What We Can Learn from the Aftermath of the Internet Bubble
With Glenn Argenbright of Quake Capital and Jay Goodwin, M&A Technologist and CTO of Coster Technologies
When you enter the New York crypto scene, you can immediately feel the hype. Everyone speaks about it with such frenzy. After speaking to quite a few people — fund managers, lawyers, developers — I found that many feel strongly about the change Blockchain tech will bring. Some of them even expressed that this space feels just like the internet bubble, with all the excitement and quick money. In fact, as I thought about just how many similarities there are between Blockchain and the internet, I realized I wanted to dig deeper into what happened during the late ‘90s to see how it relates to present day and this feeling that we are inside a bubble.
There are unarguably bubble-like qualities about the Blockchain space and crypto. Historically, there are several characteristics asset bubbles have had in common:
- They coincide with technological or financial innovations
- They coincide with frenzied trading between investors and often active trading of new investors
- They are vulnerable to increases in asset supplies
- They may burst suddenly without any warning sign
Just like the internet bubble, many aspects of the Blockchain/crypto industry align with these four traits. While I recognize that Blockchain companies and dot-com era internet companies are different — most notably, due to different fundraising methods and different geographic constraints — I really started to feel that there is something we might be able to learn from history through the people who actually lived and worked in Silicon Valley at that time.
I was fortunate to be able to speak with two individuals who had a hand in building companies in Silicon Valley in the 1990s. Glenn Argenbright is an entrepreneur, founder, and senior executive with experience running a wide variety of public and private companies. Since his time in Silicon Valley, he has had 9 exits and 3 IPOs, having created over $5B in value. He now leads the accelerator program at Quake Capital as the founder and CEO, where he oversees a team of 16 people (and a tiny dog named Monster!) who work hard to help their seasonal startup cohorts succeed.
Jay Goodwin is Glenn’s friend and a technologist, who also lived in the Valley during the dot com boom. He initially moved to the Valley in 1997 to work at a company called Internet Extra, which eventually became a company called Mediaplex, which later had an IPO. Since then, he worked at and helped build several companies that were acquired by well known corporations and he also helped broker some of these acquisitions. Currently, he is working on a Blockchain startup of his own, which was part of Quake Capital’s Fall 2017 Cohort, with musician Tommy Coster.
I was most excited to learn more about their experiences in Silicon Valley during and after the bubble. According to Glenn, Silicon Valley in the late 80s and 90s was the “coolest place in the world.” Glenn worked in ad-tech, where, back then, the potential for invasion of privacy via behavior tracking and hacking was high, but he also felt that the brand new technology really helped drive “extreme creation.”
“Being in the Bay at that time, you really were immersed,” he remembered. “You’d be sitting at a table and someone two tables away would be discussing a problem and solutions — it was just everywhere.”
So, tell me about your experience being in Silicon Valley, working with all these internet people during the bubble and right after the bubble burst.
Glenn: I’ve never — before or since — seen anything like it. It was 100% a meritocracy. There were no rules. In 1995, the internet was so new that there was no regulation around it — nothing was illegal. It sounds a little like the wild west. Of course, there were terrible things that happened, but it really took the shackles off creativity and drove innovation. The other thing that made it so unique was that there was a market similar to the gold rush. Anybody could who could make something came to Silicon Valley. Now we’re able to talk about NYC, Boston, and Austin, but at that time, everything was moving so fast there, it was absolutely where you had to be for tech. You also rarely encountered anyone there who had “made it” already in ’95.
Jay: I lived in the valley in ’97, and the guys I went to work with were either working on internet companies since ’89, or were working on systems that predate the internet. We were all pretty immersed in the ethos of the Bay. We were seeing the evolution of computing and where it was going.
I started out at Internet Extra, which eventually became Mediaplex and IPO’d. They had a transition at that company and Glenn was brought in as CEO because they were having trouble selling ads. They eventually became an ad company in order to sell their own inventory, but found that being an advertising company was working well for them. I then went to another startup called ATweb, which got acquired by Netscape, which was then acquired by AOL. Then I got the hell out, because I had no interest in working for AOL. After that, I took a job at an internet company that eventually got acquired by Intel. By that time, I was getting really tired of being bought.
