don’t, investors generally lose confidence. Finally, work out what you want from the angel’s networks and be sure you will get it.5

Incubators and accelerators Between friends, families, angels and venture capitalists lies a hybrid group known as business ‘incubators’. The term is said to have originated in the US where some of the first such facilities were created more than twenty years ago. It also alludes, of course, to chickens sitting on eggs. After the shine went off the term incubator during the 2000 tech crash, some switched to calling themselves ‘accelerators’ (while unkind commentators adopted the term ‘incinerators’) but the idea is the same. The theory is that someone sets up a facility that has lots of desks, computers, phone lines and other facilities that make small companies run, such as shared reception desks and coffee machines. Larger ones might also offer management advice and connections to accountants, marketing specialists, lawyers, venture capitalists and other service providers. Really large ones will maintain such service groups in-house. Incubators then take in small teams that are starting up new companies and let them use all this equipment and office space for up to around eighteen months. After that time they are expected to have a competent management team in place and be able to move out to premises of their own. In return they typically take 77

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cash from the company in the form of rent and fees as well as demanding an equity stake in the startup. Notably, the ‘cash’ is often the incubator’s own money that they have given to the startup when it signed up. As one US analyst has said, ‘It’s an interesting scenario. I give you this money, and basically, over the next six months you’re going to give it all back to me in fees. You’ve got to love America.’6 The advantage of all this to the fledgling company is that it doesn’t have to commit to multi-year commercial leases or take on other potentially crippling costs such as paying receptionists before it has cash flow. With lawyers, public relations people, web designers and others on tap, they should also be able to grow quickly. Good incubators also lend credibility to small companies. This can be very useful both in marketing as well as getting past the credit rating checks at big legal firms and other top flight service providers that fret about the ability of client’s to pay their bills. Universities and government bodies have been running incubators under various guises for many years. These have typically been non-profit organisations designed to help graduates or underpin regional development initiatives. Large, research-driven companies such as Lucent Technologies, owner of Bell Laboratories, have also had systems for supporting individuals or small groups that want to ‘spin off’ and pursue new projects on a semi-external basis. However, with the success during the Internet boom of large US Internet industry incubators like CMGI, idealab! and Internet Capital Group, the idea has taken on a life of its own. For a time, these companies achieved multi-billion dollar valuations by taking substantial stakes in a large number of small high tech and Internet companies then floating them as soon as possible on a nearby stock market, usually the NASDAQ. In the process they came to be seen as alchemists. For a while 78

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at least, Internet floats delivered pure gold almost every time and the incubators seemed to have discovered the secret to creating them. The largest, CMGI, has backed 70 companies including search engines AltaVista and Lycos, email management company Critical Path, and online auctioneers GoFish.com and uBid. In 2000, CMGI shares changed hands on NASDAQ at prices that gave it a market valuation of US$48 billion. To put that in perspective, the highest valuation achieved in the same year by the Ford Motor Company was US$38 billion. There were more than 300 such incubators worldwide in early 2000, about a third of which were located outside of the US.7 Australia was no exception and boasted around twenty incubators, including ten groups that have received $78 million in funding under the Federal Government’s Building on IT Strengths Scheme. These are now scattered around the country and have cool names like Bluefire, ePark and ITem 3.8 One privately funded Internet incubator is Powderbox. This is operated by chief executive Richard Poole in cooperation with Silverstream Corporate, a financial advisory firm and VC player. For a chunk of equity, Powderbox provides quality office space for small companies in downtown Sydney and offers hands-on management assistance. Its incubatees include the online women’s magazine SheSaid.com.au, a related ad sales company Tempest Online, a gay portal called Outbiz.com and the wine e-tailer Winepool.com.au. According to the entrepreneurs inside Powderbox, the company has a good set up. While it took around 25 per cent equity stakes in the companies, they don’t have to pay cash for their office space and other facilities. The companies also share a big open space, promoting a lot of interaction. Under the stewardship of Poole, who is a former lawyer and successful company CEO in his own right, the place is fun and informal. And because he was playing largely with his own money, Poole could make decisions 79

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quickly when startups needed assistance. He also kept his companies out of trouble, checking their legal activities closely and lending an imposing—he’s about six foot three, charming and sharp as a tack—presence at meetings. To me, Powderbox is what incubators should be—small, intimate and creative. A place where a successful person mentors a few new companies but also makes a quid on the side. Financial institutions such as Macquarie Bank have also established incubator facilities, backing companies such as AnnounceTV and Ozestock.com.au. These typically make more strategic investments in activities close to the bank’s heart, such as financial information. If you’re thinking of joining an incubator or dealing with any outside group, you should find out what direction they’re coming from. Their motivations will have a big impact on the way they behave and the type of value they deliver. The key question, and again this goes for all forms of investment covered in this chapter, is whether their interests are aligned with yours. If not, when push comes to shove, something will break and it’ll probably be the smaller, weaker entity—you. A benefit of the incubator system, and more broadly, VC investment networks, is that new companies would get to work alongside other new Internet companies, enabling them to share ideas and resources. Brought together by the guiding hands of incubator owners such as idealab! founder Bill Gross, they can also form ‘synergistic’ alliances. These might be designed to help drive traffic to one another’s websites, for instance. Functioning well, this would be known as a keiretsu —a Japanese word coopted by the US venture capital industry to describe a network of new companies. Morten Hansen and associates, writing in Harvard Business Review,9 have dubbed these ‘networked incubators’, saying they offer young companies the best mix of facilities, entrepreneurial drive and 80

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industry networking, particularly preferential access to industry leaders. They hold up US incubators like Campsix, CMGI, Hotbank and idealab! as examples. However, Hansen and friends also caution that networked incubators suit some startups better than others and some simple questions need to be asked: What other companies are in the incubator portfolio and is their focus consistent with your own? How strong is the incubator and its networks of partners and advisors? How do the companies inside the incubator work together and how concrete are the links between them? After the tech stock crash, people have begun to question whether the commercial incubator model is viable without a highly irrational stock market buying the end product— typically extremely immature companies with great presentation skills but unproven business models. Groups like CMGI suddenly began to look like the houses of cards that they were and saw their valuations slashed to around a quarter of their historic highs. Some of the most high profile success stories that made the incubator model so attractive were also struggling to survive in the real world. One of idealab!’s prized graduates was eToys.com. The online toy shop was ramped very quickly onto the public market at a time when everyone was convinced that traditional retailers such as Toys ’R’ Us would be wiped out by Internet newcomers. The company’s market valuation soared to more than US$10 billion before collapsing back to about US$500 million at the time of writing. This was still a healthy price for a company with a net loss of US$59.5 million on sales of US$24.9 million for the three months to 30 June 2000. Worse still, punters that bought the stock at the top of the market lost up to US$82 a share. Who collected a healthy part of the difference? You guessed it, guys like Bill ‘Aw shucks, I was just giving the kids a leg up’ Gross and other professional 81

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investors. The moral of the story, once again, is that the people who make the money in periods of rapid change and uncertainty are the ones who know when to pass the hot potato. Entrepreneurs considering entering incubators need to think long and hard about the credentials of the facility they’re seeking to enter. As bi-products of the Internet boom, most commercial incubators are even younger than the companies they’re planning to support. More than 80 per cent of 350 US incubators surveyed in June 2000 for a Harvard Business School report were less than one year old.10 Most Australian incubators are even fresher. They were also developing a nasty reputation for being expensive. Some of the worst incubators have also been taking a cut on payments made by their companies to external providers. The question you have to ask is, if these guys are taking cash for all these services then in what way are they earning their share of your company? The value of being put in a facility with a group of other new companies is also questionable. Yes, you’ll probably have a lot of fun because everyone’s young and wearing black. You may even get to do some interesting deals. But the situation is basically one of the blind leading the blind unless there is a high ratio of good operations or mentors to entrepreneurs. Entrepreneurs should therefore ask whether they couldn’t acquire all the services they require independently and on more flexible terms? If you have no revenue, you might be able to sell a share of your company for some straightforward cash then buy the services you need. Incubator managers will tell you that having to look after all these small decisions yourself will only cause you to waste time. That’s true. However, Rome wasn’t built in a day and there is value in staying independent because no one cares as much about you and your company as you do. It may even enable you to move more quickly because you will be able to sack under-performing service providers, for 82

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instance. While you might be able to do that while inside an incubator, you won’t be able to sack the facility if it owns part of your company. More generally, if you give away too many shares too early, you will also very quickly lose voting control over your company. This may in turn leave you paralysed and frustrated as you spend all your time lobbying shareholders rather than simply implementing your plans. And if you give up a large share of your company in your first year then you won’t have much left to play with later when you’re trying to attract additional investment or staff. Venture capitalists in particular like to see at least 60 to 70 per cent of a company owned by its founders and employees and often won’t invest if first round investors have taken too much.11 The reason is threefold. First, the angel or incubator will have a lot of power over the company. Second, there won’t be enough stock to provide future incentives to staff, particularly if they are diluted even further in subsequent financing rounds or an IPO. Third, as Howard Anderson, head of US incubator YankeeTek has commented, no one wants to back someone stupid enough to give away 50 per cent of their company before they’ve even begun!12 Whenever investors tell me that it is necessary to sell a large share of a company to succeed, I like to think of Rupert Murdoch. Admittedly he got a running start after inheriting his first media assets but News Corporation has become massive and continues to perform in part because Murdoch has gone to great lengths to maintain control (voting power) and has never taken his hand off the tiller. Microsoft is the same. Bill Gates still has enough power to make the lightning-fast decisions that the company needs to remain successful. So, don’t sell yourself short in your first year if you can see past the fifth. 83

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Venture capital By and large, if you play the US venture capital game you don’t have control. You just have to accept that. And if that means that you can be taken off the board or taken off as CEO in two year’s time then that’s the risk you take. —GEORGE FOSTER13

Don’t get me wrong about third party investment in companies. It’s just that the smartest entrepreneurs wait as long as possible before they take it on. So if you can make it through your first few years without outside investment—provided you are still in business and your market ‘window’ of opportunity remains open—you’ll be in a much stronger position to negotiate with venture capitalists. But first things first. What is venture capital, or VC? The difference between angels and VCs is that the former are typically rich individuals who invest their own money while the latter are professionals who invest funds on behalf of financial institutions and other groups. In other words, venture capitalists have bosses. This means that they typically take the conservative approach of putting larger amounts of money into more mature companies. It also means they’re more disciplined because they have to show real results or else they won’t get any more money to manage. A bit of gossip I picked up on a trip to California in late 2000 was that many VCs were in a deep panic trying to explain why they’d pumped hundreds of millions of dollars into flimsy Internet companies. The real answer was that the market was so hot before the April 2000 correction that they thought they’d be able to float them and get their cash back before anyone noticed how flaky they were. You try sitting in a Hawaiian shirt and Birkenstock sandals and explain that logic to a sober, dark-suited 84

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Entrepreneurs and venture capitalists are different but dependent breeds. Smart business builders take the time to learn about and understand the VCs that they’re approaching.

institutional investor from New York who just lost several million dollars. Fortunately, not all VCs are cowboys. As Australia’s VC veteran Bill Ferris has said, ‘[Venture capital] certainly isn’t about quick trading profits in the stock market. At its best, it is about helping entrepreneurs grow really great companies.’14 Good venture capitalists take an active role in the day-to-day management of the company—or, more accurately, in choosing the people that will manage the company day to day. ‘There are two schools of thought on VCs,’ says George Foster at Stanford University. ‘One is that they’re just sources of finance. The other is that they’re very effective partners or architects of businesses and I actually firmly believe in the latter.’ According to Foster, who also consults to VC firms, the most important role a venture capitalist can play is to build a 85

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company’s management team. In a lot of ways their skill, beyond raising and then investing money, is not far removed from that of recruitment consultants. They identify good people then place them into their investee companies, often in place of the founders. ‘If they do their jobs effectively then there’s less need for them on a day-to-day basis,’ Foster says, but cautions that professional investors can also take on too many deals. It’s easy to stretch yourself too thin if you’re a VC. There’s also the problem that the problem companies in the portfolio start to suck up more time than the good ones do. The really good VCs work hard, they see a lot of experience on the other ventures that they’re doing—they’re seeing 20 or 30 companies in a total portfolio of each fund, maybe managing three or four of them themselves—so, they are people that go down the learning curve very quickly.

The main thing to remember about VCs is that, more than any other type of investor they are interested only in shortterm capital gain. ‘They just want to make money, and that’s all they want to do. It’s easy to lose sight of that but you really shouldn’t,’ says one embittered Sydney entrepreneur who was sacked from his company after it was taken over by a venture capital firm. A smart entrepreneur therefore understands what the venture capitalist needs and exactly what that will mean going forward. VC fund managers need to be able to see the potential of being able to make at least ten times their money in about five years, preferably less. The reason is that they can only expect about two out of every ten companies that they invest in to deliver such stellar returns. Another two or three will break even or deliver a small profit and five will completely bomb. That receiving venture capital is no guarantee of success 86

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was starkly illustrated with the failure of companies such as K*Grind, the erstwhile web design and new media company. K*Grind raised more than $10 million in venture capital from funds, including Bill Ferris’ prestigious Australian Mezzanine Investments (AMI) and Macquarie Bank’s Macquarie Technology Fund, but still collapsed as a business in 2000 after spending too much, too quickly on information technology development. The only way venture capitalists will get the sort of return they need is by floating your company on a share market or selling it to another company for a good price. They won’t get the sort of big bang ‘exit’ they want—where the value of their minority shareholding is realised in plenty of cold hard cash— by taking a share of your annual profits or letting you repay money with interest. So, if you take VC you should expect to eventually either float your company or sell it to somebody. There’s nothing wrong with this but many entrepreneurs fail to think it through and later squirm like hell when their VCs start to look for a way out. When it comes to getting VC, entrepreneurs must therefore not only explain why they have a good business but also how it can deliver rapid capital gain. These are very different things. The first could be something like a medical practice that delivers $1 million a year in profit to a couple of doctors. This is a good business but inseparable from the professionals that run it. Preferable is a company like McDonald’s that is defined by its systems, intellectual property and brand and can be run by any pimply fifteen-year-old. These sorts of companies can be bought and sold and are therefore the only type that interest financiers like VCs. For a much fuller discussion of building companies that you can walk away from to play golf, see Michael Gerber’s best-selling book, The E-Myth Revisited.15 The second element in rapid capital gain is that it is usually 87

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to be found in fast-growing markets. This is why the burgeoning Internet was such a hoot for professional investors. I used to sit in press conferences and be mystified at the way people always held up charts from analyst firms showing incredibly strong growth projections for their types of products. After seeing one that implied that every man, woman and child in Australia would buy some obscure piece of computer networking equipment within five years, I realised that they were simply a key element in the bullshit process of selling companies. The reasoning goes like this, ‘People bought $10 million worth of headless chickens online last year. That was 100 per cent higher than the year before. If you follow that growth curve, in five years people will spend $320 million buying headless chickens via the Internet. Better still, we think we can cut off 50 per cent of that market.’ This argument would be funny if it didn’t work so well. Part of the reason that it does is that most people are basically optimistic and everyone wants to believe they’ve found the inside track to the next big thing. The pitch starts, ‘Did you fail to buy Microsoft shares in 1988? Have I got a deal for you . . .’ I like to think of VCs as being like the helicopter pilots that fly extreme skiers into dangerous mountain ranges. They take more risk than airline pilots and get paid more (when they don’t crash into cliffs), but they stop short of plunging down steep and fearsome slopes alongside their passengers. In other words, they have the means to enable risky endeavours but tend to keep themselves relatively safe. Indeed, some of the best VCs are former entrepreneurs. Roger Allen at Allen & Buckeridge is an example, having previously built the Computer Power Group into a multinational with 3,000 staff in twelve countries. His entree to the world of venture capital came in the mid-1990s when he sold out of the company and pocketed 88

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around $35 million. Rather than investing in real estate like most cashed-out Australian entrepreneurs, he decided to reinvest in the industry that had made him rich, the highgrowth technology industry. Though he admits he does have some bricks and mortar in his portfolio. Another is George Kepper, the founder of Datacraft, a computer networking and services firm that was sold to South African conglomerate Dimension Data in 1997 for $320 million. Kepper pocketed a cool $160 million from the deal and now invests through his private company, KFT Investments. Figures such as Allen and Kepper, who have done well in the technology industry then returned to pass on their capital and experience as investors, are rare in Australia but play a vital role. Because they’ve ridden the treacherous slopes of global capitalism they’re unlikely to drop you into an avalanche— unlike some newcomers to the VC game. The strength of Silicon Valley is that it’s chock-a-block full of former entrepreneurs that now invest, either informally as angels or as VCs. The hope is that no matter how insubstantial many of the companies that made money during Australia’s dot-com boom, a legacy of the period might be the presence of more experienced, cashed-up business players.

Golis’ rules One of Australia’s foremost authorities on venture capital is Christopher Golis, executive chairman of Nanyang Management, a Sydney-based fund with around $80 million under management for St George Bank and other parties. Companies that Golis has backed include audio production tool maker Fairlight ESP, entertainment group Garner MacLennan Group and point of sale technology provider PEG Technologies which is now listed on the ASX. In the absence of literature about the 89

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local VC industry, his book Enterprise and Venture Capital is something of a bible to Australian entrepreneurs.16 According to Golis, the entrepreneur/venture capital game has seven rules: 1 A rapidly growing business is always short of cash and the over-financed company does not exist. 2 Raising cash is done by a series of capital placements which result in continual dilution of the equity holders and former investors and founders. 3 The founders play a game of divide and conquer with their investors. Their objective is to have a mix of investor shareholdings while their own shareholding is diluted below 50 per cent. What the founders aim at avoiding is having one shareholder with a greater than 50 per cent holding and singular control of the company. 4 All shareholders are driven towards the goal of maximising after-tax profits and an eventual public listing, even though they know that if they are successful the greater likelihood (by a factor of four) is a takeover by a multinational. 5 Entrepreneurs who worry a lot about voting control usually have nothing to worry about. 6 There is no limit on what you can do or how far you can go—if you don’t mind who gets the credit. 7 The probability of success of a small company is inversely proportional to the size of the entrepreneur’s office and the amount he or she spends on their car. These points are each elaborated upon in Golis’ book, but 2, 5 and 7 stand out for me. The name of the VC game is to raise as much of the money that you need in exchange for as little of your company as possible. This process is called ‘dilution’ and, executed well, follows a fairly logical path. 90

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3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

1 Funds raised in stages

Start-up

Round 1

%

Round 2

Float

2 Dilution of founders’ equity

80 60 40 20 0 Start-up

Round 1

Round 2

Float

3 Increasing value of founders’ equity

20 15 10 5 0 Start-up

Round 1

Round 2

Float

Post-float

4 Example of a shareholding post listing Public 17% Founders 34% VC3 11%

VC2 11%

Angel 1 6% VC1 15%

Angel 2 6%

The above four figures from Chris Golis’ Enterprise and Venture Capital show that venture capital funding is raised in a series of stages, with the amount of money raised increasing at each step towards an initial public share offer (1). Because the company’s founders are selling more and more of their company to raise this money, the percentage they own steadily declines (2). However, even though they own a smaller share of the company, that stake is worth more because the entire company is valued more highly at each stage (3). The fourth figure shows the typical shareholding in a venture-backed company after a public listing. While the founders own a minority of the company, it will typically be worth many times more than their original shares.

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Using the twin arguments that they add a lot of value and take a lot of risk, VCs will tend to demand a sizeable chunk of equity in return for their money. There is no set proportion, but typically entrepreneurs will hand over about one-third of their company in return for VC. Some real-life examples come from Allen & Buckeridge’s mid-2000 portfolio. At knowledgemanagement company 80/20 Software the founders had 36 per cent and A&B had 16 per cent; at games maker Micro Forte the founders had 42 per cent and A&B 36 per cent; and at biomedical imaging company Torson the founders owned 22 per cent and A&B 33 per cent.17 Equally, however, there’s little attraction in losing control of your company. Spike Networks’ founder Chris O’Hanlon, for instance, sold about three-quarters of the company for $60 million to private shareholders and then to the public through a float. He quickly lost control and then interest in working there as the other shareholders took the company in a direction he didn’t support. Asked in June 2000 whether he’d do things differently if he had another go, he said: ‘No, I’m not against the IPO play, just because I trusted the wrong people and conceded a lot of the power that was in my hand immediately before the IPO. That was my naivety, my hubris, if you like. But if you can find a big pot of funding from private sources, go for it.’18 That little story should serve as a counterpoint to Golis’ rule number 5, which he attributed to Fred Adler. It says that if you’re obsessed by voting control you probably won’t ever obtain enough funding to achieve your business goals. This is fair enough and well argued in Golis’ book. It is also backed up by the story of LookSmart (see Chapter 6) which demonstrates the speed with which companies can grow if they 92

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‘lie back and think of England’, as Spike’s venture capitalist John McGuigan once joked. However, you should expect a VC to tell you not to worry about equity because, at the end of the day, their business model is short-term and depends on you ceding equity while yours, unless you’re the ‘get rich then get out type’, is likely to be more long-term and control-centric. I’m also fond of point 7 in Golis’ rules because it reminds entrepreneurs that good venture capitalists—ones that have real, hands-on experience building companies rather than those that have just walked out of the lofty environs of merchant banks, management consultancies and other places with nice toilets—like thrift. If you appear to be wasting money on fancy offices, designer suits, flash cars and glamorous parties, VCs are unlikely to give you more.

Due process VC funds typically have strict processes for investing money. Because they are ultimately accountable to superannuation funds and other higher investors, they need to have a system in place that ensures their investments are sound and the reasons behind them defensible. Nanyang Management’s investment process, for instance, comprises six structured steps that involve finding deals to fund, screening potential investees, formal due diligence and then legal work if the deal goes ahead. Nanyang says it reviewed 808 business plans in the three and a half years to the end of 1999. Out of those, only about 2 per cent of potential deals got to due diligence but 75 per cent of those moved on to settlement. If all goes well, the entire process takes 10–14 weeks (see Appendix 2: Steps in the VC process). 93

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The public markets Over time, the marketplace will crush any model that does not produce real results. —JIM COLLINS19

Nineteen ninety-nine will go down in financial markets history as among the most bizarre ever. The US market saw 319 initial public offerings by companies, many of them Internet startups. When they hit the exchanges their values almost always soared. Shares in VA Linux, an American company that sold services around an operating system it didn’t even own, Linux, saw its shares rise nearly seven times during their first day on the NASDAQ. The next four craziest first-day gains were online community theglobe.com (606%), data processor Foundry Networks (525%), and e-marketplace operator FreeMarkets (483%).20 In Australia, more than 90 companies floated during the last six months of 1999 alone. Companies like Open Telecommunications rose four times on their listing day. Wayne Passlow, the chief executive of Open, went from being worth about $64 million to $280 million in one day. It was crazy. The public markets became a form of venture capital for many untested companies. Real venture capitalists noted that many of the companies which floated during the period had previously failed to raise money privately. Proving their point, shares in almost 60 per cent of the 1999–2000 floats proved to be dud investments, finishing the year trading below their issue prices. US economist Bruce Greenwald at Columbia University is unequivocal about share market floats. ‘IPOs are a fraud,’ he says. ‘The only side you want to be on is the sell side.’ The academic maintains that good companies tend to find private equity while the public market enables the rest to raise money. 94

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He says this is the business school notion of ‘adverse selection’ and compares the markets to car lots. Car yards hold a disproportionate number of lemons because people tend to hang on to good cars and pass off low quality ones to car yards. The uninformed shopper, whether for cars or stocks, finds it hard to tell the difference.21 By this logic, you could have floated a Leyland P76 in late 1999. While it may not be quite so easy to raise money from the public these days, the ASX and other markets do remain a good source of expansion capital for established companies or people trying to test a new idea using other people’s money. A rule of thumb is that you shouldn’t go to the public market for less than $5–10 million. The reason is that it will cost you at least $500,000 to conduct a share market float and up to several million dollars if you pay a stock broking firm a share of the raised capital to ‘underwrite’ the offer. This is a form of insurance and typically runs at about 5 per cent of the funds raised, depending on the risk profile of the company that is seeking to float. Another reason is that if you’re so small or unprofitable that you need less than $5–10 million, chances are that you’ll be crippled by the costs and time involved in operating a public company. Even the smallest company will spend up to $1 million each year dealing with the market, holding annual and extraordinary general meetings, creating and distributing annual reports, paying high quality public relations firms to manage their image, dealing with analysts and all the other obligations that go with being a public company. These include the need to use top-shelf legal and accounting firms. Another reason to avoid the market if you’re small is that your revenue and earnings are likely to be inconsistent. One bad quarter and you could be dumped by investors and struggle to recover. Also, if the value of your publicly traded 95

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shares is less than about $150 million, institutional investors won’t buy your shares because it’s not worthwhile for them to analyse their value. This will leave you with a shareholder base made up of individuals, most of which will have no long-term loyalty to your company. Whether you’re big or small, you’ll have to get used to having to open your books to the whole world, including your customers. David Tudehope at Macquarie Corporate Telecommunications says that this was the biggest change he experienced in going public. ‘I’d say that the top five issues for companies going for a public listing are, number one, public profile. It’s a big change if you’re not used to it.’22 Other key issues included the distraction of staff before the float and after listing. This included the extra work involved in floating the company but also questions such as which staff would receive stock options. The third key issue was the introduction of independent directors to the board, as required when a company goes public, Tudehope says. The fourth issue, according to Tudehope, is the cost of the whole process. Since much of the cost of floating is wrapped up in paying fees to advisors, you can lose a lot if you don’t list successfully. There are plenty of companies around Australia that are still licking their wounds after preparing to float in early 2000. Many in this group paid tens of thousands of dollars in fees only to find that their underwriters wouldn’t support their floats after the market turned sour. Notably, the definition of ‘sour’ is usually agreed in writing in underwriting contracts. It will usually take the form of a clause saying that the underwriter reserves the right to cancel the float if the NASDAQ Composite Index falls below 4,000, for example. Finally, there’s the sheer workload involved in floating a company. Tudehope says that floating is completely absorbing for its chief executive, in particular, and takes immense 96

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stamina. For instance, he conducted 92 investor presentations in the lead up to Macquarie’s successful float on 27 September 1999 which raised $135 million. ‘Number five is the enormous amount of work before the float,’ he says. ‘From 1 July to 27 September I worked for the company for about three or four days—about a day a month—the other 30 days were working for the brokers. That’s the most intense period.’ Finally, it’s worth remembering that despite all the hype about IPOs, very few companies ever conduct one. Out of the hundreds and thousands of registered companies in Australia, only about 1,300 are listed on the Australian Stock Exchange.

Head of chicken, tail of ox Paul Twomey, former chief executive of the Federal Government’s National Office for the Information Economy, made an interesting comment before he quit the public service for private enterprise. We were watching entrepreneurs and investors mingle at a First Tuesday event in Sydney. I said entrepreneurs seemed to be finding it hard to swallow handing over large amounts of equity to the high-tech incubators that his office had just furnished with $78 million. A former McKinsey & Co. consultant with a passion for Byzantine history, he said that our entrepreneurs seemed to be struggling with the idea that to create large companies you have to cede a lot of equity and control to financiers. He summed this up with the Chinese question: ‘Do you want to be head of chicken or tail of ox?’ It’s a powerful question. Twomey’s point was that many Australians would rather have control of something small than part of something big but ultimately beyond their control. This, he felt, was one of the reasons that we struggled to create large 97

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corporations. I would add that Australia’s larrikin tradition and healthy distrust of authority could be a contributing factor here. The big question for you as an entrepreneur is what you want from investors and just how much control you’re prepared to cede. Is it just cash or are you also seeking guidance or some form of strategic assistance? Thinking back to Golis’ third rule, do you have to get those from the same person? Perhaps most importantly, can the person you’re talking to really deliver and do you think that you can get on with them in a high pressure business relationship that is going to last several years? These are difficult questions. Investors dress it up in different ways but money is a commodity. Friends and family will typically offer pure cash and say, ‘I don’t understand what you’re doing but I believe in you so here you go and God bless.’ Angels and incubators will say that they can save you from making a lot of silly mistakes in your formative months or years. Venture capitalists will also promise to save you from mistakes but will also talk about their ability to ‘plug you in’ to their business networks. Investors may also offer to help you develop strategy. This is one to be particularly wary about. The reason is that a professional investor’s core competency is usually raising and placing money, not identifying opportunities and creating businesses. Andy Rachleff, a general partner at leading US venture fund Benchmark Capital, put this well in an interview with Red Herring magazine. ‘Our industry is made up of a bunch of lemmings. When was the last time you heard an original idea from a venture capitalist?’ The article’s author, Michael Perkins, later concluded, ‘While the VCs bring startups useful advice, contacts, perspectives, and, of course, money, the entrepreneurs are the true heroes. They’re where most of the good ideas 23 come from.’ 98

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Just as important as knowing what you want is considering what your investor wants. In particular, ask yourself whether they’re there for the long haul like Bill Ferris, who spent seven years with Datacraft Asia Ltd and five years backing Austal Ships, or are they a paper-shuffling shark? Perkins again has a disturbing observation from the US venture industry: The trend of VC firms resembling investment banks is reinforced by the fact that a fair share of people coming into VC firms today started out as investment bankers, market analysts or attorneys. And as in investment banking, personal net worth is becoming more important as an end in itself, rather than as a lucrative by-product of building solid companies. Industry insiders readily admit that today’s venture industry is increasingly driven by short term greed and that some investments are made just to be flipped into the market or sold to the highest bidder.24

Tony Too much water can kill the plant as well as too little. —CALIFORNIAN VC ADAGE25

I have a licence to ride a motorbike but don’t. Apparently this makes me one of 400,000 Australians who would also be James Dean. To end up in this situation, I attended some riding courses, passed a test, then got married and was told my riding days were over. I was also told that my drinking and many other types of days were over too, but I won’t burden you. The motorbike exercise did however leave me with a useful analogy for what too much capital can do to an immature company. Also sitting my riding test was a guy called Tony. He was about nineteen and had been forced to get his licence again after 99

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losing it a year earlier. He’d got his learner’s permit and gone out and bought the most powerful 250cc racing bike he could find. In fact he had it there. It was a black beast of a thing. I doubt if it was even legal. He was also riding it very carefully because the steering system was still slightly mangled after the accident that had cost him his licence. He’d gone flying around a blind corner in an industrial estate only to meet a low concrete wall at about 80 kilometres an hour. He hadn’t foreseen that this might happen but I’m sure that everyone that knew this guy expected him to hit something sooner or later. They didn’t give him his licence again. Money is power, as they say, and too much of it can do more harm than good. As Randy Komisar says in his book The Monk and the Riddle, ‘When too much money is pumped too fast into a startup, there’s no room for mistakes. The initial product and the initial fix on the market have to be right.’26 Perhaps the best example of this phenomenon was Boo.com, the would-be pan-European online clothing superstore that lasted only six months after launching in late 1999. The company burned through US$120 million in venture backing in eighteen months. Dragging it down was a salary bill for 300 staff plus first-class air tickets and pricey company flats in London. The company also failed to get its technology systems working. Ironically, quickly calling the kettle black was Alison Harrington at TheSpot who suffered an almost identical fate one month later after burning through $12 million in one year.27 She told the Sydney Morning Herald, ‘[Boo.com’s] site launch was delayed, they had heaps of technical problems and they had an incredible burn rate. Plus, you need a compelling offering and I’m not sure selling clothes works on the Internet.’28 One factor in building companies in periods of high technological change is that there is a lot of uncertainty about how 100

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quickly consumers will adopt innovations, from mobile phones to genetically modified food. One of the reasons that e-tailers such as TheSpot collapsed was that they overestimated how quickly people would take to shopping online. Working from overly optimistic projections of demand, they spent too much on advertising and infrastructure too early and were quickly caught out when sales failed to match expectations. ‘I think we were spending too much money on marketing, particularly in the off-line world,’ Harrington said in late 2000, adding that management also spent too much time chasing joint venture deals.29 A lack of money, on the other hand, ensures that companies have no choice but to operate profitably and build capacity in alignment with market demand. In other words, poverty imposes discipline. This is the opposite of ‘If we build it they will come’ and says ‘If they really want it they’ll pay me to build it’. Another sober voice is Richard Foos, president of Rhino Records in Los Angeles. Rhino offers re-issues of rare recordings and was acquired by Warner Music in 1998. In an interview with Fast Company magazine he said: Start as small as possible: To achieve 100% success, you need to grow organically. Pass up outside financing until you know that you can run the company. Starting with limited financing forces you to learn every single aspect of a business: how to balance a ledger, how to collect receivables, how to draw up contracts. If you don’t understand all aspects of your business, you’ve set yourself up to fail.30

The alternative view is, however, that the world is now so fast and competitive that you have to get all the money you can, build fast and hang on to your hat. If you get the timing just right, like OzEmail did, you’ll be in the box seat. Vivian Stewart 101

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believes that it would not be possible to launch Magna Data again without substantial external finance. ‘We’d never be able to afford to do that again. The pace of the industry is now so fast that you can’t afford to grow organically,’ he says.31 Ironically perhaps, the history of Magna Data shows just what can be achieved without formal venture capital if you’re prepared to enter a market very early and work hard.

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five CASE STUDY: MAGNA DATA (DAVNET) If they’d been in any other business they would have gone broke. They were just lucky to be in a growth industry with cash flow—it covered a multitude of sins. —A FORMER MAGNA DATA SALES EXECUTIVE ON THE COMPANY’S EARLY MANAGEMENT TEAM1

I

n 1993, the Internet was a place that geeks and academics went to use online bulletin boards, send simple electronic mail messages and occasionally download text files. The Internet in Australia was basically the Australian Academic and Research Network (AARNet), owned and operated by the universities. It was a monochrome world where you had to know how to use programs with names like Telnet and Gofer. An understanding of Unix programming also came in handy when things weren’t working and the World Wide Web was yet to be set loose from the labs. At the same time, four former schoolmates were graduating from university in Sydney and looking for something to do. Jason Ashton, Luke Carruthers, Mark Cramer-Roberts and Vivian Stewart decided to create one of Australia’s first commercial Internet service providers. Ashton had studied at Sydney Grammar. Carruthers and Stewart had been to Kings 103

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and Cramer-Roberts had been to Cranbrook. All of them had been around computers since they were young. Ashton, for instance, says he saw one of his first laptops in about 1983. It was a $15,000 machine from Compaq that his father had brought home from work and so heavy that it might have broken his legs if he’d put it on his lap. They drew up a business plan and got a $100,000 soft loan from Cramer-Roberts’ and Stewart’s fathers, contributed equally. Their fledgling company was started with a 486 server, a modem and a router from Cisco Systems—the three key pieces of equipment that enable ISPs to connect subscribers to the Internet. The money tided them over for their first four months of 1994 by which time they’d started to make money, selling basic Internet access services for $39 per month, $10 more if you wanted technical support. By the end of 1994 they were offering PPP (if anyone can remember that) access to the web at $49 per month and turning over $250,000 a year. The Magna boys, as they’d become known, realised they were on a winner when their revenue surged to $1.25 million in the year to June 1996 and $4 million the year after. By coincidence, I worked next door to the company during this time. They sublet space to the small newsletter company at which I worked. I can tell you first hand that it was anything but a smooth transition. The company’s network was a hastily constructed mess, held together by the computing equivalent of Perkin’s Paste. They didn’t have enough modems leading to frustration among customers who couldn’t get online. Their telephone support was so bad that people used to come in and sit in their foyer until someone dealt with them. Yet they continued to expand rapidly, helped in part by the fact that every Internet provider in town was suffering under the weight of the same unexpected surge in demand. They were even winning a majority of the corporate business around Sydney, 104

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snapping up clients before the behemoth Telstra could work out how to sell Internet time. Indeed, the first Sydney Morning Herald website was hosted at Magna Data. And every week new staff were added to the point where they quickly began to burst out of their Castlereagh Street offices. One of the reasons they emerged from this chaos as profitable and with full control of their company was their policy of charging three months in advance for all services. This gave them the cash flow they needed to cover the growth in staff and the network. And they didn’t try to be the ideal provider for everyone, preferring profitability over perfection. Ashton concedes that the company took the approach of keeping 80 per cent of customers happy rather than going broke trying to get 100 per cent customer satisfaction. ‘Don’t build a city if you only need a country town,’ he says, adding that they preferred to scramble to meet customer demand than try to second guess the nascent market and potentially get it wrong.2 The other reason was the management team. The four founders of the company all played important roles. Carruthers led the company’s technical, marketing and regulatory relations. The latter role was crucial in the late 1990s as the Internet gradually passed from academic to commercial hands in a series of steps, any of which could have proved fatal to Magna Data. He has since left the company, working as an investor and business development adviser with Internet startups such as NetPort Hospitality Systems (now inter-touch). Cramer-Roberts was the corporate salesman and is today major account services manager at Davnet, the listed telecommunications company that bought Magna Data in February 1999. Stewart was also in sales, marketing and general business development. As above, he went on to become an investment mediator at Tinshed after a stint at Intel in Hong Kong. 105

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However, it is Ashton, who studied physics and mathematics at the University of Sydney and has a Masters in Commerce from the University of New South Wales, and Carruthers, who studied marketing, that people credit most with making Magna Data a successful business. Ashton’s drive and discipline helped carry the company through its early years and saw him emerge at age 28 as chief executive of Davnet Australia, with eight million shares in the company. When Magna Data started, Ashton knew he still had a lot to learn about business. Without much family money to fall back on he also had to earn a living and took a job within the operations and finance division of the Sydney printing company Diamond Press. While printing was a long way from telecommunications, he learned a lot about the basics of business from managing director John Spira and Michael Skettos, the company’s chief financial officer. Other helpful figures were Ashton’s father, a computer industry business figure, and Stewart’s father who was also an executive. After a full day at Diamond Press, Ashton would go in to Magna Data in the evenings and join Carruthers until the early hours of the morning. He kept this up for two years, often working sixteen to eighteen hour days, six or even seven days a week. Ashton left Diamond after it became clear that Magna Data needed the other half of his sixteen hour day as well. ‘We used to work insane hours,’ says Carruthers. ‘Through to the early hours of the morning every night of the week. We never thought of it as working hard though, we were just so enthusiastic about what we were doing.’3 ‘We were always very tight with cash,’ Ashton says, adding that despite what his former partner Stewart might say, things aren’t so different now. ‘Hard work is still a substitute for lots of money. I know lots of very successful guys building businesses without VC in the Internet.’ 106

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Carruthers maintains a lower public profile than Ashton but commands a lot of respect within the Internet industry as an entrepreneur and technological innovator. Given that he took his $4 million almost entirely in cash and has since actively reinvested it in other new high-tech ventures such as intertouch, he may well be the wealthiest, post-Internet crash, of the company’s founders. Prior to the company’s sale to Davnet, Carruthers was also very much the public face of the company. He concedes that Magna Data’s support was overloaded in the early years but points out that the company broke a lot of new ground. In our very early years, Magna was always the innovator in the marketplace. [OzEmail founder] Sean Howard used to ring me up and ask things like how we were charging for web space for our dial-up customers. We would put a price of $750 per month on unlimited ISDN, and a month later half a dozen others would release exactly the same pricing . . . Often customers would use Magna because you just couldn’t buy the same product elsewhere.

OzEmail had raised $50 million on the NASDAQ and was showing just how quickly you can build a company with large amounts of capital. While OzEmail was eventually sold for much more money than Magna Data, it never recorded a full year profit. Magna Data on the other hand was always profitable and secured the lion’s share of corporate customers through focus, corporate demeanour and the very early introduction of services such as HDSL (high-speed digital subscriber line)—a service that allows big companies to get 1–2 megabitper-second links to the Internet over normal copper phone lines at a fraction of the prices they would have paid Telstra. Today Davnet is still outfoxing the giants but the stakes have risen to much faster gigabit per second systems. 107

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Magna Data also had a sense of mission that was shared by the company’s young and idealistic founders. They wanted to make a difference—a common factor among many startups that set off blindly into their chosen areas of a new economy. They enjoyed running rings around Telstra. Indeed, their office was directly across the road from the incumbent carrier and they used to illegally park their cars on Telstra’s footpath downstairs as a sort of convenient taunt. By the time Davnet paid $16 million in cash and shares for the company, making each founder a millionaire four times over before their 30th birthdays, Carruthers and Stewart had already left. Both took more cash than shares in Davnet, then a listed but largely unknown player from Melbourne. CramerRoberts was still within Magna Data but also took more cash than shares. Ashton was the most committed to the company— or the last one standing after a period of tension between the four founders, depending how you see it—and a believer in Davnet CEO Stephen Moignard who had started the company in 1997 with $130,000 from his father.4Ashton took eight million shares in Davnet, then worth about 30 cents each, and a small amount of cash. This was the move that made him a dotcom poster boy as Davnet shares climbed as high as $5.90 in the following year. The most significant was the November 1999 move by Japanese carrier NTT, the world’s biggest telephone company, to buy just under half of Davnet Telecommunications for a staggering $119 million. ‘Philosophically, we would never have sold to Telstra,’ says Ashton. ‘If we were going to merge, it was going to have to be someone small.’ Magna Data’s decision to merge with Davnet followed a period of rapid consolidation and increased competition in the Internet business. The game was now fully commercial and the giants AAPT, Optus and Telstra had finally worked out 108

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how to package and sell the slippery and technically complicated commodity of Internet access. Ashton believes that Magna Data, with its large and established base of corporate customers, could have held out longer and been bought for more. OzEmail, for instance, was looking down the same barrel but waited until December 1999 before selling for $520 million. However, he says that he and Cramer-Roberts liked where Davnet was going. The company was also small enough for them to maintain leading roles. About that Ferrari. Ashton is unapologetic and says he has always liked powerful cars. His first car was a 4.1-litre V6 that he got for $150. Next was a $2,000 V8. At Diamond Press, he talked them into giving him a new, 5-speed V8 Commodore as a work car. Testament to the hours he used to work, this darkblue Brockmobile was stolen from Telstra’s footpath at 5 a.m. one morning—Ashton had been in the office all night. Now he drives a Ferrari 360 Mondeo because he can. ‘I’d always been passionate about cars. I just couldn’t afford fast cars.’