Wow, sounds like it must have been an incredible experience to be there and feel everything moving so fast.
Glenn: Yes, but, as people started becoming successful in ’97–’99, people started showing up to work in Ferraris and Lamborghinis. The whole Valley grew confidence. Before this, there were way more women in tech, but during and after, the culture started to become more about taking credit and preventing newcomers from knocking you down — it was no longer a meritocracy. It has a great energy if you go there, and nowhere else is close to that. Nobody’s close in terms of University density. Now you’re starting to see startup communities in other markets, like New York, helping each other and they’ve got access to — well, they may not have tech quality like in the valley, but they do have fortune 500 customers. And customers are helping these startups because they are willing to do pilot programs. There’s money, talent, and customers in New York now. Will it ever be the Valley? No. But the Valley won’t, either.
Jay: Before the bubble burst, being in the Bay, you really were immersed. You’d be sitting at a table and someone two tables away would be discussing a problem and product solutions — it was just everywhere. Then there was this change, which I think is what partially lead to a collapse. Early on, there was a focus on “we’re changing the world” and there was so much hype. The focus was always on, “people will use this thing and they will benefit from it.” That changed in mid-to-late ’99. In ’99, I would be sitting in meetings and talking to people, and the company’s focus was no longer on solving problems but, “what can we do to be attractive to investors?” And investors were these “me too” kind of investors. It felt like they were just printing money. People had lost focus on the real value — solving problems. It turned into a vicious circle that ended poorly.
I honestly think to some extent it’s still that way. Silicon Valley is now all about “me too,” and there’s no real innovation. To me, that was the end of the Valley. It’s not the same anymore.
What about after the bubble?
Jay: Right before ’99, Glenn had reached out to me to work together. There was a company that had raised $100M and turned away another $100M, but the investment group that was turned away still wanted to participate. They had invested in a company called Jotter, but realized their management was a mess, and our goal was to sell Jotter to the company that had raised $100M because they were going to IPO. We actually did convince them to buy it during a quiet period, but 3–4 weeks before their IPO, either Fortune or Forbes — I can’t remember which — ran a story about them called “The Dumbest Dot Com Ever.” Then, they blew up. It wasn’t too long after that that Glenn and I were at Internet World in LA — I think maybe a couple weeks later. That’s when the crash happened. We walked into the conference and the first day was great. The second day was like everyones parents were killed in a car wreck. Unemployment actually got to about 30 percent for engineers in the Bay, so I had to leave.
Glenn: Directly after the bubble was terrible. Those startups who hadn’t “made it” were dead. A lot of founders and employees went straight to zero and those founders would never raise money again, because in the Valley — if you failed — it was uncommon to get more than one chance. You saw a lot of really good founders and really good tech employees who were suddenly not only out of work, but couldn’t start a startup again — they had to get a job. Other founders, by luck of the draw, had finished a round right before the bubble. One of the amazing things that happened was those people that lost jobs went to companies that had just raised money. If you had just raised money right before the bubble, you suddenly had the cream of the crop talent and tended to be successful. There were also companies that had a big war chest that went out and bought stuff left and right, as there were fire sales. But, even if you had raised money, you couldn’t raise more after the bubble for a while.
There were also a lot of funds that just went away — it felt like one half to three quarters just disappeared. What funds did remain were way more protective of their own portfolio or only took the absolute, very best profitable companies, where the traction was undeniable. If you look back to the buying activity to Google and Yahoo in later part of 2000–2003, they were both still powerful and buying. They were monstrous — buying like they were at a clearance sale.
Another category of companies that remained standing after the bubble was the companies, like mine, that had IPO’d in the late ‘90s and were profitable enough that they didn’t need anyone else’s money because they didn’t have a huge bankroll. These were companies that were able to scale back operations a little bit in order to survive. They weren’t buying anything, but they also weren’t going to be bought by anything. This happened to everyone I knew who was running a public company.
How long did it take for things to pick back up?