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six CASE STUDY: LOOKSMART

[Evan Thornley] hasn’t just done a professional job. It’s been gutsy. He’s a great role model for what can be done and how to do it. —BILL FERRIS1

O

ne company that accepted the rules of the American VC game and won was LookSmart. Tracey Ellery, co-founder of the Internet directory company, will admit that her experience with VC hasn’t always been a barrel of laughs. However, it has helped make Ellery and her husband multi-millionaires. The idea of LookSmart was hatched in an apartment in New York City in 1995. Ellery was laid up in bed, pregnant with twins Max and Ruby. Thornley was working in the new media division of McKinsey & Co.’s New York office. In another example of ‘domain experience’ leading to venture success, Thornley specialised in advising clients about online advertising. Ellery, who had previously managed a small computer retail chain in Australia and edited a magazine on student finance, was spending her days surfing the World Wide Web. Leaning back on the pillows, she realised that people were going to need a lot of help when it came to navigating the mass of material on the network. 110

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‘Our business model is actually quite simple—we have developed the world’s premier Internet directory and use it to provide outsourced search solutions,’ Thornley says in management consultant-speak in the company’s 1999 annual report. While Yahoo! and other online directory and search companies were already operating, Ellery and Thornley believed that such automated systems were only so useful. To make directories truly valuable to users, they reasoned, someone would have to go out and look at websites then organise and rate them. They also figured that once they’d gone to all the effort of having their own ‘webrarians’ review and categorise sites, they would have a proprietary database of information that would differentiate them from their competitors. They could then also license the content contained within the database to other Internet companies, placing them in the information syndication business. Akin to Yahoo!, LookSmart also took the approach of organising its directory according to categories such as ‘sport’ rather than centring it on keywords like ‘soccer’. Beyond helping users, this was designed to maximise potential electronic commerce revenue. Another benefit of manually organising sites was that LookSmart could exclude some sites, such as pornographic ones, from its directory. This made it the first family-friendly Internet directory. The company also targeted its directory to people aged over 30.2 Despite being just about to become parents, Ellery and Thornley were looking to get into a venture of their own after having travelled from Australia to Malaysia and now the US for McKinsey. In October 1995, the pair returned to Australia and founded HomeBase Directories Pty Ltd. Seeing that they were on the right track but under resourced and a long way from the main game, they did a deal with one of Thornley’s former clients, Reader’s Digest Association. Reader’s bought 85 per cent of HomeBase in July 1996 through a new 111

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Delaware-based company, NetGet Ltd. This was later renamed LookSmart Ltd in the same year. All this time, Ellery and Thornley had editors, located mainly in Melbourne, churning out website reviews using seed money from Reader’s. In July 1997, LookSmart moved its headquarters to San Francisco but its relationship with Reader’s was souring. Ellery and Thornley were concerned that the directory was not a priority for the larger company and felt hampered by its bureaucracy. In October 1997, they convinced Reader’s to allow them to buy back its 85 per cent of the company in exchange for warrants to buy nine million LookSmart shares, or 10.5 per cent, and a US$1.5 million promissory note—a form of IOU. While they were lucky to get out on these terms they found themselves as the major shareholders in a company that was losing money fast. Ellery says that they could very easily have gone bankrupt at this stage. The company had almost 50 people and 350,000 hits a day on its website but was selling only US$120,000 per month worth of advertising. Its ‘burn rate’, or loss per month, was running at about US$300,000.3 The pair temporarily moved back to Australia in late 1997 with a lot of personal debt and potentially large tax liabilities caused by the change in country. With their credit cards at the limit and staff cutting them slack on wages, Thornley set out to raise venture capital. Paul Riley, the partner at Sydney venture firm Australian Mezzanine Investments (AMI) that saved LookSmart, says that when he first met Thornley the company was about two weeks from failing to meet payroll. In a snap decision, AMI chose to invest US$1.5 million through its AMWIN fund, a joint venture with the US fund Walden International and a recipient of money under the government’s Innovation Investment Fund scheme. The money was finally committed in March 1998 and 112

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bought AMWIN 15 per cent of LookSmart. Just two months later, US cable company Cox Communications invested an additional US$6 million under a deal that valued LookSmart at US$15 million. A crucial booster around this time was a September 1998 licensing deal with Microsoft under which the company would provide its directory information to the software giant for US$80 million over five years. According to George Foster at Stanford, the Microsoft deal was critical: The really big one was Microsoft . . . Evan had to go up [to Redmond] and negotiate with people who had been with Microsoft for fifteen years and they were tough negotiators, but Evan stood up and was a brilliant negotiator on that. But the way I look at it, you had the expertise and the enthusiasm of Evan but you also had on the other side a group with fifteen years’ experience on this space. It was a team, the putting together of not just one corporation but a partnership. It was the combination of the two that generated LookSmart’s turbo entry into a different stratosphere.4

There was also the company’s potentially disastrous decision in May 1998 to spend the entire US$6 million that it had raised from Cox on a marketing deal with Netscape. Netscape makes the Navigator web browser that was then used by a majority of Internet users. For this reason, its home page was one of the most ‘hit’ sites on the Internet and Netscape had been charging multi-million dollar fees for companies to advertise their products and services. For its US$6 million, LookSmart would be featured as a leading search engine on the site, raising it to the upper echelons of the global Internet industry. Foster believes that this deal was among those that made LookSmart. He also says that it illustrated Thornley’s speed, flexibility and powers of persuasion. 113

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Evan got six million on a US$15 million valuation and that was all supposed to be for rollout, supposed to be for coders and all this sort of stuff on the database, and very shortly Evan just went straight back there and said, ‘By the way, I want to use it all to buy the Netscape positioning.’ Cox was a very sizeable, established media company at that stage and the Cox people just said, ‘Yeah, do it.’ If Evan couldn’t have got the six million to go on to Netscape he would have had much more difficulty in getting traction.5

These deals also made it apparent to savvy investors that LookSmart could be floated and added to its fundraising momentum. Yahoo!’s success on NASDAQ was also reassuring. Australians that put up money included Australia’s Macquarie Bank and Kerry Packer’s private company Consolidated Press Holdings. LookSmart also split off about 15 per cent of the company’s shares for staff to ensure that the whole team remained squarely focused on capital growth in the lead up to the company’s now famous NASDAQ float in August 1999. With just four years of hard work and a total of about US$70 million in venture capital behind it, LookSmart was taken to market at a valuation of US$1.46 billion, raising net proceeds of US$96.9 million to fund its future growth. At the time of the IPO, Tracey and Evan owned 21 per cent of LookSmart or eighteen million shares, worth about US$290 million. Within two months, the shares had risen more than 100 per cent and seen the pair’s paper wealth brush the $A1 billion mark. AMWIN, which by the time of the float had invested a total of $5.4 million, was sitting on a profit of around $280 million. The return was also a win for the Australian Federal Government that had put money into AMWIN through its Innovation Investment Fund scheme that enabled the VC fund to take the risky, snap decision to invest in LookSmart. 114

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Beyond the trials of raising money—which became Thornley’s full-time job from 1997 to 1999 while Ellery, as company president, oversaw its operations—the company has also had plenty of growing pains. Some of the company’s US staff became so disaffected with what they described as an oppressive and uncaring environment at the San Francisco headquarters that they created a ‘LookSmart survivors’ discussion group, dubbed LookStupid. It makes sense that writing website reviews could be oppressively dull, but Ellery comments that a challenge of doing business in the US as an Australian has been that American employees are highly sensitive to criticism. No doubt there has been some rough and tumble as the company lurched from financing round to financing round, but it’s hard to tell whether LookSmart has unfairly exploited staff or if its Aussie management simply lacked tact. In the same way that travel photos fail to convey the height of a mountain range, it’s hard to describe in words the scale of what Ellery and Thornley have achieved. And how quickly. I remember watching Evan Thornley speak at the Australian Financial Review’s Internet Awards in Sydney in late 1998. The company had won a prize and Thornley got up to accept. No one knew much about the company except that it was run by Australians and presumed to take on the likes of Yahoo!. It seemed destined to fail and become yet another example, like Sabela Media and data networking equipment manufacturer JNA Telecommunications, of Australian innovation being extinguished by American capital. When Thornley announced that the company was going extremely well and would make its investors ‘richer than God’ it sounded like so much hot air. LookSmart took on the elite of the global Internet industry and emerged as one of the major players. It has also established one of the few global Internet brands to come out of Australia. Beyond the wealth—which was dwarfed by about a factor of 115

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ten by the amount made by the founders of Yahoo!—the site has become one of the most popular in the world. LookSmart also has alliances with the likes of Sony and Time Warner and has begun building web directories in 30 countries. By mid-2000 LookSmart was on track to take in annual revenue of more than US$100 million and was gradually reining in losses that continued to run at about US$30 million a year. Asked if their life had changed with all the money, Ellery said no. ‘It’s so unreal for us,’ she said, adding that about all they’d done was buy a car—a Jaguar, mind you—and had started flying their friends and family to the US for get-togethers. She also took as much delight in watching the company’s staff buy houses as feathering their own nest. ‘I really think that we derive an enormous joy and pride from building a great company. Doing what’s almost impossible and continuing to grow that.’6 LookSmart watchers will know that the company’s stock fell under pressure in late 2000, dropping to under US$10 per share on NASDAQ. So have Ellery and Thornley lost the money they once had on paper? Yes, but not entirely. In a practice that is more accepted in Silicon Valley than other parts of the world (where people think it shows a lack of faith), they have been gradually selling their shares in their company since it floated. In September 2000, for instance, Thornley sold 380,000 shares, or about 4 per cent of his own stake in LookSmart, at an average price of US$16.83, walking away with US$6.4 million in cash.7 LookSmart will also help make us a little richer over time. The success of Thornley and Ellery in Silicon Valley has helped raise the reputation of all Australian business people both there and around the world. LookSmart is also a genuine nextgeneration business, one that couldn’t have existed before the Internet and the sort of company that our kids will take for granted. Behind the scenes there is also a small army of 116

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potential entrepreneurs at work. Indeed, some have already left LookSmart and a few have even received direct backing by Thornley, who is now recycling his wealth and experience as an angel investor. As above, success breeds success and LookSmart’s achievement can be expected to pay subtle dividends for years to come. However there is also a lesson in the LookSmart story. The company is a winner but nowhere near as successful as Yahoo! and the key reason for this is that LookSmart was starved of capital in its early days after its founders retreated from San Francisco to Melbourne. Yahoo!, on the other hand, was fast-tracked through the cream of American venture capital a couple of years before LookSmart, giving it a head start that LookSmart could never hope to match. If we are to help create future Yahoo!s, Australia needs a much more sophisticated venture capital industry and risk-oriented business culture.

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seven CASE STUDY: ONE.TEL

R

odney Adler is probably right when he says that there are a lot of people that grow up in wealthy families but never win the support of business people like James Packer and Lachlan Murdoch. But then again, there are those who do, like John David (‘Jodee’) Rich. Dollars aside, the One.Tel story is also one about building a great business, extraordinary ambition and, one suspects, a certain amount of revenge on the Australian business community. It starts in 1991 when Rich sold the remains of Imagineering, the computer distribution business he founded in the 1980s, to Hong Kong’s First Pacific. Imagineering lost $35.4 million in the sixteen months to December 1989 and another $11.57 million in the six months to 30 June 1990.1 The company’s shares, which had once climbed to around $8, were worth only about 10 cents when the company was taken over by Hong Kong group First Pacific in 1991. However, the company had briefly catapulted Rich into the BRW Rich List and, as Rodney Adler points out, even though it was sold off at fire-sale prices, Imagineering never collapsed. Indeed, the company lives on today in the form of Tech Pacific Australia, a large and successful operation that still distributes high-tech products and services in Australia. 118

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With his business reputation in tatters, but still worth a couple of million dollars, Rich spent a few years skiing, learning to fly and studying molecular biology and nanotechnology. He also did an executive program at Wharton business school in the US and started a family with his wife Maxine.2 That might sound like fun, but it was a harrowing period for the former high-flyer. Most galling was a continuing stream of humiliating media reports, the worst of which suggested that Rich had disappointed his father. Even today, he still has enemies in the business community from his Imagineering days. In 1995 Rich re-entered Australian business life with a plan for a new telecommunications company that would resell mobile phone services provided by Optus, operator of the country’s second largest digital (GSM) mobile phone network. Optus had decided to appoint five resellers and invited companies to pitch for the positions. While others such as Hutchison Telecoms, now called Orange, said they would target big-spending business people and others showing an early interest in mobiles, such as trades people, Rich proposed to target run-of-the-mill consumers—customers Optus thought couldn’t be serviced profitably. Rodney Adler, who supported the development of One.Tel and became a foundation investor in the company, says: The original plan for One.Tel was to go to Optus and say, ‘Look below a certain level it’s not economic . . . for you to have those customers because you’re so large, you’ve got certain overheads. You’re missing a large segment of the market because it’s not productive for you. We at One.Tel would like to be your eyes and ears at the bottom end of the market. Let us be your people down there. Let us accumulate the market that isn’t profitable for you because we believe we can make it profitable because our overheads will be very, very low.’3 119

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The first Optus knew about Rich’s plan was when chief executive Bob Mansfield got a call out of the blue from Rich. The call was passed on to John Greaves, then Optus’ finance director, whose first thought when he and Jodee met was that he had silly hair. ‘It was sort of up over his ears, pointing up like little blond pixies.’4 (If you look at One.Tel’s mascot, which was drawn by one of Rich’s relations, you realise that the ‘Dude’ is almost certainly Jodee.) Greaves didn’t buy the business plan, either. Rich went back to the drawing board for a few months and, in an example of how high-placed friends can be useful, spent two or three months developing his proposal in consultation with one of Adler’s business analysts from FAI. According to Adler, FAI then agreed to invest $1.5 million to buy 20 per cent of the company. Optus also came to the party, buying 30 per cent. Rich received around 25 per cent of the stock for having the idea and bought another 20 per cent by putting in $1.5 million of his own money. Rich’s former associate at Imagineering and now joint managing director of One.Tel, Brad Keeling, was given about a third of Rich’s shares. James Packer completed the picture a few months later, buying 5 per cent for the now higher price of several million dollars. Without the cost of building a phone network, the company was cash flow positive from the day it started trading in May 1995 and quickly repaid its debts, Adler says. Asked why he gave Rich a chance at a time when the rest of corporate Australia was still shunning him, Mansfield says: I knew Jodee—didn’t know him well—and observed the Imagineering exercise. He didn’t enjoy that, nobody enjoyed that, but he had the guts to get up and go again and what he’s done with One.Tel you’ve got to say has been gutsy. 120

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Jodee marched into my office when I was running Optus and said, ‘I’ve got this idea for a different form of distribution for mobile phones’ . . . It was a novel idea. We were looking at how to get into the breadth of the market and he came up with that low-cost, youth-directed appeal. It’s been successful. I judge people based on where they are today and tomorrow. You don’t disregard what happened yesterday but hell, Jodee was young enough to get up and go again and he had a good idea . . . I think it’s unusual to be as determined and focused to come back and have another go like Jodee did. We don’t all succeed at everything all the time.5

At the time, no one had any idea that Mansfield’s nod would set Rich on the path to becoming a billionaire. ‘He would have been a brave man if he thought he was going to be a billionaire from that meeting because I certainly didn’t think it would be that way,’ Mansfield says today. One unexpected factor was that from 1995 to 2000 the mobile phone market grew almost four times more quickly than anyone expected. This was lucky for One.Tel which rode the wave and was reselling Optus’ network services to 285,000 mobile customers by late 2000 and had another 57,000 subscribers on a new GSM network of its own. Adler believes this was the only thing One.Tel did right. When everyone was buying cable and building cable, we built customers. Now, we believe that the key to success is owning customers. We have over 1.1 million customers today. We believe that we can rent cable whenever we want it. We believe that the gift is to keep and grow customers. We have a four billion [dollar] market capitalisation because we have customers.

Worldwide, One.Tel has gained more than two million customers, 1.2 million of whom are located in Europe and about 121

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70 per cent of whom use the company’s cheap long distance phone services. ‘We are the only Australian brand, other than Foster’s, you recognise when you get off the plane in London,’ Keeling has said.6 This was amusingly reinforced in late 2000 when London’s Financial Times incorrectly ran a photo of Telstra chief executive Ziggy Switkowski, describing him in the caption as the head of One.Tel, the telecommunications company that Brits now most readily associate with Australia. One.Tel achieved this rapid growth in Europe through a massive consumer marketing blitz, made possible through the backing of News Corporation which owns England’s largest tabloid newspaper, the Sun, and many other media assets in Europe. News Corporation became an investor in One.Tel in February 1999, promising half of $700 million alongside Packer’s Publishing & Broadcasting Limited. The money had been supplied in cash and kind (advertising) but One.Tel still unveiled a stunning loss of $291 million on revenue of $653 million for the year to mid 2000. Announcement of the loss coincided with revelations that One.Tel had paid Rich and Keeling $7.5 million each in the same financial year. The massive cash payouts were partly the result of their success in raising One.Tel’s market capitalisation from $5 million to $4 billion in four years but that didn’t help its shares. Investors dumped One.Tel stock, driving its share price as low as 55 cents and its market value to around $1.5 billion. The slump also brought Rich back from the billionaire club, reducing the value of his holdings to around $200 million. As chairman of Telstra, Mansfield finds it awkward to talk too positively about rival One.Tel, but he tips his cap to Keeling and Rich, saying that it’s important for more Australian companies to succeed offshore. 122

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To take a company that even here I’d say is amongst the speculative category and to jump into a market that is thousands of miles away—different culture, different countries—and succeed across the whole spread of that challenge is no mean feat. It’s taken Rupert Murdoch 40 years to do it. But it would be great if more Australian companies could do it.

But how did they do it? There are two key events that have made One.Tel what it is today. The first was winning the right to resell Optus’ mobile phone services in Australia and focus on obtaining customers. The second was the company’s decision to spend $9.5 million to buy some leftover blocks of wireless communications spectrum in Australia in September 1998. This enabled it to start creating the above mentioned GSM network on its own and enter into direct competition with the nation’s existing GSM network operators: Optus, Telstra and Vodafone. While contradictory to the company’s oft-stated preference for owning customers rather than infrastructure, the move was expected to deliver higher profit margins and give One.Tel more freedom to introduce innovative services. The other point was the spectrum was dirt cheap and gave an opportunistic One.Tel an asset against which it could borrow further money to fund its international expansion. In particular, US giant Lucent Technologies gave One.Tel a billion-dollar line of credit, enabling it to build networks now but pay for them later. In retrospect, it seems like an obvious move. But at the time, the company ran a very real risk of destroying its relationship with Optus. Even worse, Adler says, it just didn’t have the money. Jodee and I went around the market desperate for $10 million. I’m talking desperate. This is straight after the spectrum auction. We bought the spectrum and we had to pay for it. People forget. We were desperate. Only because James Packer in 123

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his own personal right and David Lowy for the Westfield funds put in $5 million each and only because Jodee and I stood behind that money and gave them our assurances as individuals, friends, that we managed to raise that $10 million. That’s like two years ago when the market cap of the company was $400 million and everyone thought we were lepers.

Deciding to buy the spectrum was also an agonising process. Jodee and I and Brad Keeling and James were sitting up in the FAI boardroom and it really boiled down to this: we were all undecided whether we should buy it. We didn’t have $9.5 million. James had it, I had it, but One.Tel didn’t. We debated the whole philosophy of changing from being a service provider and actually competing with our main company, being Optus. We lived and died on our service agreement. Without them we were nothing. They could change the access fee here and there and we’d be dead. Everyone agreed to do it but the risk was this: the key to success if we bought that spectrum, sure, in the radius of where we bought that spectrum we’d have a good system but what about the rest of Australia? Could we enter into roaming arrangement agreements with the others? My view was very clearly that the ACCC would insist that all the others sign the roaming arrangement with us. Because we’re an Australian company and that’s the whole definition of competition. The argument against me was, ‘Why the fuck would they do it?’

‘Roaming’ was the key. If mandated by the Australian Competition and Consumer Commission (ACCC), it meant that Optus, Telstra and Vodafone would be forced to allow One.Tel’s customers to use their networks for a reasonable fee. This meant that even though One.Tel had only bought patches of communications spectrum in some capital cities, it offered a 124

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‘national’ service from day one. Subscribers wouldn’t realise, but when they left One.Tel’s direct coverage area, their calls would be carried by another phone company. In the end, the ACCC did mandate roaming but the decision could have gone either way. The existing players had a strong argument that it would undermine their incentive to invest in future network infrastructure and degrade the quality of telecommunications for all Australians. If the ACCC hadn’t stuck to its guns and resisted the lobbying might of Telstra and the others, One.Tel’s spectrum investment would have been a write off. Adler says: If we were successful then that $9.5 million would have turned into hundreds and hundreds of millions of value. If we were unsuccessful then we would have actually wasted nine and a half million dollars.

A related factor that went One.Tel’s way was that in 1999 and 2000, wireless spectrum became one of the hottest commodities on earth. At the height of the global boom in Internet and telecommunications shares, licences to the same sort of spectrum sold for more than A$100 billion in the UK and Germany alone. Just a few months later, a similar auction in Italy for comparable frequencies netted only half the amount. However, the increase in the value of spectrum also cost One.Tel dearly when it sought to augment the $9.5 million worth of capacity. For all its bravado, the company had only secured 2.5 megahertz (MHz) of spectrum in most cities but, according to the Australian Financial Review, needed up to 10MHz in each place to run its wireless networks. By the end of this second auction in March 2000 it had paid 55 times its original investment, or $523 million, for licences to 12.5MHz of spectrum in Sydney and Melbourne and 10MHz in Adelaide, Brisbane and Perth. The high price was met almost entirely by 125

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News Corporation and due in large part to aggressive competition from another carrier, Hutchison Telecoms. The Australian Financial Review went on to suggest that One.Tel had become a ‘casualty in a global turf war’ between the Murdochs at News and the Li family of Hong Kong, owner of Hutchison Telecoms.7 Most reports about One.Tel focus on the big, often frightening, numbers. But big deals will only get you so far. There are many other factors that have made One.Tel a real and fast growing business. The first is Keeling and Rich’s management style. The pair were previously together at Imagineering and work extremely well together. While interchangeable, they also complement each other. Rich focuses more on high-level strategy while Keeling is known more for his operating and marketing expertise. In 2000, for instance, Rich moved to Europe to continue the company’s expansion there while Keeling took over day-to-day management in Australia. Although both are into yoga and are slightly ‘new age’, Rich dreamed up the idea for One.Tel and remains the company’s visionary, while Keeling has been more focused on the nuts and bolts of making it a business. Both John Greaves, the company’s chairman, and Rodney Adler say that Keeling is the more cunning of the two. According to Adler: I would classify Jodee as the most reluctant billionaire you’ll ever meet. He didn’t start this business to be a billionaire, he started this business because he thought it would be a cool thing to do and he thought it was going to be profitable. In his wildest dreams, he never thought he was going to be a billionaire on this company, so soon, so fast. Whereas Brad Keeling is very different. Brad Keeling wants to be a billionaire, knows he will be a billionaire and will be a billionaire.

Rich and Keeling’s closeness has been cloned across the company in the form of a unique buddy system. Like scuba divers, 126

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everyone in One.Tel is ‘buddied’ to another person that could do their job if required. This is a central element in One.Tel’s team-oriented culture. It also means that business can continue when a person is sick or resigns, which is a major issue with a large, young and transient staff doing mainly call centre and sales work. In telecommunications, it’d be seen as building a system with ‘no single point of failure’. Another thing you notice about One.Tel is its open-plan, colourful offices. Large cut-outs of The Dude mascot and handpainted signs adorn every corner. There are also very few meeting rooms. Instead, staff meet on a loose collection of office chairs behind palm trees located at one end of each floor. There are no meeting tables. Even Rich and Keeling don’t have offices, preferring instead to work at two massive antique desks that look back over one floor of their building. They don’t make exceptions for important visitors either. The day that Lachlan Murdoch and James Packer met at One.Tel to announce their joint investment in the company, they were to be found sitting around Rich’s desk on standard chairs, not cooped up in a private conference room. In other words, it couldn’t be further from Optus and Telstra. A book that has influenced One.Tel’s management approach is Ricardo Semler’s Maverick.8 This inspiring volume, recommended to me by John Greaves, talks about Semler’s company Semco, a Brazilian industrial group that has introduced many industrial innovations such as allowing factory workers to organise their own shop floors, paint walls and even decide their own pay packets. It’s not all laissez-faire at One.Tel though. For instance, and ironically, you won’t hear the sound of ringing phones at the company. Rich hates it and, in addition to banning staff from having their mobiles on in the office, has mandated that all office phones be answered within two rings or automatically 127

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switched to voicemail. One.Tel is also a heavy user of voicemail, even using it as a cheap but effective way to broadcast company announcements. The company has also built its own customer management system, designed from day one to enable it to treat its mobile, long distance and Internet access subscribers as single customers. It is also key to the company’s ability to chase up bad debtors quickly and, despite the warm and fuzzy decor, comes with a sophisticated system for tracking staff performance. ‘No longer is [the telecommunication] industry dominated by ex-Baby Bell executives,’ Rich once laughed in an interview, taking a swipe at then Telstra chief executive Frank Blount and AAPT CEO Larry Williams. ‘It’s a dude’s world!’9 If LookSmart was about poor people using venture capital to get rich, then the One.Tel story is about rich people using each other’s money—venture capital and later public money— to get even richer. By late 2000, the company had raised $1.25 billion from the Murdochs, Packers and other investors. It remains to be seen whether this massive injection of capital leads to the creation of Australia’s first global telecommunications player. The alternative is that One.Tel has bitten off more than it can chew and ends up crippled by a weak balance sheet. By late 2000, the company was failing to win capacity at the European spectrum auctions. It was also sending out confusing messages to analysts and media about its intentions towards its Australian network and plans to team up with Spanish carrier Telefonica. There was a feeling that One.Tel was up on a high wire and that its safety net—the abundance of cheap capital for telecommunications companies—was shrinking fast. Whatever happens at One.Tel, at least Keeling and Rich are giving it a go. Even if the company were to be broken up and its customers sold off—which is what the market is 128

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expecting—it has innovated, provided thousands of jobs, delivered cheaper telecommunications services to millions of people, and taught a lot of Australian professionals within the company about doing business at an elite level.

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eight CASE STUDY: MACQUARIE CORPORATE TELECOMMUNICATIONS Once we define ourselves in terms of others, we lose the freedom to shape our own lives. —JIM COLLINS1

I

f someone offered you and your brother a couple of hundred million dollars in cold hard cash would you turn it down? Think about it. Enough money to never work again. Enough money for your children to never work again. Or their children for that matter. Aidan and David Tudehope did. Crackpots, right? Perhaps. Macquarie sells telecommunications services to big businesses in Australia. It was the third major provider in the telecommunications market after deregulation began in 1991. The company set up shop before Optus but after AAPT (now owned by Telecom New Zealand). At the time of writing its turnover was around $200 million a year and had a market capitalisation on the Australian Stock Exchange of about $400 million. That was a drop in the ocean next to market leader Telstra, with revenues approaching $20 billion and a market capitalisation of about $50 billion. But it wasn’t bad for an eight-year-old company built by a couple of twentysomethings—certainly good enough for large, foreign tele130

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communications companies to be interested in buying. What the Tudehope brothers had built only became clear in 1999 when the company floated on the Australian Stock Exchange. Prior to then, it was highly secretive. With a focus on corporate clients, there was no need for it to go out and advertise on the sides of buses. In 1999–2000, its $200 million in revenue was sourced from only 1,300 customers. Indeed, I was the first journalist to interview David Tudehope for a major paper. In May 1998, I was called in to meet a young guy in second-class offices on Bligh Street in Sydney. In a small, windowless conference room with cheap grey office furniture, he told me that Macquarie was, next to Telstra, Australia’s most profitable provider of telecommunications services to corporate customers. He also said that it was doubling in revenue every year and had almost 100 staff. Having got used to the plush offices at the other major corporate providers, AAPT and Optus, all this seemed a little hard to believe. But when Macquarie released its financials with its prospectus, it showed a history of strong, steady growth. As a ‘service provider’, Macquarie resold services from other carriers rather than owning its own networks. Its core business proposition was that it could add enough value in the form of better billing information and customer service to attract big customers away from the carriers that did have their own networks. It also meant that it did not have to sink millions into building networks then wait years for a payback like Optus, for instance. Macquarie first became profitable in 1995, recording sales of $4 million in that year. By 1997 it had revenue of $51.1 million and a post-tax profit of $2.7 million. In 1999–2000, it achieved sales of $194 million and delivered a post-tax, operating profit of $9 million. However, the most surprising piece of information in the 131

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company’s prospectus was that through their private company Claiward, Aidan and David basically owned the entire company. The reason for this unusual situation was that, until the float in 1999, they had never sold a share of the company to gain venture capital. Instead they’d grown by reinvesting their profits and operating as leanly as possible. ‘Macquarie, of all the telecommunications companies, started the most frugally and today has a culture which is very costconscious, which is a good thing in any business,’ says David Tudehope, pointing out that the boardroom table we’re seated at was bought from a client that went into receivership.2 He also has a grubby 15-inch monitor for the computer on his desk, one of many second-hand machines that the company has bought. According to David, the brothers started Macquarie with the savings of ‘normal’ individuals. In a short time, every dollar they owned was in the business and they quickly learned to redefine what it meant to have no money. They also learned how to run the new business on the smell of an oily rag by keeping its infrastructure light. However, David says that he and Aidan never faced financial ruin because they retained an ability to trim their expenses to near zero when necessary. Under the initial public offer, Claiward lined up to sell 25 million shares to the public and institutions at $1.80 each. Macquarie would also issue 50 million new shares, diluting Claiward’s holding in the company down to around 60 per cent to raise a total of $135 million. For those that aren’t lawyers or stockbrokers, this means that David and Aidan pocketed a tidy $50 million in cash to go and spend on things like holidays and car stereos. The brothers also retained about 60 per cent of the company, worth about $240 million at the time of listing and leaving them firmly in control of its day-to-day management. In March 2000, the 132

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company’s shares went as high as $3.25, valuing the brothers’ shareholding at almost $400 million and easily winning them places on Business Review Weekly’s list of Australia’s richest 200 people. But how did they get there? Like David Perry at Chemdex.com, the Tudehopes had a unique insight into the industry and, just as importantly, the guts to do something about it. In 1990, David worked for Westpac’s merchant banking division, Partnership Pacific Ltd (PPL). At 25 he was part of the team advising the Kalori Consortium, the group that was competing with Optus for the government licence to become Australia’s second telecommunications carrier. David stresses that it was a minor advisory role but says it opened his eyes to the world of telecommunications. Aidan joined the company at 22 after studying at Harvard Business School. Both brothers had studied Commerce at the University of New South Wales. In a fortunate twist of fate, Kalori was unsuccessful, leaving David free to enter the industry directly without encountering conflict of interest accusations. ‘I left PPL and could see the opportunities in the industry but, like a lot of people in the industry, didn’t know how to make it happen,’ he says. The first step was to travel to the US in 1991 to learn how that market had been transformed since deregulation commenced in 1984. David found that despite his age and lack of backers, American service providers were more than happy to meet and tell him what they could about the industry. He also witnessed how large companies such as MCI and other new entrants had grown. Fired up, he returned and founded Macquarie in 1992 with Aidan. The pair estimates that they put less than $500,000 into the company over the first couple of years, either up front or by not drawing full salaries. A key early executive was Peter Muspratt, a senior banker who joined 133

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in 1993 after having managed Westpac’s operations on the west coast of the US. In retrospect, it doesn’t sound very courageous for David to have left banking in favour of telecommunications. But this was 1992. Market liberalisation had made banking hot and PPL was a leader in the then new industry of mortgage securitisation. Telecoms, on the other hand, meant Telecom and OTC. It was a government-run utility and about as sexy as water or electricity. There was no World Wide Web, mobile phones were bricks and Al Gore was yet to utter the words ‘information superhighway’. Worse still, the country was in a slump. It’s hard to imagine today, but the recession was still going strongly. We’d watch the TV at night and hear about high levels of unemployment, and many people said to me at the time that leaving a secure job doing a relatively exciting thing like securitisation wasn’t the smartest move in a recession. But sometimes you do have to move against the trend.

Most extraordinary is that Macquarie got off the ground at all. Beyond Telstra its first two major competitors for corporate customers were AAPT and Optus. Both had literally millions at their disposal, flash buildings, nice brochures and large sales staffs. Yet, like many stories in this book, Macquarie had technical focus, innovation and hunger on their side. Among the first and most important was its billing system that enabled it to tell executives exactly how much they were spending on their telecommunications, not only down to the day but also by cost centre within their organisation. By buying Telstra and Optus carriage services at a wholesale discount, Macquarie was able to undercut the giants on price. It was also operating in a green field, meaning that there were plenty of customers to win and no one had fixed ideas about service—pretty much anything was better than Telstra. 134

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Even so, the early days for the company were hard yakka as the company pushed through the deadly catch-22 of being unable to win customers because it didn’t have customers. Having a 26-year-old chief executive and a 22-year-old chief operating officer couldn’t have helped either. ‘There’s no doubt that the toughest period in your business is getting those first few customers,’ says David. ‘When they say, “So, who else uses Macquarie?” and you say, “Nobody,” they don’t go, “Great, this is the option for me!”’ David comments that help came from places they least expected—and not always from the people that they thought they could rely on. While many of their contacts in the financial community and elsewhere proved reluctant to try the young Macquarie, others that they’d only met in passing stepped up and gave them a go. Interestingly, the recession helped Macquarie because businesses were hurting and willing to try anything that might reduce their telephone costs. David notes that there was also plenty of argy-bargy for Macquarie to muscle through as Telstra got used to the idea of competition. ‘There’s been some pretty disappointing activity by Telstra staff. In the early years there was some frankly almost illegal activity by Telstra staff which I think was part of the adjustment from a monopoly to a competitive regime.’ Macquarie never let its problems with the incumbent destabilise its business. The most serious issues for all the new telecommunications companies in the early days of deregulation centred on billing. Telstra had never sold services on a wholesale basis to other companies before and now encountered technical problems that led to disputes over charges. These weren’t little disputes either. AAPT, for instance, is still claiming that Telstra owes it $300 million as a result of the problems. Other service providers went out of business 135

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fighting. Since it was their own money they were spending, Macquarie kept a very tight handle on the quantity of services it used and quickly spotted any problems with the bills it received from Telstra. The company was in negotiations months before any other provider, says Tudehope, and managed to resolve the problem without having to resort to legal action. Despite the changes in recent years, Macquarie has also paid constant attention to its customers. David is the face of Macquarie and its lead salesman. Despite the extra workload in running a public company, he says he still tries to see two or three customers every day. ‘You’ve got to,’ he says. ‘They’re the best source of ideas.’ Regarding the decision not to take venture capital, David says that Macquarie had little choice. ‘The part that’s hard to imagine today . . . is that there was very little venture capital around in ’91, ’92, ’93, ’94. Also, banks weren’t keen to lend to people without a proven track record. Maybe if I’d known the right individuals that might have been different, but I didn’t.’ There was pressure around 1996 and 1997 to take on venture finance in order to fund the company’s growth, however David says that by that time Macquarie had become ‘culturally conditioned’ to growing by reinvesting its profits. By 1998 it became clear that Macquarie would need to invest in its own network infrastructure if it was to make the transition to datacentric telecommunications and the Internet. It would also need to do this to achieve higher profit margins. Needing at least $10 million to build a new data network, Macquarie looked both at venture capital and the increasingly hot public market. As David says: We looked at all the options, including venture capital, but there’s no doubt that the public became far and away the best 136

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option very quickly because capital markets were receptive to telecommunications stocks like never before.

Asked whether his own age has ever proved an obstacle, David, looking characteristically boyish but intense, says, ‘No, I think it’s the way you handle yourself and the approach you take.’ If you ask for the single most important factor behind Macquarie’s success, he’ll tell you that it’s the company’s people. A lot of chief executives say that but you get the feeling that he’s sincere. He also has the numbers to back it up. Macquarie is a very tight ship and we’ve worked very hard to develop a family sort of culture. We’ve only ever had less than half a dozen staff ever leave to a competitor in eight years and most of those have been pretty junior. Our turnover of staff is single digit percentages over the eight years.

Despite their own youth, Aidan and David have tended to hire older staff, particularly former Telstra employees in their thirties and forties. They spend a long time deciding on each person and are especially shy of anyone that has seemed to move through a lot of jobs. If you visit Macquarie, you’ll notice that the result is a sober, very business-like company culture where the word Tudehope almost seems to permeate the air. Sitting in the foyer one day, I overheard one receptionist say to another, ‘Make sure you remember to lock the drawer [to the reception desk] or else Aidan will have a fit.’ I don’t think you’ll find too many large companies where the major shareholders not only run the show but still spend twelve hours a day in the office and micro-manage down to drawer locks. There’s a lot to like about the Macquarie story even though the company’s shares plummeted in 2001 after announcing unexpected losses and other controversies. The first thing is that you probably haven’t heard it before. 137

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Second is that they saw where the telecommunications industry was going very early and decided to build a new business around it. They then grew the company the hard way, using elbow grease in the absence of outside capital. One positive side-effect of this is that they really understand their business. People that raise lots of money to grow their businesses tend to end up as experts in just that: raising money. David and Aidan Tudehope, on the other hand, had no choice but to develop a deep understanding of their customers, industry regulations and technology. Finally, Macquarie appears intent on becoming a standard bearer for Australia in the region’s telecommunications industry, recently completing its first move offshore with an office in Singapore.

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nine CASE STUDY: SPIKE NETWORKS Every strong entrepreneurial personality has an extraordinary need for control. Living as he does in the visionary world of the future, he needs control of people and events in the present so that he can concentrate on his dreams. —MICHAEL GERBER1

T

he biggest challenge when operating in high growth, capital-fuelled and changeable environments is keeping control of your company. For every successful mega company like Microsoft that is still run by its founding entrepreneurs, there are thousands of others that are controlled by financiers, have merged with other enterprises, or simply failed. Few, it seems, manage to ride the big waves all the way to the beach. Selling the majority of your company to investors is an obvious way to lose control. However, nothing is black and white. Sir Peter Abeles, for instance, owned only about 1 per cent of transport conglomerate TNT but ruled the company like a personal fiefdom. There are also many examples of companies in which investors have a large or controlling stake but rarely find themselves in conflict with founders because their interests are aligned and there is a healthy mutual respect 139

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between the parties. Another good way to lose control is to distribute so much equity or influence to partners during alliances and other deals that you end up hamstrung by competing interests. Worse still, you could run the whole vessel aground and collapse into bankruptcy. There are also other more subtle ways to lose control. You might end up in a situation where you own the whole box and dice but find that none of your staff support your decisions. Or perhaps the company goes through so much change over time that you just don’t want to be in it anymore. Another way to lose control of your company is to lose control of yourself. One entrepreneur that lost control of his company on all sorts of levels was Chris O’Hanlon, founder of Spike Networks. Whatever becomes of Spike—and as someone that knows a lot of people at the company and wishes it well—it won’t be what O’Hanlon had in mind.

Spiked ‘There is no question that Spike would not have the exciting and dynamic future that it does ahead of it if it had not been for the drive and vision of Chris,’ a strained John McGuigan told Spike Networks shareholders on 8 June 2000. The executive chairman was addressing an extraordinary general meeting of shareholders in the light and airy surrounds of The Atrium restaurant on Castlereagh Street, Sydney. On the agenda was a vote on a multi-million dollar alliance with Hong Kong Internet and telecommunications conglomerate, Pacific Century CyberWorks (PCCW). Wide-screen televisions proclaimed that the deal would make ‘Spike CyberWorks’ Asia’s leading e-business services company. But there was nothing light or airy about the mood at the meeting. That morning the Sydney Morning Herald had published what McGuigan 140

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euphemistically described as a ‘rather detailed’ story about the departure of the company’s founding CEO Chris O’Hanlon on 17 April. Beginning on page one and titled ‘How Denim Vader came to a sticky end in the web’, the article ran to more than 2,000 words and was highly critical, on both personal and professional levels, of the noticeably absent O’Hanlon. Herald journalist David Higgins wrote that O’Hanlon was facing a potential sexual harassment claim from a former US employee and that his former ‘mistress’—O’Hanlon was single at the time, having earlier separated from his wife Given Rozell—had allegedly stolen US$53,000 from the company. Higgins also wrote that O’Hanlon had overseen an extravagant US$267,000 party in Los Angeles in 1999 to launch SpikeRadio.com, the company’s online radio station. The story was the result of extensive research as well as input from disgruntled insiders at the company. The resulting Herald article said that McGuigan had forced O’Hanlon to resign after learning of the harassment issue. ‘Furious when he heard about the sexual harassment claim, [McGuigan] immediately suspended Mr O’Hanlon from all Spike duties and called a board meeting over the weekend. He wanted Mr O’Hanlon out, and the board approved a motion that Mr O’Hanlon be asked to resign,’ the Herald stated. A follow-up Herald article on 14 July 2000 said that the company settled the claim privately by paying out US$750,000 to the former Spike DJ, Stefanie King. Neither the company nor O’Hanlon would confirm or deny the figure which was attributed to two unnamed sources. McGuigan, who previously ran the world’s largest legal firm, Baker & McKenzie, did go on record as saying that the matter had been settled.2 O’Hanlon maintains that no harassment suit was ever actually filed and that, despite the settlement, he never admitted any guilt. He has also denied that there are other suits pending, as 141

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suggested in some reports. O’Hanlon has said: I’m no walk in the park, unless that park is Central Park after midnight or somewhere in Zaire, but I am neither i) a harasser or ii) someone who is dumb enough to make such an admission to anyone ahead of a court date.3

Whatever happened, it was bleak stuff. Making it worse, the company’s shares were languishing at around $1—well below their issue price of $1.45 when the company raised $32.6 million from the Australian public in mid 1999. (They would later go as low as 20 cents). The twenty or so shareholders at The Atrium meeting were outnumbered by Spike staff, merchant bankers, accountants and media representatives. The PCCW deal—one that could yet see Spike become a very successful services company—was sullenly passed. It was also a world away from the sunny Sunday morning in late summer 1999 when I first met McGuigan at O’Hanlon’s house in exclusive Double Bay, Sydney, to report on the company’s upcoming float. In a scene that now seems unreal, McGuigan bounced in late, fresh from a morning swim and dressed in a casual, open-necked shirt. He looked every bit the wealthy, successful lawyer having a bit of fun in the zany new Internet business. The sun streamed in through the windows and Chris gushed about Spike’s upcoming float in a gravelly, American–Australian accent and Given served coffee and muffins. It was the beginning of an outstanding business partnership, even friendship, between O’Hanlon and McGuigan. Even a year later, in late January 2000 when I first interviewed O’Hanlon for this book, he was still enthusiastic about both McGuigan and John Atkinson, McGuigan’s partner at Hunter Bay Innovation, the venture firm that owned about 25 per cent of Spike. Speaking by phone on a Sunday morning from a hotel room in Tokyo, he said, ‘My partnership with 142

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John McGuigan is a partnership on a number of levels. Same with John Atkinson. There is a great deal of filial and fraternal depth to it . . . There is a great deal of fun and laughter and mockery.’ The trio had gotten to know each other very well, travelling the world selling Spike in gruelling road shows that would see them address up to eight, often sceptical, groups of investors per day. O’Hanlon described McGuigan and Atkinson as ‘shrewd and active’ shareholders and praised them for attracting other heavyweights such as John Greaves from One.Tel and Timothy Mainprize, the former FAI Insurance Group director. This momentum also led to Lawrence Maltz, the former chief operating officer of Starbucks Coffee Company and a family friend of O’Hanlon’s, joining Spike’s board in May 1999. With the money in the bag after the April float, the sky seemed to be the limit. When the company announced the PCCW deal in December 1999, it seemed that it might just get there. In that same January 2000 interview, O’Hanlon said: If we had not raised that capital then and achieved the progress that we have had now, we wouldn’t be in the position to be talking to someone like [PCCW executive chairman] Richard Li. And that Richard Li relationship is going to turn the company into a billion dollar company.4

As 2000 began Spike had a stellar team and, as a potential member of the PCCW clan that would later include Telstra, a big future ahead of it. Yet despite all the money, power and connections that the team possessed, they just couldn’t lift the company’s share price off the floor. The trouble started the day Spike floated. The company had the misfortune of listing during a week where American and Australian investors were dumping technology and 143

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Internet stocks. Despite the success of its capital raising and the company’s super-high profile, once on the market the company’s shares gradually slipped below their issue price. The company’s executives blamed the negative market sentiment but the excuse seemed increasingly weak as other Internet companies recovered but Spike shares stayed ‘underwater’. The rumour on the street was that Salomon Smith Barney, the stockbroking company that had backed the float, did not go out of its way to support Spike’s stock in the market after listing. After such an apparent vote of no confidence from its own financial institution, Spike’s stock languished. Also not helping was the disdain among conservative brokers and analysts for Chris O’Hanlon’s habit of wearing denim jeans and T-shirts to meetings, drawing parallels between the Internet and heroin, and the other colourful antics that his trendy, young staff adored. ‘It was like saying “fuck you” to the market,’ says one financial analyst in Sydney. The heat from the market led to a rapid build-up in tension and a lot of soul searching. Was Chris upsetting the fund managers? Should Spike become an e-business company servicing major corporations or should it stay true to O’Hanlon’s original, more quixotic, vision of becoming a global youth media company? The passing of the PCCW deal, an e-business tie-up with accounting and services giant Arthur Andersen announced in February 2000, and O’Hanlon’s departure shortly after, signalled that Spike had chosen the corporate option. This was consistent with McGuigan’s view, borne no doubt of his success at Baker & McKenzie, that profit lay in doing fee for service work. Spike planned to ‘sell the picks and shovels’ in the Internet gold rush, he said. That was also sensible, given that 144

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the company was bleeding cash chasing its dreams for Internet radio and global presence. In the year to June 2000, Spike lost $27 million on revenue of $19 million, attributable mainly to the cost of the Internet radio operation as well as closing the company’s failed US web design group and the creation of new offices in Australia and Asia. The problem was that O’Hanlon, the entrepreneur, still wanted to chase the gold. He also believed that he was onto a rich seam—the first group of young people in history that had grown up with the Internet—and had assembled some of Australia’s, and to a lesser extent America’s, best creative talent to deliver media product to them. The most obvious result was Spike Radio which, despite its lack of viability, looked great. In an email sent after his resignation, O’Hanlon wrote: I do feel as if, somewhere along the way, my vision not only of the company’s future, but the future technological, social and economic environments in which it would operate was no longer trusted—despite the fact that it was my vision that had drawn everyone—my fellow directors, our employees, the press, even small and institutional shareholders—to the company in the first place. In my final months at the company, I’m not sure any of my fellow directors understood what I was talking about—though I’d concede my view of the future online as somewhat complex and necessarily only vaguely defined.5

A few days later he added: We were, in short, being too mindful of the market, rather than the technological and competitive environment in which we had been born. Then again, I’m talking as the company’s founder— a dreamer, an entrepreneur. I’m confident the new management will build an exceptionally successful company. But to do so, 145

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they need to be supported by those who share their vision. In the end, I didn’t.

I asked O’Hanlon if he wasn’t being naive to think that he could float Spike on the stock exchange and not expect to become ‘mindful of the market’. Yes. Totally. But I was naive to concede so willingly the direct management and supervision of that transition. I was too quick to rely on the judgement of people whom I credited with having the same clear, strong vision for the company that I had and whom I thought were a better judge of the corporate characters needed to achieve that vision.