Glenn: Things started to turn around two to two and a half years later. For me, it felt more like five years before things were back to normal. In ’98, if an office space opened up, you would have to overbid by about 25% or lock into a long term deal the day that it opened. Sometimes you would have to even do it sight unseen. In just three to four years later, you had this massive vacancy — an exodus — people living in their cars. It’s difficult to imagine how high the highs were to how low it went to. The confidence of the day traders trading tech stocks went from “we can do no wrong” to “holy crap how are we gonna get out of this!”
I’ve heard a lot of people say that this mania in the crypto space feels similar to what they felt right before the internet bubble popped. Would you agree with this sentiment?
Glenn: It’s different, but there is a similarity. Millennials are unique in a lot of ways, but one way in particular is that there are an awful lot of millennials who like the idea of starting and owning a company. They also like this social impact twist. They’re really driving that more, especially in New York. I don’t think there’s anything exactly like the dot-com boom and crash, but it’s the closest I’ve seen outside of California in ’95-’96.
CNBC recently reported that there are over 120 crypto funds that have opened up so far.
Glenn: That I didn’t know. I went to a launch 5–6 years ago and there were a lot of Bitcoin exchanges/wannabes. If you attended their conference, they would give you a fraction of a coin. So I think in total, I’ve got a whole Bitcoin now without ever having paid for it.
I actually get do a little worried about this. To me, it almost seems like betting on an infant. You’re taking a bunch of infants and betting on which one’s going to be in the NBA. Forget where the company is going — we don’t know where the industry is going. Government is looming on the edges of this and we don’t ultimately know what they’re going to do. When the government released the internet — because that’s what they did — they allowed us to use it. This is very different. You’re talking about a group of individuals who have created tools that circumvent banking, finance, and regulation. If the internet had been created by individuals to do those things, I don’t know that we would’ve seen the boom that we saw.
But on the other hand, there is a real cowboy mentality about these people’s thinking — just like during the internet days.
Jay: With Crypto I pause, because I hear more of the same “me too” behaviors I recognize from the dot com boom. Back then, people saw a certain result and tried to replicate the actions that lead to the result with no understanding of how it all works. They think, “Because I did this one thing and there was this result, whatever I did must have caused it” — never mind that there’s no possible connection between the two. Similarly, a lot of people now in Blockchain think they’ve seen success — heard about it, or witnessed it — saw those behaviors taken to get there and think that doing those same actions will bring them success.
Do you mean companies or investors?
Jay: Everyone. It happens on the individual level, marketing professionals, developers, etc. There are people raising capital or who have capital, but don’t have a lot of business sense. They might have an audience, but an audience isn’t a business. You have to know how to monetize it. And there are investors who want to understand how these tech things work and a very small number of people who truly understand it enough to explain it to them. So investors either truly get it, or try to understand and don’t and just jump on the bandwagon anyway.
Is the mania the same? It is, to a lesser degree. As Mark Twain said, “History doesn’t repeat, but it often rhymes.” Companies are jumping onto Blockchain just because they think it will make them successful investors and this is the hype reaction that makes me feel like it’s similar.
Do you have any predictions about what the future of Blockchain tech is?
Jay: How the Blockchain tech ends up being used is going to be interesting. It solves a number of interesting problems, but we have to remember that it’s not a miracle that turns everything into rainbows and happiness.
Java was hyped like this when it first came out, and it was horrible. But what happened was that it got into schools and enterprises and, because of so much institutional inertia, it stuck. A lot of companies with blockchain are taking a round peg and putting it into a square hole. They invoke the magic of blockchain and, when it turns to crap for their need, they’re either gonna be stuck with it, or there will be a big turn on Blockchain tech.
I worry about that, though. Take, for example, machine learning — this is the 3rd time it’s become “hot.” Every time it was hot in the past, people would over promise what this technology could do. And then everyone would turn against it. Machine learning people were called charlatans and thieves. They weren’t — they were just applying it incorrectly. Professors then turn on it and then no one enters the field for a while. I don’t want to see Blockchain and the possibilities that go with it make that same mistake.
And I think that cryptocurrencies, to a certain extent, have a real potential to incentivize behaviors within systems that would make the systems successful. But people also have a certain dream that they can get around banks and government policy, and that’s not going to happen. You’ll soon find out that the government is pretty damn good at telling you what to do — and I saw that with the internet.