However, there was more to the story than falling share prices and divergent visions. By all reports, including his own, O’Hanlon became highly erratic in early 2000. O’Hanlon has suffered from bi-polar depression, or manic depression, since he was ten years old. In early 2000 he pushed himself to the limit on an international investor road show, during which Spike’s share price briefly recovered and soared to $3.99. Then his illness hit him like a freight train. While he was still appearing in upbeat articles such as a ‘24 hours in the life of’ piece published in the Sun-Herald in April,6 he was also ignoring a longstanding personal health regime designed to stave off his blackest periods. In the first four months of 2000, he made around 30 flights between his home in Tulsa, Oklahoma and Los Angeles, New York, San Francisco, Hong Kong, Tokyo, Singapore, Sydney and London, never spending more than a week in one spot. He was also becoming aggressive towards staff, many of whom were already fed up with the cramped, chaotic working conditions at the company’s Double Bay offices. 146

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I pushed myself particularly hard and having not had a depressive episode for a number of years, had begun to overlook many of the personal disciplines that had maintained (literally) my sanity. I also ignored some of the signs that all was not as well as I kept telling myself. The breakdown was not dramatic. I just found I could not unload the emotional ‘deadness’ within me, a symptom not untypical of advanced cases of burn-out. It began to affect my judgement, my demeanour around my colleagues and employees, and ultimately, the imaginative talent and drive that was my greatest contribution to the business.

O’Hanlon also says that he began trying to resign before 17 April but says he was compelled to continue by the board. I spent most of my last two weeks at Spike sitting around in my office, attending only the most necessary meetings. I was depressed, demotivated, pondering my future: all in all, at the end of my tether. I twice asked Lawrence Maltz and once asked John McG. to consider a process and timing for me to step down as CEO: partly because of my illness, partly because I did not enjoy the company of most of Spike’s senior management anymore. Nor they mine, I suspect.

Adding to the tension were accusations about who was to blame for the blow-out in the company’s finances. For instance, O’Hanlon points out that he was not running the Los Angeles office of Spike at the time of the company’s infamously expensive $267,000 coming out party in Los Angeles. He says that he approved a budget of US$100,000 and that was pretty much the last he had to do with it until he showed up on the day. This embattled O’Hanlon is a world away from the brash, larger-than-life figure that built one of Australia’s top web 147

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design companies. He was also only a shade of the character that had the wit and charisma to persuade Australia’s first generation of super-bright but semi-anarchic Internet specialists to build corporate websites rather than hacking into government networks. He had basically also managed to build a 24-hour-a-day Internet sweatshop in an exclusive Sydney suburb, of all places. But many staff loved it. Michael Mesker was among the first people employed by Spike and remains a supporter of O’Hanlon to this day. During my research, he wrote to describe his first meeting with his new boss in 1996: The mystique around Chris O’Hanlon grew—I’d been working there for almost 3 weeks and I still hadn’t seen this guy. I think he was overseas but the anticipation grew. When the office door finally did swing open and he walked in, it was still a while before he actually came up to me. ‘So you’re the one who’s taken over all the Mercantile Mutual accounts? You poor fucking bastard.’ It was funny, and kinda scary at the same time . . . Chris O’Hanlon, I was told in all honesty by the production manager, was an eccentric, a man who was intensely passionate, very very intelligent, and who drove his crew hard and expected the best. I was told he could be tough, but I was also told that working at Spike would be a wild, fun ride. This was also back in the days when O’Hanlon had introduced the famous ‘20 days on, 10 days off’ a month roster. Employees could nominate which 20 days they wanted to work a month, and the 10 days they wanted to spend recuperating. I was entranced and I took the first opening they had—in the infamous ‘night crew’—who worked from 6pm until often 2 or 3 in the morning.7

By the time the venture capitalists and merchant bankers arrived to take Spike to another plane it had become more of a 148

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cult than a company. The company that the rest of the industry loved to hate made up for a woeful lack of business systems with attitude and a sort of collective willpower. It was, in short, cool to work for Spike. It was also ‘cool’ to use Spike, which kept the dollars rolling in. Today, O’Hanlon cherishes the culture and loyalty that he built. As he recovered in mid 2000 and quietly prepared to launch what he described as ‘the next next thing’, he would occasionally fax or email articles that he felt explained his position. The most notable was from the US magazine Talk. It asked whether the New Economy hadn’t really been a new religion and whether the high priests of dot-com mania hadn’t been ‘quasi-delusional, fanatical visionaries’. It also suggested that while figures like Jim Clark from Netscape, Steve Jobs at Apple and Michael Saylor from MicroStrategy were manic they were also valuably creative: Am I saying, then, that people like Jobs, Clark and Saylor are crazy and shouldn’t be followed? No. I am saying that they may be crazy but, paradoxically, it might be rational for sane people to follow them anyway. It might even be argued that manics serve an important social function: They create new myths and paradigms and energize their culture.8

Making me wonder if O’Hanlon wasn’t waiting for his chance to make a messianic return to Spike, there was also the passage: For Jobs, Apple wasn’t a business but a religious movement . . . He persuaded the then CEO of Pepsi-Cola, John Sculley, to switch to the top spot at Apple with the question: ‘Do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?’ Sculley would eventually fire Jobs from his own company for his destructive, erratic 149

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behaviour then drive Apple into the ground by running it like a normal company.9

It’s all stirring stuff, enough to make you question whether you aren’t missing a bit of spark in your life. It’s also a reminder that many high-growth companies, operating in periods of rapid change, are often run by charismatic individuals more as cultural movements than conventional companies. I even wrote back, saying that the world certainly did need more mountain movers. However, the reality remains that investors have lost millions of dollars on Spike. No one is more conscious of this than John McGuigan and his partners at Hunter Bay who, despite receiving some criticism in the press around the time of O’Hanlon’s departure, have been working very hard in the background to try to save the company from collapse. The result was a deal in November 2000 that saw PCCW’s stake in Spike CyberWorks (Spike’s main revenue earner) sold to Hong Kong investment company techpacific.com. Under the agreement, techpacific.com emerged with 51 per cent of the company, meaning that it has left Australian hands. I have written at length about the Spike because I think it shows the extremes of the entrepreneurial experience. The launch of Spike Radio, the establishment of overseas offices, the PCCW deal and other events showed just how formidable an innovative company, working with strong backers and large amounts of capital can be. But, whatever Chris O’Hanlon’s failings, it also shows what a smoking heap can be left behind when an entrepreneur’s dream gets derailed. For those who would still follow him down the path of entrepreneurship— and why not, he did make lots of money—O’Hanlon offers this advice: 150

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Do not be too quick to cede control. If you have confidence in your business model and your ability to pull it off, tread very carefully in the raising of first and second rounds of capital: your venture is probably worth more, not less, than you think. Do not doubt your vision: venture capitalists very often use one idea to trampoline their imaginations to half a dozen different ones that they will argue are ‘better’. And they may be, but have faith in your first idea, and be prepared to evangelise it forcefully, even to doubters. Do have a clear understanding at the very beginning between all business partners and first round investors of what each is expecting personally, from each other, and from the venture. Ensure you are all on the same page.

I’m sure John McGuigan, in particular, could also offer a few tips about managing volatile chief executives, fickle personality-driven media, and unrealistic shareholder expectations in high growth markets. However, at the time of writing he didn’t seem to want to talk about it.

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It may be a new economy but it still often pays to take your money and run. —GERARD MINACK1

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ne of the more blackly humorous footnotes to the dot-com boom was the emergence in 2000 of a US website called www.fuckedcompany.com. A play on Fast Company, the magazine for web-savvy entrepreneurs, this was America’s own tall poppy cutter. The site was created by a Philip Kaplan in New York City and profiled failed dot-com companies, tracking staff layoffs, missed prospectus forecasts and other events that confirmed that in the latter part of the twentieth century it was easier to float an Internet company than actually make money. However, at the time of writing, reality was returning and many companies were running out of cash, leading their founders back to business basics like valuing customers and profits ahead of website traffic and alliances with other cash-strapped, implausible businesses. For those that don’t want to find themselves lead story on FuckedCompany, there are a great many books on how to run companies well. Here I would like to pass on some specific advice for people trying to do it during periods of rapid technological change. 152

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Rule #1—Aim to make a profit If we had known then that we’d never be able to raise another dollar for Garden.com until we achieved profitability, would we have made different decisions? Of course. —CLIFF SHARPLES, CEO, GARDEN.COM AFTER THE COMPANY’S COLLAPSE2

Readers in established businesses might regard this piece of advice as mind numbingly obvious, but lately making a profit has been optional for many new companies. With share markets running hot worldwide, low interest rates and a popular appetite for speculative investing meant that people with a good high-growth story could survive for years without making a quid. Top online retailer Amazon.com almost made it a point of pride to lose a cumulative total of more than US$1 billion in its first few years. That is quite an achievement. Even if you threw an Australian hundred dollar note into a fire every second it would still take you 185 days to burn that much money. ‘In the end, you must make money,’ says Rodney Adler. ‘You can only survive so much by raising equity to pay wages and to pay the losses. The Amazon.com’s of the world have done an absolutely unbelievable marketing job but in the end, unless they get their margins up, they won’t survive. They’ll be taken over.’3 Adler believes that the almost decade-long economic boom of the 1990s and early 2000 led investors to take many more risks than they normally would. In turn, all sorts of businesses were funded and many entered into a mad scramble to win market share. This was the great Internet land grab, a period when many potentially lucrative economic positions were going super cheap to those that realised their value early. 153

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Take, for instance, the people that first registered Internet addresses like Business.com and later sold them for millions of dollars. However, there’s no point being first to do something in business if you can’t see a way to make money. As Adler adds: People think you have to make a loss if you start a new business. You don’t. I like to invest in businesses that work. If you plan not to make money, I’m sure you won’t. If you plan to make money you may not, but I always plan to make money.

It is worth noting that most of the very top companies in the global Internet business have a history of making profits. These include access provider America Online (now AOL Time Warner), equipment maker Cisco Systems, online auction house eBay and directory provider Yahoo!. Sure, they have been massively overvalued, but at least they are businesses that are capable of generating profits. Among the better ‘famous last words’ I’ve read came from Craig Winn, the (former) chief executive of a one-time high profile online shopping company called Value America that floated in April 1999, achieving a market valuation of US$3.2 billion. On 11 August 2000 it filed for bankruptcy. Among Winn’s famous comments was that ‘[in the Internet economy] the old models don’t necessarily work’.4 Maybe they do.

Rule #2—Focus The chief executives of these companies, at least the successful ones, have the knack of staying absolutely on top of the nitty-gritty detail of the company without ever losing track of the bigger picture. —BILL FERRIS5 154

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Successful business people and observers almost always list ‘focus’ as a key attribute of successful entrepreneurs. Focus can mean a lot of things but, for the most part, it’s about being single-minded, identifying the most important parts of your business and ensuring that you get them right. It’s also about avoiding distractions, something which can be particularly difficult in a high-growth environment where everything looks like an opportunity but nothing has yet taken on a defined value. As Bill Ferris says above, it’s also about being able to keep your eye on the micro and the macro at the same time or, put another way, see detail from a distance. David Tudehope at Macquarie Corporate Telecommunications says he has made an effort to keep the company focused on servicing only corporate customers. This move has seen Macquarie remain smaller in overall revenue terms than its main rivals, AAPT and Optus, but enabled it to beat them in this niche. The alternative would have been to enter the retail, or consumer, market for telecommunications services alongside companies like One.Tel. Even though the business case often made sense, Tudehope was afraid to take his eye off the ball. I compete with guys that have whole office blocks with their names on them . . . That focus on just one market and one model to treat that market . . . is the key, rather than trying to be all things to all people. [For that reason] we’ve been able to overtake Optus and AAPT in terms of share in the corporate marketplace. It means basically giving up some opportunities along the way to achieve the end result. We’ve had some great opportunities to enter into the residential marketplace and small business marketplace in terms of alliances with different people and alliances we could enter into. Some of them were pretty good opportunities and probably did stack up commercially but the risk for us is that we’d divert our focus away from our market.6 155

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Another factor unique to high growth markets is that, like the automobile industry in the 1920s, they tend to consolidate very quickly. Megabrands like Cisco and Yahoo! absorb large numbers of small companies to form the new Fords and General Motors. The purchases of OzEmail by American giant UUNET or advertising technology group Sabela by 24/7 Media were no exception to this rule. In a rapidly consolidating environment, you either want to be a megabrand, a specialist worthy of acquisition or a company that has built a defensible, independent position such as Macquarie. The challenge is for specialists to resist the temptation to build fragile empires, such as the failed Internet conglomerate LibertyOne, that are neither attractive acquisition targets or strong enough to survive in their own rights.

Rule #3—Work hard A lot of pain is associated with success. In the pursuit of success, time is of no consequence and effort has no limits. In many ways, being successful in business is no different from being a successful sportsman. To get there you need drive, discipline and determination. You also need to cope with the pain of maybe not succeeding. —FRANK LOWY7

Another fact of life in high growth, unstable industries is that people work very, very hard. The reason is that there are usually a small number of very large prizes to be won, such as becoming the world’s primary online auction house (eBay), the dominant operating system for small computers (Palm) or the foremost owner of web browser technology (Microsoft). As in each of these examples, tech races tend to end up with one or two winners taking all and everyone else collapsing in 156

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piles of debt. Take, for example, the rise of Cisco, which now supplies 80 per cent of the hardware that makes up the Internet, at the expense of companies like Cabletron Systems, a company that led the computer networking industry in the 1980s and early 1990s. A key buzz phrase aired far too often during the dot-com boom was ‘first mover advantage’. I say too often because there is sometimes a nasty tendency for the first mover to take all the risks to establish a new market only to be beaten by a follower that learns from its mistakes. For instance, Palm entered the market after behemoths like Apple, Compaq and Microsoft had introduced, and in some cases even abandoned, handheld computers. Another factor is that the very increase in economic speed and innovation enabled by the Internet is undermining the value of such early victories. In other words, because business cycles are now so fast, it’s hard for even first movers to maintain their lead for long. ‘Where once the first mover could milk the advantage for years, if not decades—it took General Motors 20 years to overhaul Ford’s first mover advantage in automated car production—now first movers have less time,’ says Gerard Minack, an analyst at ABN-AMRO.8 John Greaves says that when he was chief financial officer at Optus during its startup year under Bob Mansfield there was a running joke that Fridays were great because it meant there were two more working days before Monday.9 Greaves is lucky he’s not at Telstra where Mansfield is now chairman. During an interview for this book, Mansfield said that business timelines were shrinking dramatically thanks to the mobile phone, Internet and other communications technologies. ‘Six months ain’t good enough anymore,’ he says. ‘It should probably be six weeks. If it was six weeks previously it probably should be six days.’10 157

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Removed from weekends and fun, entrepreneurs in highgrowth environments tend to be very effective (before they burn out). The Tudehope brothers win a guernsey in this category as well, though I don’t think they’re about to burn out. In the absence of venture finance, they raised Macquarie off the ground through sheer elbow grease. Even today they work twelve-hour days, at least six days a week. From the way David Tudehope tends to arrange appointments with people like me for about 5 p.m. or 6 p.m., his strategy appears to be to see customers throughout the day then work in the office during the evenings. You’ve got to say to yourself for the first couple of years, I’m willing to sacrifice not just my working week but my working nights and, in the early days, my weekends. And not just the weekends that suit me—possibly every weekend, because you are the company. I knew it would be hard work starting the business but I didn’t quite anticipate that nothing happens unless you, or whoever is working with you, personally do it. If you don’t do that you don’t succeed, because you spend half your time being an admin person rather than getting out there and building your business. Everyone you talk to in life says they work long hours, whatever they do, but nothing matches working for yourself with limited finance.

Sean Howard adds that, back when he had to, he used to work at least twelve hours a day establishing OzEmail. Today, as a professional investor, he says he finds it hard to locate smart people that are prepared to put in the effort and dedication required to make new businesses work. At the moment, there is no shortage of money. There is no shortage of ideas either, really. The biggest shortage of what 158

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we’ve got in the world right now is people—smart people. There’s stacks of money out there. There’s stacks of good ideas. It’s execution that’s the hard part. There’s a real shortage of people who are talented and who are prepared to dedicate themselves.11

However, Howard cautions that all work and no play doesn’t help either. If you’re a hard worker but you don’t have that recklessness I think you’ll drop your bundle through your nerves— nervousness will get you because you’ll get too caught up in ‘what will happen if this idea doesn’t come off’. I saw that in a couple of my competitors in the ISP game. They just weren’t prepared to take the big punts . . . We went out and put in banks and banks of modems in the expectation that the market would grow and that was, I suppose, a bit reckless, but when the market did grow we were way in front.

Mansfield goes a step further, saying that it’s important for business people to maintain a balance between their work and personal lives. Without this they’re likely to experience a breakdown in one or the other. Mansfield has five kids who in 2000 ranged from 8 to 23 years. He says that his personal strategy is to start each year by blocking out key dates such as birthdays, Christmas and school holidays. He then writes in any events that he can’t miss or move, such as Telstra board meetings. Anything else that arises during the year must then fall within these parameters, but even then he tries to leave empty spaces in his schedule for opportunities and emergencies.

Rule #4—Cherish intellectual property In industries driven by innovation there is nothing more valuable than technological know-how, or unique intellectual 159

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property (IP). Australian researchers and business people are relatively weak when it comes to IP protection. This has been particularly prevalent in the Internet industry where we got a head start on much of the world but failed to capitalise on many opportunities. One illustrative story here involves shopping and a computer scientist named Ernst Van Oeveren. Way back in 1994—the very dawn of the web—Van Oeveren was working for the National Rural Health Research Institute and came up with a then very novel idea: the Internet shopping basket. The idea was to make it easy for people to gather a group of items for purchase on a website. Later that year, while working at the web development firm AUSNet, he extended the metaphor to create one of the world’s first online ‘shopping trolleys’ for a website, www.science.com.au. Around the same time, US company Open Market was developing a similar system. Van Oeveren believes his trolley was probably completed first but it was the American group that spent the tens of thousands of dollars required to patent it. ‘Our technology pre-dated their application for a patent,’ he once told me. ‘But we didn’t patent it because we were too busy trying to make money.’12 Other US Internet leaders that patented key technologies include Amazon.com (which has secured the rights to its ‘1-Click’ shopping system, recording shoppers’ credit card details so that they don’t have to re-enter them during the next visit) and Priceline.com. In a decision that made people question the thought processes at the US patents’ office, Priceline managed to patent the idea of the reverse auction—people posting the price they were willing to pay for something on a website and vendors of goods and services, like hotel rooms and air tickets, ‘bidding’ to match the offers. At the time of writing, Open Market had gone on to list on NASDAQ and become a global giant in the online commerce 160

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and customer relationship management arenas. It had more than 250 customers in 30 countries, including AOL.com and Lycos.com, nine offices around the world including Australia and had been valued at around US$3 billion at the height of the dot-com boom. Van Oeveren, on the other hand, was still slogging away in Sydney trying to float the online travel software group World.net to raise about $5 million. Ernst is a nice guy and a gifted computer programmer, but his story emphasises Australia’s lack of international commercial savvy. Open Market hasn’t built its market cap on shopping trolleys alone but the aggressive mindset that saw it slap that patent down in 1994 is the same one that has made it a winner.

Rule #5—Keep an open mind The problem with new industries is that it’s very hard to know what’s valuable and what isn’t. For participants this means trying to take advantage of opportunities without overcommitting to any one path. Financial market types might call this hedging and lovers would see it as infidelity. Internet entrepreneurs call it forming ‘alliances’. Alliances are typically vague agreements for two companies to work together. The good thing about them in uncertain environments is that even if the participants don’t know what they’re getting, at least they know who is on their side. I spent years asking Internet entrepreneurs to tell me what, exactly, their alliances and ‘strategic partnerships’ actually entailed. Were they going to make any money out of them? Get more customers? Derive any clear benefits? The response was almost always the verbal equivalent of junket. One academic that is sceptical about the tendency of unproven companies forming alliances with each other is Avi Shama, an academic in Texas. The result of alliances between 161

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many dot-coms, he argues, has been a self-perpetuating cycle of hot air where theoretical business A teams up with theoretical business B to create hypothetical value C. Worse still, he says all this activity has distracted the management of such companies from spending time trying to make any money: In a vision-driven business with numerous ‘strategic alliances’, which serve to further inflate the vision, why worry about pricing and the profit built into it.13

Having said that, I have to admit that some alliances have delivered. LookSmart, for instance, has proved very adept at signing up companies around the world to use its directory on their websites. These tended to be alliances as much as deals because LookSmart would often exchange the value of its database of Internet addresses for a prominent position on a major website such as those operated by British Telecom. George Foster at Stanford identifies Evan Thornley’s ability to negotiate such alliances as key to that company’s success. Another aspect of keeping an open mind is being very flexible. In industries where entire ‘paradigms’ can shift overnight, you have to remain hyperaware and light on your feet. A prime example here is Microsoft which in 1995 reoriented every one of its products towards the Internet. The turning point was Bill Gates’ now mythical six months surfing the Internet in his study. When he came down from the mountain he was convinced that the network would dominate personal and business computing. In an internal company email titled ‘The Internet tidal wave’, he argued that the Internet was the most important change to the industry since the IBM PC was introduced in 1981 and proceeded to turn Microsoft ‘on a dime’, as they say in Redmond.14 According to Foster, US entrepreneurs are also far more open-minded when it comes to doing deals that might involve 162

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their losing control of their companies or merging with other enterprises. ‘The American entrepreneurs are very, very flexible and very malleable in terms of being flipped down and reinventing themselves and coming up with different cuts at it.’15 Foster adds that this is something of a function of the large US market where young companies have a wider number of potential customers and partners. This also allows them to try different strategies with different parties and refine their pitch if things go awry. It’s a much tougher market in Australia to get the ability to continually refine and revise your ideas at the customer or the alliance partner level, because there’s fewer customers and fewer alliance partners . . . [Established Australian companies] also have, to date, less of a history of working with startups.

Rule #6—Get famous and use it I just think it’s tragic we don’t put our deserving icons—whether it be sport, whether it be society, whether it be whatever—on a higher platform. We just have that innate ability that when they get there we just want to kick their guts in to make sure they don’t get any further. —BOB MANSFIELD16

A public profile can be very beneficial to entrepreneurs in attracting customers, partners, employees, investors and service providers. This is particularly true when the person has no track record or reputation. Huy Truong, chief executive of Wishlist.com.au, for instance, was a refugee to Australia from Vietnam. Not only have he and his sister, Jardin, built a good business, they have gained a high profile in the press. In turn, they have used it to win distribution deals with companies 163

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like BP and Country Road, and funding from venture capital firms like J.P. Morgan and Allen & Buckeridge. Media coverage, in particular, can also add credibility to implausible blue sky stories and will help get stock market floats away. I remember writing about a group of guys from Queensland that had an excellent idea for farming fish. They even had some good marine biologists and other experts onboard. However, because the only companies that were able to raise money in late 1999 seemed to be Internet companies, they named themselves Seafoodonline.com and came out with a crazy prospectus saying that they were going to let Chinese restaurants in Hong Kong watch fish swim around in tanks via the Internet before buying. The float was fine—Australia should get into fish farming—but it was nonsense to dress it up as an Internet venture. Still, I wrote about it and even ran a photo of the chairman, Terry Byrne, holding up a dead fish. Given the subsequent woeful performance of the company’s shares, that now seems appropriate. The trick to getting media coverage is to understand how the media works. As a former journalist, I can tell you that the Australian media is highly concentrated and under-resourced. This is unfortunate for good business people waiting for a journalist to accidentally discover them but a boon for people who know how to play the game. Because journalists are pressed for time and must churn out several times more words, sounds and/or images than their overseas counterparts, they typically have little time to develop an in-depth understanding of their field or conduct exhaustive research. The result is that the majority of news stories are fed to the major media organisations through trusted channels such as the fax machine and public relations people. Particularly in finance journalism, much of this is quickly, if begrudgingly, rewritten and published. When you’re a stressed-out journalist you basically have to 164

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trust people to tell you the truth. If you ever find out they were lying to you, you then turn on them like wolves. This was part of the reason why some Internet entrepreneurs met such nasty ends in the media, but I won’t name names. There are, of course, a lot of simple, sensible and perfectly honest ways to do yourself a favour when it comes to getting favourable media coverage. These centre on explaining yourself clearly, knowing why you are seeking media attention, understanding what journalists need and working out which journalists might be interested in your story. Having been on the other side of the fence, I would advise people to get professional help when approaching the media because, as with all power tools, you can do yourself a lot of damage very quickly, particularly if you’re within a listed company. As a reporter, I regarded Chris O’Hanlon to be the most adept at getting media coverage. Indeed, he even had his own column about online marketing in the Australian Financial Review when I started there in 1997. A former journalist himself, he understood the game. Having grown up around a famous father, he knew how fame worked and actively worked on being seen as a ‘rock star CEO’ in the American tradition of people like Gates and Apple chief executive Steve Jobs. ‘It’s that game,’ says O’Hanlon. ‘It’s the walk from the private plane to the limo. You make sure that in that 100 feet, you stand a little taller . . . Do I do all that consciously? Absofucking-lutely.’17 However, O’Hanlon is also aware of the risks involved in putting your hand up in public: If you court fame, you encourage public attention at all times, even when it is unwanted. The movie star that earns $20 million a movie cannot complain that the press constantly intrudes on his or her privacy. It’s the ugly reality of the late twentieth century/early twenty-first century cycle of ‘celebrity’. 165

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The trick, as the futurist Watts Wacker points out in his latest book, The Visionary Handbook: Nine paradoxes that will shape the future of your business, is to have a clear perspective— and some control—of the legend you create. That’s an essential task and responsibility of any entrepreneur. It should not be taken lightly but should be laboured on with as much diligence as the rest of the business.18

Two specific ways that seeking a high profile can cause problems are if the process becomes a distraction or if it brings you within cooee of Australia’s infamous tall poppy syndrome. Here, you may be cut down for being seen to be too good at something—unless it’s sport. But even then, you should be modest about it. The only entrepreneur who declined a direct request for an interview for this book was Jodee Rich. In the 1980s Rich founded and ran Imagineering Technology Ltd, a computer distributor. The company quickly reached sales of around $300 million a year and Rich, still in his twenties and with a personal worth of around $85 million, was hailed as one of the country’s hottest new entrepreneurs. He was the youngest member ever of the BRW 200 Rich List and reported to have been ‘bold, brash and supremely confident’; an avid selfpromoter who courted media attention and held lavish parties.19 But it all came crashing down in the early 1990s when Imagineering collapsed under the weight of borrowings. Shareholders were left to lick their wounds but the worst treatment was reserved for Rich himself who discovered just how quick the media can turn on its favourites when it smells blood. Overnight, he became a symbol of everything that was wrong with the debt-driven eighties. ‘Jodee feels he was treated very badly by the press and that’s the reason he won’t talk,’ Rodney Adler has said. ‘He endured an absolutely public humiliation after he sold out of Imagi166

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neering which was very unfair. There was one story headlined “The son who let the father down”. His whole world just caved in and he went through an awful period.’20 Just how sensitive Rich and his joint managing director at One.Tel, Brad Keeling, remain was shown in an extraordinary email sent by Keeling to Sydney Morning Herald reporter Kevin Morrison.21 Morrison had asked Keeling who might replace then departing chairman John Greaves. Keeling’s response, which followed weeks of negative pieces about the company but which I’m sure Keeling never expected to see in print, was revealing: I get enough flak from you that I think I’ll just keep my head down, tail up, and work to build an even greater business than the great business we already have. If John resigns we won’t be in a big hurry to find a replacement. If someone shows up, fine; if not, so be it. It’s not essential, one day we will find a new chair if we need one . . . I am a parent of a teenager—if you were a student in her schoolyard you would be classed as a bully. Were you a bully at school? Do you ever feel pride in anything anyone else ever does? Or do you only feel proud when you hurt someone else and their families? I think I know.22

It’s not surprising that Rich is now media shy (and, I might add, debt averse). However, during my time reporting on telecoms, he did participate in a number of interviews. The most notable was on 15 February 1999. Rich and joint managing director Brad Keeling were joined by Lachlan Murdoch and James Packer at One.Tel’s offices in Sydney to announce that News Corporation and Publishing & Broadcasting Ltd would invest around $700 million in the company. But even that was a strange event. If a normal company wanted to announce that 167

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it had just received hundreds of millions of dollars from two of the most powerful families in the country, if not the world, they’d book out the Entertainment Centre. Instead, they invited only myself on behalf of the Australian Financial Review and a press photographer from Murdoch’s Daily Telegraph. And even after the interviews were done and photos taken, they wouldn’t let me touch a phone or leave their office until their lawyers rang to say that the deal was done. I was later told that I was something of a pawn in a wider game but never have been able to confirm it. In the end I was allowed back to the office in time to file the story for the next day’s paper. Rich has a reputation for being difficult and abrasive. However, in my experience as a reporter at least, he was softly spoken and charming. When it came to new communications technology he was also a well-informed zealot. Even so, the only direct input from him in this book dates from interviews conducted while at the paper. You certainly won’t find him offering up handy hints for ‘entrepreneurs’—a word that has bitten him once already. Having said that, I will admit to being in two minds about the tall poppy question. Anyone that knows me personally will know that I helped found a small magazine called Strewth!. Our mission statement read that The Strewth! Institute Inc., the body set up to publish the magazine, was: ‘Dedicated to making the tall poppy syndrome world’s best practice in time for the Sydney 2000 Olympics.’ We were only half joking. On the one hand, it is unfortunate that the Australian business environment is unforgiving. That people who make it clear they want to become richer or smarter or faster than their peers are often brought back into line through ridicule. However, my reading is that truly competent and honest people are not unduly criticised in Australia and most people who cry ‘tall poppy’ end up being found to have deserved rough 168

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treatment. The stellar example from the dot-com boom is Chris Tyler, chief executive of Solution 6. Tyler, for instance, did a great job for a few years at the accounting software company then lost his head during the dot-com boom. He started making very loose comments (which he later denied) about the outlook for the company’s share price and attempted to enter into numerous large and complex deals around the world. Before the ineffectiveness of his acquisition and joint venture activities became apparent, Business Review Weekly magazine published an explosive article saying that he’d been arrested in the US fifteen years earlier for handling a large quantity of drugs and been central to the dramatic failure of a listed Canadian company called Lessonware. He soon left the country, saying all sorts of awful things about the Australian media. Solution 6 got a new CEO in August 2000, Neil Gamble, who promptly announced a wide-reaching cleanup of the company and its strategy. Revenues were above $300 million but Tyler’s spending spree, which had involved the purchase of eleven companies, had landed it with an operating loss of $79.5 million for the year to June 2000. Solution 6 shares, which had once reached $17, slumped to below a dollar. On the other hand, no one has ever successfully cut down Kerry Packer for instance. Or Frank Cicutto, Lindsay Fox, Gerry Harvey, Janet Holmes à Court, Frank Lowy, Rupert Murdoch, John Singleton or even Bob Mansfield, for that matter. The upshot is that you can succeed in Australia, you just have to be Australian about it. And I don’t think things are really all that different in Silicon Valley. Fuckedcompany.com is, after all, an American website. Then there’s the following quote from Californian investor Randy Komisar: Silicon Valley does not punish business failure. It punishes stupidity, laziness, and dishonesty. Failure is inevitable if you 169

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are trying to invent the future. The Valley forgives business failures that arise from natural causes and acts of God . . . The key question here is why a business failed.23

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Who made the money? As a general statement, the stockbrokers and the solicitors—they made a lot of money. The liquidators will catch up pretty soon. —RODNEY ADLER1

W

atching the basketball on TV the other night, I realised that the Internet and the associated boom really had changed the world. There at the edge of the court was an ad for OzEmail, the company that had barely existed five years earlier, now just another mass consumer brand. People no longer thought twice about sending email messages or looking on the Internet for phone numbers, soccer results, books or love. I opened the paper the same day and it said Sean Howard had bought a resort called Double Island, near Cairns, for $4.5 million and everything seemed to have turned full circle. A new technology had made the world anew and spawned a new elite. As with his house in Sydney, Howard had bought the island from a member of the previous ruling class, property developer John Palasty.2 Just who did make the money during the dot-com boom? Who walked away with the loot? The really big winners have been guys like David and Aidan Tudehope at Macquarie Corporate Telecommunications, who 171

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built solid, profitable companies the old-fashioned way but were lucky enough to realise some gains when the capital markets went berserk—in this case, $50 million in cash and another $240 million or so on paper. A couple of others from the telecommunications industry were Barry Roberts-Thompson, founder of Hutchison Telecoms (now called Orange) in Australia, and Phil Cornish, who got 4.5 per cent of Vodafone’s Australian operation before anyone had even heard of the company. They have emerged with fortunes worth in the hundreds of millions. Hopefully the one-time billionaires like Jodee Rich at One.Tel and Tracey Ellery and Evan Thornley at LookSmart will eventually be seen as belonging to this group. At the time of writing, they were yet to show the ability to make a profit and storm clouds were gathering over their businesses. The second group are the guys like Sean Howard, who got in early and chose just the right moment to get out. In his case it was by selling OzEmail for $520 million (of which he pocketed $118 million) at the absolute high point of the Internet boom. Others include Steve Outtrim, the computer software maker who founded Sausage Software in 1995 at age 23 and walked away from the company with more than $66 million a turbulent five years later. There were lots of less high-profile winners too like David Archer, the well-groomed founder of a small telecommunications company called Spectrum Network Systems. The company was in the business of reselling long distance telecommunications services, which was good for a while until competition undermined profit margins. Archer saw the writing on the wall and instead of investing in the infrastructure required to enter the next stage of the telecoms game, he sold his customer base to newcomer PowerTel for a personal profit of $12 million. The last I heard of him was that he’d made another $1.6 million from a company called ECAT Development Capital and Gretel Packer was buying his Sydney 172

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home, the historic Winston in Bellevue Hill, for $10 million.3 A third group that got moderately wealthy in the tech boom were the ones that hung off the coat-tails of the major entrepreneurs (and in some cases, such as with Steve Outtrim and his corporate saviour Wayne Bos, made them). These included the venture capitalists, minority investors, merchant bankers, second-tier executives, consultants and even lawyers and accountants. Bill Ferris, executive chairman of LookSmart’s Australian venture capital financier Australian Mezzanine Investments, for instance, would have millions even after distributing most of the spoils of its $200-million plus gain on LookSmart. Though the fund has also lost money on dud projects like youth website K*Grind. Many executives also make bucket loads by getting shares and stock options in sexy companies. Chris Tyler may have had a rocky time at Solution 6 but he limped away with more than a few million dollars in salary and share options. Some, like Don Hagans, even made big money in resigning. Hagans joined LibertyOne as chief executive in late 1998 then left abruptly in early 1999, clutching a payout of $2.2 million. Others, like Larry Williams, CEO of AAPT, simply found themselves well paid for a job well done. In Larry’s case, that meant about $1 million a year in salary before any other incentives. There were also plenty of lawyers, accountants, consultants and other folks in suits that sucked up hundreds of thousands of dollars from the companies that floated on the Australian Stock Exchange—and the even greater number that tried but never made it. The other group that made a packet were the administrators and liquidators that came in to clean up the mess after so many crashed. This group can also be seen kicking around town in sporty little Mercedes. So too can plenty of merchant bankers and stock brokers from companies like Deutsche Bank, Hartley Poynton, Ord Minnett and Salomon 173

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The once high-flying CEO of software maker Solution 6, Chris Tyler quit his job in 2000 and left Australia under a cloud after a past drug conviction and corporate failure became public. In March 2001 he found himself in a US court, struggling to remember the details of a $2.8 millionplus acquisition that left his old university pal Tom Montgomery not only rich, but also free to compete with Solution 6.

Smith Barney that soaked up millions in underwriting and other fees from the float festivities. A few pundits even built businesses around the growth of the Internet and, in turn, the speculative frenzy that followed. The most notable was Ramin Marzbani, founder of Internet research firm www.consult. Marzbani built his company throughout the boom then in late 2000 sold it to ACNielsen for a rumoured $5 million. Not all the money raised during the boom went to line people’s pockets. Much of it was appropriately invested in building new businesses or expanding existing operations. At the same time, though, some of it was simply stolen. Given Australia’s defamation laws, I’m not even going to touch this topic, but many of the deals that went down between 1995 and 2000 would be best classified as white-collar crime. 174

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The Australian once published an article suggesting that executives involved in Internet-based businesses were four times more likely to have dubious or criminal pasts than the business community at large.4 This sort of makes sense. Where there is fast money to be made, you’ll also find a lot of crooks. Or, to put it in surfing terms, storms might bring good waves but they also flush out lots of sewerage. Speaking of human waste, some money was simply pissed up against the wall. The high point here was the decision by Isis Foundation, the charitable arm of listed Internet and media company Isis Communications, to spend $5 million sponsoring a World Reconciliation Day concert featuring Nelson Mandela. The company had raised $55 million from investors in 1999, promising to make a profit of $5.6 million in the year to December 2000. Instead, it lost $29.7 million. Michael Wolff’s comment about entrepreneurs who are given too much money, too easily, thinking they’ve been born into the Medici family suddenly seemed to ring truer than the bells at St Peters.5 But where did all this money come from? There are two main sources of all the silly money to be found during the dot-com boom. The first is everyday share market investors, ranging from naive mums and dads to semiprofessional ‘day traders’ who, on balance, lost money during the period. In the 1999–2000 financial year, for instance, 161 companies floated on the ASX raising $1.54 billion.6 Around a third of these were Internet-related and close to 60 per cent finished the year below their issue prices—the amount that the above entrepreneurs, merchants bankers, brokers, lawyers and others managed to flog them for when the company floated (or sank). However, companies like One.Tel and Solution 6, let alone Telstra and News Corporation, don’t get multi-billion dollar valuations without support from professional investors. That 175

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means fund managers at major superannuation funds, which means your retirement savings. Many of these guys hated the fundamentals—the financial data that shows how well a company is performing—of many high-flying Internet and technology stocks. But they found themselves compelled to buy because, whether it was rational or not, people were making money. This pumped billions, indeed trillions, of dollars into the global markets, creating the extraordinary bubble that finally burst in April 2000. The lesson for entrepreneurs, punters and professionals alike was that you can make a lot of money quickly during booms but the old rules will apply eventually. The trick is to take risk—you’ve got to be in it to win it— but treat every day as if it’s the one in which the rules will return. Most of the entrepreneurs that lost serious money in the boom were the ones like TheSpot that spent money they didn’t have in the faith that investors would bail them out. They raced from funding round to funding round, but when the music stopped they ended up stranded. Another large group was people who tried to list on the ASX in early 2000. They couldn’t get their floats away after the market turned sour but still had to pay up hundreds of thousands of dollars to merchant bankers, lawyers, accountants, public relations firms and others. But the dot-com boom wasn’t just about share market excess. That just proved it’s still possible to get rich, fast. The boom was also a period of exciting innovation in which a lot of new companies were created, particularly in key areas such as computing and telecommunications. I would even argue that Australia rediscovered entrepreneurialism itself. It also spurred the Federal Government to introduce wide-ranging tax changes and other incentives that should make Australia a healthier place for business builders. Even better, the whole of Australian 176

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society is becoming a more level playing field for smart people with good ideas. And all those new multi-millionaires listed are around and reinvesting not only their money but also their experience. Even those people who tried to float but failed now at least know how the process works. Let’s hope that the flameouts of companies like LibertyOne don’t eclipse the learning that Australia has been through and our newfound passion for innovation. We need people to build great businesses that create real wealth if we want to maintain our historically high standard of living. This will always be a hit and miss process but that’s the nature of innovation, as Rodney Adler explains. It’s just a boom like any other boom but it probably went a little bit longer and a little bit higher. But there are some great companies that evolved and made it. I’m biased with this first one, but [take] One.Tel. Okay yes, One.Tel’s gone from a $7 billion market cap to a $1.1 billion market cap but it’s still at $1.1 billion—that’s a great success. We’ve all done extraordinarily well at $1.1 billion.

And why didn’t the Tudehope brothers take the millions in cash for their company when they could have? I asked David. He looked slightly apprehensive—like maybe he’d one day look back and ask himself the same thing—but said they just couldn’t do it. After eight years of personal sacrifice, all the money in the world couldn’t bring him and Aidan to sell out. Before One.Tel got a foothold in Europe, he often expressed his disappointment that no Australian carrier has ever built a successful offshore business. He was particularly critical of the failure of Telstra, with all its billions, to establish a foothold even in Asia. He also seems young enough, and idealistic enough, to try to do something about it. The day in early 2000 that he received an international award in Washington DC 177

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ranking Macquarie as the world’s best provider of business telecommunications services is obviously among his proudest. The company also recently opened an office in Singapore, its first move offshore. The way I look at it, the entrepreneurs that have to worry about ridiculous questions like ‘Do you want to keep working every day or can I give you millions of dollars for your company?’ are usually the ones that aren’t driven by money in the first place. If you’re an entrepreneur operating in a boom, or aspiring to be one, you have to ask yourself two broad questions. First, are you the sort of person that could muscle into an established industry and come out on top, like Gerry Harvey or Rupert Murdoch? Or are you more like Sean Howard and the Tudehope brothers, capable of spotting trends and light enough on your feet to surf your way to wealth? Either way, what would you do if you made it? Are you the sort that could sell out of your company and buy an island? Would that be your objective from day one? Or would you also knock back the cash if it clashed with your vision? There’s no wrong or right and this country needs both kinds of people. But the answer will shape your whole approach to business. If you don’t mind the thought of losing control of your company then you might look to the world of venture capital and other external finance. If you would hate to ever find yourself answerable to outside shareholders, then you might be best to keep your company private. The risk, of course, is that you starve yourself of capital and end up having no business to worry about. There are no black and white answers or even safe solutions—especially when just making a dollar each day is hard enough. Your challenge is to look beyond the day-to-day and find a path that suits your personality, business situation and industry. And don’t be afraid to be a little reckless along the way. As Bob Mansfield says, ‘Profit’s a reward for risk.’7 178

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epilogue YOUR NEXT STEP

I

know I’m cynical but if I’d just read this book I would be asking myself, ‘If this guy knows so much about being an entrepreneur then why is he writing books about it rather than doing it?’ It’s a fair question and the answer is that, with my wife Cassandra and business partner David Crowe, I am giving it a go. In March 2000, I quit my job as information technology editor at the Australian Financial Review and started full time at Editor.com Pty Ltd, our own company. By the time I left the paper, I had convinced myself, perhaps misguidedly, that leaving wasn’t brave at all. Bravery, I decided, would have been to stay and take my chances at eventually winning one of the two or three really big salaries available. I was also genuinely excited by what I thought we could do with Editor.com. Another factor was the belief that it is important to try to create new companies that exploit the latest innovations. Sure, we also wanted to make some money but, as I’ve discussed in more detail in this book, there really is a need for constant economic renewal and that won’t happen on its own. A related theme here is the dilemma of finding what Jim Collins, author of the now famous, acerbic essay, ‘Built to flip’,3 might refer 179

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to as ‘meaningful work’. He argues that in the materialistic 1980s people simply worked for money. Then with the birth of the Internet there was a lot of excitement about the idea of changing the world, of creating companies that did meaningful things and added real value to humanity. The three qualities a company should aspire to, he says, are ‘excellence, contribution and meaning’. However, these high ideals were quickly corrupted by the rush to build enterprises ‘to flip’— structures built on legal documents, PowerPoint slides and rented Formica desks—created only to be sold to the next sucker at a higher price. The best that six billion people in an age of extraordinary technological progress and information flows could come up with, it seemed, was e-tailing. What a soulless bummer. We had, Collins believes, gone full circle from working for money to working for money, albeit vastly more of the stuff. The question for me was where did I fit into this cycle? After all, I didn’t even do e-tailing, I just wrote about it. Worse still, as a financial journalist at a respected business newspaper, I was central to the whole flipping thing. Indeed, I’ve cringed re-reading my old upbeat stories about companies like LibertyOne, Solution 6 and Spike in the process of writing this book. It’s yet to be seen whether doing my own thing is any more meaningful or valuable but it seemed worth a go. Finally, we knew that if we didn’t at least try going into business for ourselves we would have always wondered whether ‘we could’a been contendas’. Perhaps you are reading this book because you’re also considering doing your own thing. I am in no position to offer advice, which is why I interviewed so many smarter and more successful people for this book. What I would say is that if you have done your research and believe in both yourself and your idea, then you should go for it. You might prefer to ask: what will happen if I stay? One technique is to look around 180

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your office, identify the people that run the show and ask whether you want to end up like them. What have they had to go through to rise to the top? What sort of people have they become? Are you naturally that sort of person? Would you like to become like that? Is there any reason why you wouldn’t—it’s obviously the sort of person that succeeds in your environment? And so on. I also like the following quote from Mark Beesley, a New Zealand television director and filmmaker who helped to create the smash TV series Xena: Warrior Princess: It’s a big lie that you can do anything. Every profession is full of people who are hopeless at what they do. The people who are happiest are those who recognise what’s within themselves.4

Beesley spent a decade as a business journalist before he mustered the courage to move to writing scripts and directing. I gather that he is now a much happier man. It’s not very upbeat but it’s from the heart and encourages you to look in the right place for answers—yourself. It doesn’t matter if you’re a doorman or a brain surgeon. Look around your world. Think about what you know that no one else knows. What’s changing? How are people behaving? What new technologies or trends are affecting the landscape? What wave can you see coming? Is it a big one? Might it change the world? Are you in a position to take advantage of it? Could you be? If the answer is yes, then start paddling.