What do you think were some of the differences between companies left standing and companies that failed back then?
Glenn: Really, I think it was just that they had money and were profitable. If they didn’t have money, they had a backer who kept them alive. A lot of VCs that came in during the bubble to save their companies either had to jettison them or they went out of business. If you’re a startup, it’s my opinion that you have to get to breakeven as fast as you can. At a lot of places, they teach growth, but you cannot forfeit getting to breakeven just because you want to grow as fat as you can. There were a lot of companies that had tremendous growth that died because they had no money. My advice to companies: get a war chest. Don’t turn down capital unless terms are horrible. You can rarely have too much. You must get to breakeven.
Jay: To me, companies that succeeded had one thing in common: they were focused on adding a value to or solving a problem for an end user. That’s always, at the end of the day, what a business is — what is the problem, how many people have this problem, what solutions exist, can mine be better, and can I get paid for it?
Most of the companies that you think of as being successful tech companies aren’t tech companies. Google is an advertising company. Amazon is a retailer. Tech is almost always never an end. It is a means.
Companies like CISCO and Ethereum are creating tools that other people will use to make products — true tech companies. But this isn’t nearly as big a market for that as people think.
Do you think keeping this in mind would also help Blockchain companies survive the bubble?
Glenn: That’s the fear I have about Blockchain right now. Where I see interesting things happening in this space is Blockchain tied to POS systems or IOT. We see a lot of deals that are frankly tied to things outside of the control of the company and there is no near term path to revenue. If the market tanks, there’s nothing that company can do to change their stars. If you do have revenue, you need to be able to get rid of anything you need to to breakeven. But 99% of these Blockchain companies have no prayer because there’s no immediate path to revenue, and that’s really risky. I want to see companies that can either cut staff, immediately turn on a revenue engine, or maybe do an acquisition of a company with positive cash flow.
Another worry I have is that if the ecosystem within a certain industry collapses, it kills all the funding that is on the edge of that ecosystem. When you have a friend who runs a fund who gets taken out by a group of a certain type of companies, you’re likely not going to support that type of company going forward. What happened in the Valley that could be happening here is the funds — if a whole boatload of funds start investing in valuations that will eventually deflate, it will be really bad. Everyone in the Valley was overextended, picking shitty ideas and getting funding. The joke about drawing it up on a napkin was true. Everyone was a day trader — your cab driver was a day trader — and the funds were so heavily leveraged they had nothing but startups in the Valley. If the bubble pops and valuations drop, token startups will struggle and a vast majority of companies will go out of business. And if you’re a fund who has invested in these companies, you either have to let your startups die as a fund or fight it, and that is also certain death.
Then that leaves 30 juggernaut funds and companies which will buy everything else. That’s why you’ve got Andreesen, Hummer, etc. — they were the surviving class, and they bought everything.
Jay: I think that we’ll need to have have companies that realize the tech isn’t the end goal, who think about what what the benefit is to the end user. They will always have to focus on how to get paid — if there is a problem, is it painful enough, and can I solve it better than existing solutions.
This isn’t specific to Blockchain — that’s how business works. The worst thing about business is the number of people in it who don’t understand this.
Do you think we should be investing in Blockchain companies with these key characteristics in mind?
Glenn: There are a handful of them that probably do that already. There’s sort of a gold rush cowboy mentality — this space attracts a certain type of player. It’s also somewhat limiting, because you really can’t hunt down unicorns. That’s our thesis: don’t go looking for unicorns. But that’s just not the mentality today.
I think you can absolutely learn from history, but you have to have both types of mind, because if you just had a bunch of risk averse people in ’96, we wouldn’t be very far. But I think it should be important for companies in any industry that starts to feel like a bubble to remember to get to revenue as fast as they can. I disagree that they should focus on growth not revenue.
Do you have any advice to investors in this space?
Jay: If you’re an investor focusing on Blockchain, then for every opportunity you look at, you should be thinking, “Why is the Blockchain there? What is the existing solution that the Blockchain is better than?” You should really know when and where to use it.
Thank you so much for your insights and time, Glenn and Jay!