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appendix 1 OPPORTUNITIES FROM TAX REFORM

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he changes to Australia’s tax system introduced in 2000 by the Federal Government went well beyond the goods and services tax and included a number of steps designed to make it more attractive to build companies in Australia. These steps include those set out below.

Lower company tax rate The government dropped the company tax rate from 36 per cent to 34 per cent for the 2000–01 income year and to 30 per cent thereafter. This move is designed to bring Australia into line with other countries within our region and has taken corporate tax rates to substantially below many European nations.

Lower capital gains tax (CGT) for individuals In a bid to stimulate investment in shares and other assets, the government now taxes only half the capital gain that individuals make on their investments. Before this change, if you made $2,000 by selling some Telstra shares, for instance, you would have paid up to 48.5 per cent tax—the maximum personal rate—on that whole amount. This would have equalled 182

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$970. Under the new rule, you would now pay capital gains tax on only half that gain, or $1,000, and face a maximum liability of $485. Another way of looking at it is that the highest rate of CGT for individuals is now 24.25 per cent.

Less CGT for small businesses The government has increased the number of small businesses eligible for a 50 per cent cut on capital gains tax by expanding the definition of a ‘small business’ from companies with net business assets of up to $2.3 million to $5 million. Larger companies pay CGT at the normal company tax rate of 30 per cent. The government has also simplified small business rollover and retirement exemption provisions.

Less CGT for super funds The government has also effectively reduced the amount of capital gains tax that superannuation funds—the massive repositories of people’s mandatory retirement savings—must pay on investments from 15 per cent to 10 per cent. They have done this by making them pay tax on only two-thirds of their capital gains or giving them the option of using alternative techniques to measure capital gains made. Notably, the government now allows all three groups—individuals, funds and companies—to offset capital losses against capital gains, further maximising benefits to tax payers.

Foreign super funds exempted from CGT Foreign super or ‘pension’ funds have traditionally avoided Australia because it has been one of the few countries in which they were asked to pay capital gains tax on their investments. 183

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While it might seem reasonable to make Florida retirees pay tax on investment wins down under, we have been missing out on foreign investment flows. In response, the government has exempted US, British, Japanese, German, French and Canadian funds from having to pay any CGT on ‘active’ investments in companies with assets under $50 million. Here, ‘passive’ means investment categories such as real estate.

Scrip for scrip rollover relief A step that should make it easier for companies to restructure and expand through mergers and acquisitions will be CGT relief on deals that involve the exchange of shares but not cash. Under certain conditions, companies will no longer have to immediately pay tax on capital gains derived during such ‘scrip for scrip’ transactions until ‘ultimate disposal of the replacement asset’. This treatment is normal in the US, for instance, so a secondary aim is to keep companies in Australia.1 The best example of the distorting effects of this final rule was the sale of Internet service provider OzEmail in 1999. The management of OzEmail, which included Sean Howard and republican campaigner Malcolm Turnbull, was keen to sell to Australian telecommunications carrier AAPT. However, AAPT was offering shares, not cash, which would have left the OzEmail team with shares that they couldn’t sell for a certain period but a massive tax obligation in the vicinity of $200 million. The alternative, which they took, was a $520 million cash bid from American giant UUNET. They had to pay tax, but there was no risk. Unfortunately, the company was effectively taken offshore in the process. In retrospect, AAPT was bought by Telecom New Zealand so either way, OzEmail would have gone offshore. That’s globalisation for you. 184

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appendix 2 STEPS IN THE VC PROCESS

V

enture capital firms maintain strict processes for assessing potential investments. The six steps below show the process followed by Sydney venture capital fund Nanyang Management.

Deal flow Like all VCs, Nanyang beats the bushes looking for worthwhile companies to fund. Its specific criteria are that investees should be based on Australia’s east coast, have a significant domestic market share and export potential, a turnover of $5–25 million and already be generating annual profit of $500,000 to $1.5 million. The company must also be facing demands or opportunities that cannot be met from existing financial resources and have a team in place—that is, be past sole trader stage.

Screening Nanyang then conducts a series of formal tests, including the Bell-Mason Diagnostic Test. This is a structured group interview with the potential investee’s senior managers that can run for 185

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four to five hours and is designed to identify the company’s strengths, weaknesses and stage of development. It also conducts psychological profiling of CEOs. These tests take a total of about three weeks but are not charged to the management team.

Due diligence If the company gets past the screening, the process moves on to full due diligence where the company’s financials and references are checked.

Approval Here the fund gets down to the nitty gritty of valuations and deal structure. It will present the potential investee with a written proposal that has been passed by its own investment committee.

Documentation If the fund and entrepreneur/s can agree on terms, a shareholders’ agreement is drafted and payment details finalised.

Settlement The money changes hands.

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NOTES

Introduction 1 Rivkin, Rene, Robert Half seminar, Sydney, 29 September, 1999. 2 Verrender, I., ‘Satellite going out of orbit as the sparks fly’, Sydney Morning Herald, 1–2 July 2000, p. 1.

One—Interesting times 1 Boyd, Tony, ‘At $1.1 billion, one company still Sheins amid the dot com meltdown’, Australian Financial Review, 8 November 2000, p. 35. 2 Maiden, Malcolm, ‘Picking up a bargain from dstore debacle’, Sydney Morning Herald, 4 December 2000, p. 32. 3 Mansfield, Bob, interview with the author, 2 February 2000. 4 Stockport, G. and Wibberley, S., ‘Thoughts on being a global player’, Business Day (South Africa), 15 July 2000. 5 Boutros-Ghali, Boutros, cited in Peter-Martin, H. and Schuman, H., The Global Trap: Globalization and the assault of democracy and prosperity, Zed Books, London, 1996, p. 28. 6 Paul Budde Communications, Global Internet Market—Statistics Overviews, www.budde.com.au, 2000. 7 Tapscott, Don, Growing up Digital: The rise of the N-Generation, McGraw-Hill, New York, 1998. 8 Encyclopedia Britannica online, www.britannica.com. 187

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9 Reichart, Bill, speaking at Tinshed’s Kickstart for Startups conference in Sydney, 29 March 2000. 10 www.consult, Australian Online Shopping Report, July–December 1999. 11 Potter, Ben, ‘E-com exchanges worry small players’, Australian Financial Review, 26 June 2000, p. 20. 12 ibid. 13 Kirby, James, ‘Corporate buying group due for testing times’, Business Review Weekly, 21 July 2000. 14 Weiss, Peter, quoted in ‘Lions and tigers and bears and the FTC’, Darwin Magazine, August/September 2000, p. 102. 15 ‘Last laugh of a cowlick’, Australian, 1 May 2000, p. 40. 16 The Economist, 22 January 2000, p. 18. 17 Peter-Martin, H. and Schuman, H., The Global Trap: Globalization and the assault of democracy and prosperity, Zed Books, London, 1996, p. 117. 18 ‘Labour pains’, The Economist, 23 September 2000, p. 25. 19 Crittle, Simon, ‘Indian takeaway’, Sun-Herald, 21 November 1999, p. 3. 20 Fogel, Robert, The Fourth Great Awakening and the Future of Egalitarianism, University of Chicago Press, Chicago, 2000. 21 Peter-Martin and Schuman, op. cit., p. 23. 22 ‘Inequality a myth as poor’s lot improves’, New York Times, cited in Sydney Morning Herald, 12 August 2000, p. 51. 23 A key academic currently writing on this issue is Dr Naren Chitty at Macquarie University, Sydney, a former lecturer to the author. 24 Friedman, Thomas, The Lexus and the Olive Tree, HarperCollins, London, 1999. 25 Peter-Martin and Schuman, op. cit. 26 Ugeux, Georges, interview with the author at the New York Stock Exchange, September 1998. 27 Young, Patrick and Theys, Thomas, Capital Market Revolution: The future of markets in an online world, Pearson Education, London, 1999, pp. 46–7. 188

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28 Treadgold, Tim, ‘Electronic gorilla could test the stock exchange’, Business Review Weekly, 28 January 2000, p. 33. 29 ibid. 30 Young and Theys, op. cit. 31 Vgeux, op. cit. 32 E*Trade advertisement published in Business Week, 16 November 1999, p. 42. 33 Thus Young and Theys (op. cit.) play on liberté, egalité, fraternité, ‘Liquidity! Accessibility! Transparency!’. 34 Gray, Joanne, ‘New technology redefines the financial packagers’, Australian Financial Review, 7 January 2000, p. 12. 35 Gates, William, Business @ the Speed of Thought, Viking, New York, 1999, p. 73.

Two—In it to win it 1 Gerber, Michael E., The E-Myth Revisited, HarperBusiness, New York, 1995, p. 24. 2 Wolff, Michael, Burn Rate: How I survived the gold rush years on the Internet, Weidenfeld & Nicolson, London, 1998, p. 91. 3 ‘Heavy reading’, The Economist, 6 May 2000. pp. 76–7. 4 ‘The Business Week best-seller list’, Business Week, 6 March 2000, p. 24. 5 ‘Boomtown’, The Economist, 15 January 2000, p. 93. 6 Wolff, Michael, ‘e is for easy’, Sydney Morning Herald, Spectrum, 15 January 2000, p. 6s. 7 Margo, Jill, Frank Lowy: Pushing the limits, HarperCollins, Sydney, 2000, p. 303. 8 Foster, Professor George, interview with the author, 21 August 2000. 9 PricewaterhouseCoopers, ‘Q3 2000 MoneyTree report results (see www.pwcmoneytree.com). 10 Venture Economics/Thomson Financial, ‘Analysis of firms and funds: Report to the Australian Venture Capital Association Ltd’, January 2001, p. 16. 189

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11 Bivell, Victor, ‘Strong growth forecast for venture capital’, Australian Venture Capital Journal, August 2000, p. 5. 12 Lewis, Michael, ‘The Internet’s blank-check business model’, Bloomberg News, 25 January 2000. 13 Uren, David, Rimmer, John and Forman, David at Acuity Consulting for Australian Services Network, ‘The New Entrepreneurialism: Opportunities within Australia’s reach’, ASN and Acuity Consulting, Melbourne, 2000. 14 Enterprise Market statement at www.em.asx.com.au, 4 September 2000. 15 Mansfield, Bob, interview with the author, 2 February 2000. 16 Howard, Sean, interview with the author, 7 February 2000. 17 Adler, Rodney, interview with the author, 19 January 2000. 18 Ellery, Tracey, interview with the author, 19 April 2000. 19 Adler, op. cit. 20 Whitlam, Nick, quoted in ‘iReality denies refusal to fund LibertyOne’, Australian Financial Review, 8 December 2000, p. 55. 21 See Davidson, John, ‘LibertyOne’s complex web’, Australian Financial Review, 20 December 1999, p. 1. 22 Mansfield, op. cit. Subsequent quotes from the same interview. 23 See Lieber, Ron, ‘Free-agent clubhouse’, Fast Company, July 2000, pp. 211–24. 24 Komisar, R., The Monk and the Riddle: The education of a Silicon Valley entrepreneur, Harvard Business School Press, Boston, 2000, p. 150. 25 Balu, Rekha, ‘Exit strategies’, Fast Company, April 2000, p. 352. 26 Handy, Charles, author of The New Alchemists (Hutchison, London, 1999), quoted in unlimited Magazine, February 2000, p. 37. 27 Tabakoff, N. and Featherstone, T., ‘The dumbing of Australia’, Business Review Weekly, 2 July 2000, p. 52. 28 Cave, Michael, ‘Internet headhunters leave bodies behind,’ Australian Financial Review, 2 December 1999, p. 1. 29 Uren, Rimmer, and Forman, op. cit. p. 10. 190

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NOTES

Three—Seeing in the dark 1 Mansfield, Bob, interview with the author, 2 February 2000. 2 Heinecke, William E. with Marsh, Jonathan, The Entrepreneur: 21 golden rules for the global business manager, John Wiley & Sons, Singapore, 2000, pp. 17–25. 3 Shawcross, W., Murdoch: The making of a media empire, Simon & Schuster, New York, 1997. 4 Howard, Sean, interview with the author, 7 February 2000. Subsequent quotes from the same interview. 5 Crowe, David, ‘Net worth’, The Australian Financial Review Magazine, 24 April 1998, p. 34. 6 Tudehope, David, interview with the author, 5 January 2000. 7 Komisar, Randy, The Monk and the Riddle: The education of a Silicon Valley entrepreneur, Harvard Business School Press, Boston, 2000, pp. 82–3. 8 ibid. 9 Quoted in Wallace, Tim, ‘That vision thing and high net worth’, Australian Financial Review, 20 November 1999. 10 Bunnell, David, with Luecke, Richard A., The eBay Phenomenon, John Wiley & Sons, New York, 2000. 11 Katz, Laurence E., ‘Chemdex.com’, class paper, Harvard Business School, 22 June 1999. 12 Ince, John F., ‘Ventro aggressively pursues its strategy to build verticals’, UpsideToday, www.upside.com, 18 July 2000. 13 Nicholas, Sean, ‘Wizard of Spike’, The Eye, 21 October–3 November 1999, pp. 18–24. 14 ibid. 15 Mesker, Michael, email to the author, 10 July 2000. 16 O’Hanlon, Chris, interview with the author, 30 January 2000. 17 Barker, Garry, ‘Locals snare fortunes in web’s wild ride’, Age, 15 January 2000. 18 Kirby, James, ‘Q&A: Chris O’Hanlon’, Business Review Weekly, 13 October 2000. 19 Lewis, Michael, The New New Thing, Hodder & Stoughton, London, 1999. 191

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20 21 22 23

ibid., p.81. myCFO company press release, dated 7 February 2001. ‘Know Thyself’, The Economist, 30 October 1999, p. 102. The built to flip idea was introduced by Jim Collins in ‘Built to flip’, an article for Fast Company, March 2000, p. 131. Collins is also co-author of Built to Last: Successful habits of visionary companies, HarperBusiness, New York, 1994.

Four—Other people’s money 1 The Industry Standard, October 2000, p. 41. 2 Collins, Jim, ‘Built to flip’, Fast Company, March 2000, p. 132. 3 Davis, Paul, speaking at First Tuesday event at the Australian Stock Exchange, 6 June 2000. 4 Abernethy, Mark and Heidtman, David S., Business Angels, Allen & Unwin, Sydney, 1999. 5 Adamovich, Alex, interview with the author, April 2000. 6 Edward Black from Aberdeen Group in Boston, quoted in Inc. Magazine, July 2000, p. 98. 7 ‘Hatching a new plan’, The Economist, 12 August 2000, p. 57. 8 The BITS scheme incubators were: Bluefire Group, NSW ($6.0m); IT Catalyst, NSW ($7.37m); ITem 3, NSW ($7.37m); Information City, VIC ($8.0m); Australian Distributed Incubator—Emerge, multi-state ($7.0m); ePark, NSW and VIC ($5.0m); InQbator, QLD ($9.5m); Perth Ideas Centre of Technology, WA ($10.0m); SA BITS, SA ($10.0m); and Capital Region Technology Business Centre, ACT ($8.0m). 9 Hansen, Morten T. et al., ‘Networked Incubators: Hothouses of the new economy,’ Harvard Business Review, September– October 2000, pp. 75–84. 10 ‘Hatching a new plan’, The Economist, 12 August 2000, p. 57. 11 Singer, Thea, ‘Inside an incubator’, Inc. Magazine, July 2000. 12 ibid. 13 Foster, Professor George, interview with the author, 21 August 2000. Subsequent quotes from the same interview. 192

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NOTES

14 Ferris, Bill, speaking at the launch of his book, Nothing Ventured, Nothing Gained (Allen & Unwin, Sydney, 2000), 14 March 2000. 15 Gerber, Michael E., The E-Myth Revisited, HarperBusiness, New York, 1995. 16 Golis, Christopher, Enterprise and Venture Capital, 3rd edn, Allen & Unwin, Sydney, 1998. 17 Allen & Buckeridge, conference proceedings, Allen & Buckeridge investor seminar, Sydney, 15 August 2000. 18 O’Hanlon, Chris, email to author, 4 July 2000. All other O’Hanlon quotes are from phone or email interviews conducted with the author in mid 2000, unless otherwise noted. 19 Collins, Jim, ‘Built to flip’, Fast Company, March 2000, p. 139. 20 Romei, Stephen, ‘Fools and their money’, Australian, 23 December 1999, p. 26. 21 Schiffrin, Anya, ‘The last-chance market’, Industry Standard, 2 October 2000, p. 92. 22 Tudehope, David, interview with the author, 2 February 2000. Subsequent quotes from the same interview. 23 Perkins, Michael, ‘Burn baby burn’, Red Herring, June 2000, p. 424. 24 ibid, p. 414. 25 Cited by Christopher Golis in his personal list of ‘Famous Venture Capital Sayings’, 1999. 26 Komisar, Randy, The Monk and the Riddle: The education of a Silicon Valley entrepreneur, Harvard Business School Press, Boston, 2000, p. 52. 27 Nicholas, Katrina, ‘Lack of cash squeezes out TheSpot’, Sydney Morning Herald, 29 June 2000, p. 25. 28 Nicholas, Katrina, ‘Boo failure sounds a warning’, Sydney Morning Herald, 20 May 2000, p. 103. 29 Nicholas, Katrina, ‘When the dot com dream goes bung’, Sydney Morning Herald, 31 October 2000, p. 28. 30 ‘Unit of 1: Starting your startup’, Fast Company, January– February 2000, p. 106. 31 Stewart, Vivian, interview with the author, 17 January 2000. 193

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Five—Magna Data 1 Conversation with the author, December 2000. 2 Ashton, Jason, interview with the author, 2 May 2000. Subsequent quotes from the same interview. 3 Carruthers, Luke, interview with the author, 12 November 2000. Subsequent quotes from the same interview. 4 Allard, Tom, ‘He’ll take the new car—but hold the helicopter’, Sydney Morning Herald, 15 November 1999, p. 18.

Six—LookSmart 1 Ferris, Bill, conversation with the author, February 2000. 2 Ferris, Bill, Nothing Ventured, Nothing Gained: Thrills and spills in venture capital, Allen & Unwin, Sydney, 2000, pp. 63–4. 3 ibid, p. 67. 4 Foster, Professor George, interview with the author, 21 August 2000. Subsequent quotes from the same interview. 5 Sinclair, Jenny, ‘LookSmart comes under fire’, Age, 8 August 2000. 6 Ellery, Tracey, interview with the author, 19 April 2000. 7 You can obtain details on this type of ‘insider’ trading through the NASDAQ website at www.nasdaq.com. Select the stock you’re interested in, then ‘Holdings/Insiders’.

Seven—One.Tel 1 Verrender, Ian, ‘From rich to filthy rich’, Sydney Morning Herald, Spectrum, 29 January 2000, p. 3s. 2 ibid. 3 Adler, Rodney, interview with the author, 19 January 2000. Subsequent quotes from the same interview. 4 Greaves, John, interview with the author, 13 January 2000. 5 Mansfield, Bob, interview with the author, 2 February 2000. Subsequent quotes from the same interview. 194

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NOTES

6 Romei, Stephen, ‘One.Tel poised to explode into profitability: Keeling’, Australian, 13 October 2000. 7 Chenoweth, Neil, ‘One.Tel teeters on the edge of a generation gap’, Australian Financial Review, 13 October 2000, p. 54. 8 Semler, Ricardo, Maverick, Random House, London, 1993. 9 Interview with the author while a reporter at the Australian Financial Review in 1999.

Eight—Macquarie Corporate Telecommunications 1 Collins, Jim, ‘Built to flip’, Fast Company, March 2000, p. 140. 2 Tudehope, David, interview with the author, 5 January 2000. Subsequent quotes from the same interview.

Nine—Spike Networks 1 Gerber, Michael E., The E-Myth Revisited, HarperBusiness, New York, 1995, p. 24. 2 Higgins, David, ‘Spike founder on sharp end of $1.2m sex harassment payout’, Sydney Morning Herald, 14 July 2000, p. 3. 3 O’Hanlon, Chris, email to the author, 30 November 2000. 4 O’Hanlon, Chris, interview with the author, 30 January 2000. 5 O’Hanlon, Chris, emails to the author, May–June 2000. Subsequent quotes from these emails. 6 Sams, Christine, ‘24 hours: Chris O’Hanlon’, Sun-Herald, SundayLife!, 2 April 2000, p. 4. 7 Mesker, Michael, email to the author, 10 July 2000. 8 Gartner, J.D., ‘Prophet or loss’, Talk Magazine, June/July 2000, pp. 66–7. 9 ibid.

Ten—Lessons from the boom 1 Minack, Gerard, ‘ABN-AMRO Overnight report’ daily newsletter, 24 February 2000, p. 1. 195

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2 Cited in the Australian, Cutting Edge (IT section), 12 December 2000, p. 10. 3 Adler, Rodney, interview with the author, 19 January 2000. Subsequent quotes from same interview. 4 Hagerty, James, ‘How e-commerce entrepreneur, once flying high, fell back to earth’, Wall Street Journal, 7 January 2000. 5 Ferris, Bill, speaking at the launch of his book, Nothing Ventured, Nothing Gained (Allen & Unwin, Sydney, 2000), 14 March 2000. 6 Tudehope, David, interview with the author, 5 January 2000. Subsequent quotes from the same interview. 7 Margo, Jill, Frank Lowy: Pushing the Limits, HarperCollins, Sydney, 2000, p. 165. 8 Minack, Gerald, ‘ABN-AMRO Overnight report’, daily newsletter, 24 February 2000, p. 1. 9 Greaves, John, interview with the author, 13 January 2000. 10 Mansfield, Bob, interview with the author, 2 February 2000. 11 Howard, Sean, interview with the author, 7 February 2000. Subsequent quotes from the same interview. 12 Van Oeveren, Ernst, interview with the author for Australian Financial Review, January 2000. 13 Shama, Avi, ‘Forget sales, profit: Downfall of dot coms is a vision thing’, Australian Financial Review, 18 August 2000, p. MW7. Shama is Dean of the College of Business at the University of Texas-Pan American at Edinburg, Texas. 14 Gates, William, Business @ the Speed of Thought, Viking, New York, 1999, p. 171. 15 Foster, Professor George, interview with the author, 21 August 2000. Subsequent quotes from the same interview. 16 Mansfield, Bob, speech to Australian Services Network dinner, October 1999. 17 O’Hanlon, Chris, phone interview with the author, 30 January 2000. 18 O’Hanlon, Chris, emails to the author, May–June 2000. 19 Verrender, Ian, ‘From rich to filthy rich’, Sydney Morning Herald, Spectrum, 29 January 2000, p. 3s. 196

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NOTES

20 ibid. 21 Askew, Kate, ‘Thoughts of non-chairman Brad’, Sydney Morning Herald, 30 November 2000, p. 31. 22 ibid. 23 Komisar, Randy, The Monk and The Riddle: The education of a Silicon Valley entrepreneur, Harvard Business School Press, Boston, 2000, p. 150.

Eleven—Where’s the loot? 1 Adler, Rodney, interview with the author, 19 February 2001. Subsequent quotes from the same interview. 2 MacDermott, Kathy, ‘OzEmail founder buys island playground’, Australian Financial Review, 3 November 2000, p. 5. 3 Chandler, Matthew, ‘Gretel Packer tipped as $10 million buyer’, Australian Financial Review, 3 March 2000, p. 83. 4 Hayes, Simon, ‘Start-ups attract executive crooks, says investor’, Australian, 7 November 2000, p. 44. 5 Wolff, Michael, Burn Rate: How I survived the gold rush years on the Internet, Weidenfeld & Nicolson, London, 1998. 6 Hoyle, Simon, ‘Navigating treacherous sea of dud floats’, Australian Financial Review, 16 September 2000, p. 34. 7 Mansfield, Bob, interview with the author, 2 February 2000.

Epilogue 1 Encarta World English Dictionary, Pan Macmillan, Sydney, 2000. 2 Bryson, Bill, The Mother Tongue: English and how it got that way, Avon Books, London, 1996. 3 Collins, Jim, ‘Built to flip’, Fast Company, March 2000, pp. 131–40. 4 Beesley, Mark, quoted in unlimited Magazine, February 2000, p. 35.

Appendix 1 1 Taxation information taken from the Treasury Department website at www.treasury.gov.au. 197

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INDEX

‘10 per cent club’, 43 24/7 Media, 41–2, 156 80/20 Software, 92 AAPT, 108, 128, 130–1, 134–5, 155, 173, 184–5 Abeles, Sir Peter, 139 ABN-AMRO, 157 ABS see Australian Bureau of Statistics ACCC see Australian Competition and Consumer Commission accelerators see incubators ACNielsen, 174 Adamovich, Alex, 76 Adler, Fred, 92 Adler, Larry, 36, 37 Adler, Rodney, xi, 25, 36, 75, 118–21, 123–4, 126, 153–4, 166, 171, 177 Allen & Buckeridge, viii, 88, 92, 164 Allen, Roger, viii, 72–3, 88–9 198

alliances, 9, 140, 143–4, 150, 161–3 AltaVista, 79 Amazon.com, 8, 18, 153, 160 America Online see AOL Time Warner AMP, 9, 18, 33 Anderson, Howard, 83 angel investment, 72–7, 117 AnnounceTV, 80 ANU see Australian National University ANZ Bank, 9 AOL Time Warner, 32, 68, 154, 161 Apple, 149–50, 157, 165 approval, 187 Archer, David, 172 Arthur Andersen, 144 Ashton, Jason, ix, 26, 103–9 Asian Infrastructure Fund, 25 ASIC see Australian Securities and Investment Commission

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INDEX

ASN see Australian Services Network ASX see Australian Stock Exchange Atkinson, John, 142–3 AuctionWeb, 55 AUSNet, viii, 160 Austal Ships, 99 Australia Club, 44–5 Australian Academic and Research Network (AARNet), 103 Australian Bureau of Statistics (ABS), 47 Australian Business (previously NSW Chamber of Commerce), 75 Australian Business Angels, 75–6 Australian Competition and Consumer Commission (ACCC), 124–5 Australian Consolidated Press, 60–1 Australian Mezzanine Investments/AMWIN, 45, 87, 112, 114, 173 Australian National University (ANU), 48 Australian Securities and Investment Commission (ASIC), 21 Australian Services Network (ASN), 33, 49 Australian Stock Exchange

(ASX), 18–20, 34, 38, 65, 89, 95, 97, 130–1, 173, 175–6 Baker & McKenzie, 141, 144 Barker College, 45 Beesley, Mark, 181 Bell Laboratories, 78 Bell Resources, x Bell-Mason Diagnostic Test, 186 Benchmark Capital, 98 Bertini, Anthony, 62, 70 Besen family, 2 BHP, 9 Blount, Frank, 128 blue sky investments, 33, 63–9 passim, 164 Bluefire, 79 BMCMedia, 39, 62, 70 Bond, Alan, x, 72 Boo.com, 100 Bootcamp for Startups conference, 25 Booz Allen & Hamilton, 58 Bos, Wayne, 173 Boutros-Ghali, Boutros, 5 BP, 164 Brady, Damien, x, xii brain drain, 14–16 passim, 48–9 Bristow, Graham, 43–4 British Telecom, 162 BRW Rich List, 118, 166 Buckeridge, Roger, viii Buffett, Warren, 10 199

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Building on IT Strengths scheme, 79 ‘built to flip’, 68–9, 71, 179–80 Bunnell, David, 56 burn rate, 100–2, 112, 153–4 business accelerators see incubators business risk, 1–2, 46–7, 176–81 passim Business Thinking Systems, 37 Business.com, 154 Buy.com.au, 8 Byrne, Terry, 164 Cabletron Systems, 157 Campsix, 81 capital gains tax (CGT), 182–4 capital markets, 16–22, 70–1, 94–7 CareerPath.com, 47 Carrefour, 9 Carruthers, Luke, ix, 103–9 CDNow, 32 CGT see capital gains tax Chemdex.com, 56–8, 133 Chinadotcom, 43 Cicutto, Frank, 169 Cisco Systems, 2, 20, 104, 154, 156–7 Citibank/Citigroup, 15, 17 Clark, Jim, 66–9, 149, 179–80 clubs, 44–6 CMGI, 59, 78–9, 81 Coca-Cola Amatil, 9 Coles Myer, 2, 9 200

Collins, Jim, 71, 130, 179–80 Columbia University, 94 Com Tech Communications, 2 Compaq, 157 Computer Power Group, 88 Consolidated Press Holdings, 114 Cooper, Brad, 37 Cornish, Phil, 172 CorProcure, 9 Country Road, 164 Covey, Stephen, 24 Covisint, 9 Cox Communications, 113–4 Cramer-Roberts, Mark, ix, 103–9 Cranbrook (school), 36–7, 104 Critical Path, 79 CRM see customer relationship management customer relationship management (CRM), 121–2, 128 cybersqatters, 32, 154 DaimlerChrysler, 8–9 Danko, William, 24 Datacraft, 89 Datacraft Asia Ltd, 99 Davis, Paul, 73 Davnet, ix, 26–7, 103–9 deal flow, 73, 186 Decisive Publishing, viii Department of Industry, 29

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INDEX

deregulation, 31–2 Deutsche Bank, 173 Deutsche Boerse, 21 Diamond Press, 106, 109 Digital Media Group, 75 dilution of shareholdings, 90–1 Dimension Data, 2, 89 disruptive technology, 31 DNA Sciences, 68 Doerr, John, 59 domain experience, 54–5, 110 DoubleClick Inc., 40–2 Doust, David, 75 Dowell Schlumberger, 57 Downer, Alexander, 39 dstore, 2, 75 due diligence, 93, 187 E*Trade, 21 eBay, 56–5, 154, 156 ECAT Development Capital, 172 ecorp, xii Edge Group, x Editor.com, 179 Eisa, x, xii electronic communications networks (ECNs), 21 Ellery, Tracey, ix, 32, 37–8, 45–6, 110–17, 172 Enterprise Market, 34 entrepreneurialism, vii-xiii, 16, 27–8, 33–4, 51–3, 57–8, 139,

145, 150, 171–81 passim Eordogh, Andrew, 64 ePark, 79 Equity Partners Asia, 76 eToys.com, 81 excess funding, 99–102, 176 Excite, 43–4 Exxon, 19, 57–9 FAI, 37, 120, 124, 143 Fairlight ESP, 89 fame, 163–70 passim Ferris, Bill, 45, 85, 87, 99, 155, 173 financial system revolution, 8–10, 16–22 passim first mover advantage, 157 First Pacific, 118 First Tuesday, 25, 97 Fisher, Greg, xi, xii flexibility, 113, 163 focus, 134, 154–6 Fogel, Robert, 13 Foos, Richard, 101 Ford Motor Company, 8–9, 79, 156–7 Foster, George, 27–8, 85–6, 113–4, 162–3 Foster’s, 9, 122 Foundry Networks, 94 Fox, Lindsay, 169 free trade, 10–11 FreeMarkets, 10, 94 friction-free capitalism, 10, 22 Friedman, Thomas, 15 201

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FTR Holdings, 35 FuckedCompany, 152, 169 Gamble, Neil, 169 Garage.com, 7, 25 Garden.com, 153 Garner MacLennan Group, 89 Gates, Bill, 5, 22, 52, 83, 162, 165 GE Capital, 12, 16, 19–20 General Motors, 8, 156, 157 Gerber, Michael, 87 Global 1000, 10 globalisation, 3–22 passim, 185 GlobalNetXchange, 9 GoFish.com, 79 Golis, Christopher, 89–93, 98 goods and services tax (GST), 34, 182 Gore, Al, 4, 134 Greatorex, David, 25 Greaves, John, xi, 120, 126–7, 143, 157, 167 Green, James, 40 Greenwald, Bruce, 94 Greiner, Nick, 2, 39 Greylock, 58 Gross, Bill, 80–1 GST see goods and services tax Hagans, Don, 173 Handy, Charles, 47 Hansen, Morten, 80–1 Harbour Angels, 75 Hardie, James, 18 202

Harrington, Alison, xii, 100–1 Harris Scarfe, 2 Hartley Poynton, 173 Harvard Business School, 57–8, 82, 133 Harvey, Gerry, 51, 169, 178 Harvey Norman, 51 Hawke, Bob, 26 Healtheon, 67–8 Hewlett Packard, 64 Higgins, David, 141 high growth (managing), 103–9, 126–9, 150, 156–9 passim Hochma, 2 Holmes à Court, Janet, 169 Home nightclub, 26 HomeBase Directories, 111 Hooker, Janusz, 25, 75 Hooker, L.J., 25 Hotbank, 81 Howard, John, x Howard, Sean, vii, viii, xii, xiii, 32, 35, 39, 41, 50, 52, 59–63, 107, 158–9, 171–2, 178, 184 HSBC, 15, 22 human resources management, 14, 115, 127-8, 137, 148–9 Humphry, Richard, 18 Hunter Bay Innovation, 142 Hutchison Telecoms, 119, 126, 172; see also Orange IBM, 19–20, 33, 52, 162 idealab!, 78, 80–1

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INDEX

Imagination Entertainment, 75 Imagineering Group, 36, 118–20, 126, 166 Immutech, 58 incubators, 77–83 information superhighway, 4, 134 initial public offers (IPOs), 24, 94–7 passim, 114, 132, 142–3 Ink Development Corporation, 56 Inner Circle party, 25 Innovation Investment Fund scheme, 112, 114 Instinet, 21 Intel, 105 intellectual property (IP), 87, 159–61; see also patents Internet Assigned Numbers Authority, 6 Internet Capital Group, 78 inter-touch, 105, 107 IP see intellectual property iReality Group, 43 Isis Communications, 175 ITem 3, 79 iX, 21 Japan, 24–5 JGL Investments, 2 JNA Telecommunications, 115 Jobs, Steve, 149, 165

John Fairfax Publications, 63 J.P. Morgan, 164 K*Grind, 87, 173 Kalori Consortium, 133 Kaplan, Philip, 152 Katz, Laurence, 57–8 Keeling, Brad, 120, 122–9 keiretsu, 80 Kennedy, Trevor, 41 Kepper, George, 89 KFT Investments, 89 Kickstart for Startups conference, 25 King, Judith, 33 King, Stefanie, 141 Kings (school), 103 Kiyosaki, Robert, 24 Kleiner Perkins Caufield & Byers, 59 Knox (school), 36 Komisar, Randy, 53–4, 100, 169 Labor Party, 13 Leibler, Mark, 2 Lentell, Gour, 39–42, 62 Lessonware, 169 Lewis, Michael, 33, 66, 68 Li family, 126 Li, Richard, 143 Liberman family, 2 LibertyOne, 43–4, 156, 173, 177, 180 Linux, 94 Linux Care, 48 203

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Living.com, 22 London Stock Exchange (LSE), 21–2 LookSmart, ix, 2, 32, 37–8, 45–6, 92, 110–17, 128, 162, 172–3 Love, x; see also Reynolds, Siimon Lowy, David, 25, 124 Lowy, Frank, xiii, 27, 169 LSE see London Stock Exchange Lucent Technologies, 78, 123 Lycos, 79, 161 McCance, Henry, 58 McDonald’s, xiii, 37, 49, 87 McGuigan, John, 93, 140–4, 147, 150–1 Mackerras, Paul, 48 McKinsey & Co., 97, 110–1 Macquarie Bank, 80, 87, 114 Macquarie Corporate Telecommunications (MCT), ix, 31, 53, 96–7, 130–8, 155–6, 158, 171, 178 Macquarie Technology Fund, 87 Macquarie University, 1 Magna Data, viii, ix, 25–7, 74, 102, 103–9 Mainprize, Timothy, 143 Maltz, Lawrence, 143, 147 Mandela, Nelson, 175 Mansfield, Bob, xi, 4, 45–6, 50, 204

120–2, 157, 159, 163, 169, 178 Marzbani, Ramin, 64, 174 MCI, viii, 133 Melbourne Club, 44 Mercantile Mutual, 64, 148 Merrill Lynch, 22 Mesker, Michael, 64, 148 Metro group, 9 Micro Forte, 92 Microsoft, 4–5, 17, 20, 48, 52, 56, 68, 83, 88, 113, 139, 156–7, 162, 165 Microsoft Australia, 48 MicroStrategy, 149 Miles, Neville, 41 Minack, Gerard, 157 Moignard, Stephen, 108 Monkeydex.com, 33 Mothers (stock exchange), 25 Mount, Nick, 75 MTM Funds Management, 41 Murdoch family, 126, 128 Murdoch, Lachlan, 118, 127–8, 167 Murdoch, Rupert, 51, 83, 123, 168–9, 178 Murdoch University, 33 Muspratt, Peter, 133 myCFO, 67-8 MYOB, xiii Nanyang Management, 89, 93, 186–7 Naphtali, Michael, 2

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INDEX

NASDAQ see National Association of Securities Dealers Automated Quotation National Association of Securities Dealers Automated Quotation (NASDAQ), 19–21, 25, 33, 38, 41, 43, 57, 62, 78–9, 94, 96, 107, 114, 116, 160 National Office for the Information Economy (NOIE), 97 National Rural Health Research Institute, 160 NetGear Ltd, 112 NetJ.com, 33 NetPort Hospitality Systems, 105 Netscape, 4, 62, 66, 68, 113–4, 149 Network Solutions, 4 networking, 25–6, 50 NetX, 37 new economy, 149 New York Stock Exchange (NYSE), 17, 19–21 News Corporation, 18, 65, 83, 122, 126, 167, 175 N-Generation, 6 Nike, 47 ninemsn, 2 Nissan, 8 NOIE see National Office for the Information Economy Norman, Greg, 44

Norman Ross, 51 Normanhurst Boys’ High School, 35 NRMA, 39, 44 NSW Chamber of Commerce, 75; see also Australian Business NTT, 108 NYSE see New York Stock Exchange O’Hanlon, Chris, 63–6, 92, 139–51, 165 Oeveren, Ernst Van, 160–1 Omidyar, Pierre, 55–6 One.Tel, ix, xi, 37, 118–29, 143, 155, 167, 172, 175, 177 Open Market, 160–1 Open Telecommunications, 70, 94 Optus, 168, 119–21, 123–4, 127, 130–1, 133–4, 155, 157 Oracle, 40 Orange, 119, 172; see also Hutchison Telecoms Ord Minnett, 173 OTC, 134 ‘other people’s money’ (OPM), 70–102 Outbiz.com, 79 Outtrim, Steve, 172–3 OzEmail, viii, x, 32, 35, 39–41, 59–63, 101, 107, 109, 156, 158, 171–2, 184–5 OZeStock.com.au, 80 205

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Pacific Century CyberWorks (PCCW), 65, 140, 142–4, 150 Packer family, 45, 128 Packer, Frank, xiii Packer, Gretel, 172 Packer, James, 25, 36, 75, 118, 120, 122–4, 128, 167 Packer, Kerry, viii, 62, 114, 169 Palasty, John, 171 Palm, 156–7 Partnership Pacific Ltd, 133–4 Passlow, Wayne, 70–1, 94 patents, 160–1; see also intellectual property Paul Budde Communications, 6 PBL Online, 48; see also Publishing & Broadcasting Ltd PCCW see Pacific Century CyberWorks PEG Technologies, 89 Pepsi-Cola, 149 Perkins, Michael, 98–9 Perry, David, 56–9, 133 Peter-Martin, Hans, 15 Petre, Daniel, xii, 48 Pets.com, 8 Poole, Richard, 79–80 Powderbox, 79–80 PowerTel, 172 Priceline.com, 160 PriceWaterhouseCoopers, 28–9 206

public relations, 163–70 passim; see also fame Publishing & Broadcasting Limited (PBL), 122, 167 Punch, Justin, xii R&D see research and development Rachleff, Andy, 98 Radiata Communications, 2 Reader’s Digest Association, 111–2 Rebel Sports, 2 Redmond, 162 Reichert, Bill, 7 Renault, 8 research and development (R&D), funding, 47–8, 71 Reuters, 21 Reynolds, Siimon, x Rhino Records, 101 Rich, Jodee (John David), ix, xii, 36, 50, 118–29, 166–8, 172 Rich, Maxine, 119 Rich, Stephen, 36 Riley, Paul, 112 Roberts-Thompson, Barry, 172 rough backgrounds (growing up poor), 35–8 passim Rozell, Given, 141–2 Sabela Media, 39–43, 62, 115, 156

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INDEX

Salomon Smith Barney, 144, 173–4 Sarris, Stan, 37 Satellite Group, The, xi Sausage Software, 172 Saylor, Michael, 149 Sculley, John, 149 Seafoodonline.com, 164 Sears Roebuck, 9 Secure Sockets Layer (SSL), 4 Seek.com.au, x Semco, 127 Semler, Ricardo, 127 SFE see Sydney Futures Exchange Shama, Avi, 161 Shawcross, William, 51 Shein, David, 2 Shein, Jon, 2 Shein, Stephen, 2 SheSaid.com.au, 79 ShopFast, 75 shopping basket/trolley (Internet), 160 Shuttleworth, Mark, 4–5, 22 Silicon Graphics, 66, 68 Silverstream Corporate, 79 Singleton, John, 25, 169 Skellern, David, 1 Skettos, Michael, 106 Skoll, Jeff, 55 Smith, Adam, 14 Smorgon, Norman, 25 Softbank Interactive, 40 Software-markets.com, 75

Solution 6, xi, xii, 43, 169, 180, 173, 175 Sony, 116 South Australia Club, 39, 44 Spectrum Network Systems, 172 Spence, David, 41, 62 Spike Networks, 32, 63–6, 92, 139–51, 180 Spira, John, 106 St George Bank, 89 Stanford University, 27–8, 68, 85, 113, 162 Stanley, Thomas, 24 Starbucks Coffee Company, 143 Stewart, Vivian, ix, 25, 75, 101, 103–9 Strewth!, 168 success, vii–ix, xiii, 1–2, 38–9, 171–8 passim Sussan, 2 Swinburne University, 33 Switkowski, Ziggy, 122 Sydney Futures Exchange (SFE), 18–19 Sydney Grammar (school), 103 tall poppy syndrome, 152, 166–8 passim Tapscott, Don, 6 tax reform, ix, 34–5, 47, 176–7, 182–5 Tech Invest, 73 Tech Pacific, 150, 118 Telecom, 134; see also Telstra 207

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Telecom New Zealand, 130, 185 Telefonica, 128 Telstra, viii, xi, 4, 9, 18, 33, 45, 53, 105, 107–9, 122–5, 127–8, 130–1, 134–7, 143, 157, 159, 175, 177, 182–3 Tempest Online, 79 Tetherless Access, viii Thawte Consulting, 4–5 theglobe.com, 94 TheSpot, xii, 2, 100–1, 176 Theys, Thomas, 17, 19 Thornley, Evan, ix, 32, 38, 110–7, 162, 172 Time Warner, 116 Tinshed, 25–7, 74–6, 105 TNT, 139 Tokad, 40 Tokyo Stock Exchange (TSE), 25 Torson, 92 Toyota, 63 Toys ‘R’ Us, 81 Traveland, 36 Tridgell, Andrew, 48 Tripp, Simon, 41 Truong, Huy, 163 Truong, Jardin, 163 Tudehope, Aidan, ix, 130–8, 171, 177–8 Tudehope, David, ix, 31, 36, 53, 96–7, 130–8, 155, 158, 171, 177–8 Tufts University, 56 208

Turnbull, Lucy, 35 Turnbull, Malcolm, 35–6, 41, 184 Turner, David, 39–42, 62 Twomey, Paul, 97 Tyler, Chris, x, xii, 169, 173 Tyson, Eric, 24 uBid, 44, 79 Ugeux, Georges, 17, 19 Union Club, 45 University of Cape Town, 4 University of New South Wales, 106, 133 University of Sydney, 106 University of Tulsa, 57 UUNET, viii, 32, 156, 185 VA Linux, 94 Value America, 154 VECCI see Victorian Employers’ Chamber of Commerce and Industry Ventro Corporation, 56–7 venture capital, viii, xi, 26–30, 71–3, 84–93, 97–102, 186–7 Verisign, 4 Victorian Employers’ Chamber of Commerce and Industry (VECCI), 75 vision, 50–3, 59–63, 126, 145, 149–51, 162 Vodafone, 123–4, 172 voting control, 71–7, 83, 90–3 passim, 97–9, 139–40, 162–3

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INDEX

Wacker, Watts, 166 Walden International, 112 Wang, Johnson, x, xi Warner Music, 101 wealthy backgrounds (growing up wealthy), xii, 35–9 passim, 118 Web Wide Media, 40, 62 WebMD, 68 Weldon, Kevin, 25 West, Morris, 63 Weste, Neil, 1 Westfield, 124 Westpac, 31, 133, 134 Wharton (business school), 119 Whitlam, Gough, 39 Whitlam, Nick, 39, 43–4 Williams, Larry, 128, 173 Winepool.com.au, 79 Winkler, Craig, xiii Winn, Craig, 154

Wishlist.com.au, 163 Wolff, Michael, 23, 175 Wolff New Media, 23 World Intellectual Property Organisation, 32 World Trade Organisation, 11, 31 World.net, 161 www.consult, 7–8, 174 www.science.com.au, 160 Yahoo!, 111, 114–17, 154, 156 YankeeTek, 83 Yell, Brendan, 32 Young, Patrick, 17, 19 Zivo, 44 Zulumedia, 40 Zulu-Tek, 40; see also Zulumedia Zurich, 64

209