By the end of the Bubble, companies going public with no earnings were being derided as "concept stocks," as if it were inherently stupid to invest in them. But investing in concepts isn't stupid; it's what VCs do, and the best of them are far from stupid.
The stock of a company that doesn't yet have earnings is worth something. It may take a while for the market to learn how to value such companies, just as it had to learn to value common stocks in the early 20th century. But markets are good at solving that kind of problem. I wouldn't be surprised if the market ultimately did a better job than VCs do now.
Going public early will not be the right plan for every company. And it can of course be disruptive-- by distracting the management, or by making the early employees suddenly rich. But just as the market will learn how to value startups, startups will learn how to minimize the damage of going public.
The Internet genuinely is a big deal. That was one reason even smart people were fooled by the Bubble. Obviously it was going to have a huge effect. Enough of an effect to triple the value of Nasdaq companies in two years? No, as it turned out. But it was hard to say for certain at the time. [1]
The same thing happened during the Mississippi and South Sea Bubbles. What drove them was the invention of organized public finance (the South Sea Company, despite its name, was really a competitor of the Bank of England). And that did turn out to be a big deal, in the long run.
Recognizing an important trend turns out to be easier than figuring out how to profit from it. The mistake investors always seem to make is to take the trend too literally. Since the Internet was the big new thing, investors supposed that the more Internettish the company, the better. Hence such parodies as Pets.Com.
In fact most of the money to be made from big trends is made indirectly. It was not the railroads themselves that made the most money during the railroad boom, but the companies on either side, like Carnegie's steelworks, which made the rails, and Standard Oil, which used railroads to get oil to the East Coast, where it could be shipped to Europe.
I think the Internet will have great effects, and that what we've seen so far is nothing compared to what's coming. But most of the winners will only indirectly be Internet companies; for every Google there will be ten JetBlues.
Why will the Internet have great effects? The general argument is that new forms of communication always do. They happen rarely (till industrial times there were just speech, writing, and printing), but when they do, they always cause a big splash.
The specific argument, or one of them, is the Internet gives us more choices. In the "old" economy, the high cost of presenting information to people meant they had only a narrow range of options to choose from. The tiny, expensive pipeline to consumers was tellingly named "the channel." Control the channel and you could feed them what you wanted, on your terms. And it was not just big corporations that depended on this principle. So, in their way, did labor unions, the traditional news media, and the art and literary establishments. Winning depended not on doing good work, but on gaining control of some bottleneck.
There are signs that this is changing. Google has over 82 million unique users a month and annual revenues of about three billion dollars. [2] And yet have you ever seen a Google ad? Something is going on here.
Admittedly, Google is an extreme case. It's very easy for people to switch to a new search engine. It costs little effort and no money to try a new one, and it's easy to see if the results are better. And so Google doesn't have to advertise. In a business like theirs, being the best is enough.
The exciting thing about the Internet is that it's shifting everything in that direction. The hard part, if you want to win by making the best stuff, is the beginning. Eventually everyone will learn by word of mouth that you're the best, but how do you survive to that point? And it is in this crucial stage that the Internet has the most effect. First, the Internet lets anyone find you at almost zero cost. Second, it dramatically speeds up the rate at which reputation spreads by word of mouth. Together these mean that in many fields the rule will be: Build it, and they will come. Make something great and put it online. That is a big change from the recipe for winning in the past century.
The aspect of the Internet Bubble that the press seemed most taken with was the youth of some of the startup founders. This too is a trend that will last. There is a huge standard deviation among 26 year olds. Some are fit only for entry level jobs, but others are ready to rule the world if they can find someone to handle the paperwork for them.
A 26 year old may not be very good at managing people or dealing with the SEC. Those require experience. But those are also commodities, which can be handed off to some lieutenant. The most important quality in a CEO is his vision for the company's future. What will they build next? And in that department, there are 26 year olds who can compete with anyone.
In 1970 a company president meant someone in his fifties, at least. If he had technologists working for him, they were treated like a racing stable: prized, but not powerful. But as technology has grown more important, the power of nerds has grown to reflect it. Now it's not enough for a CEO to have someone smart he can ask about technical matters. Increasingly, he has to be that person himself.
As always, business has clung to old forms. VCs still seem to want to install a legitimate-looking talking head as the CEO. But increasingly the founders of the company are the real powers, and the grey-headed man installed by the VCs more like a music group's manager than a general.
In New York, the Bubble had dramatic consequences: suits went out of fashion. They made one seem old. So in 1998 powerful New York types were suddenly wearing open-necked shirts and khakis and oval wire-rimmed glasses, just like guys in Santa Clara.
The pendulum has swung back a bit, driven in part by a panicked reaction by the clothing industry. But I'm betting on the open-necked shirts. And this is not as frivolous a question as it might seem. Clothes are important, as all nerds can sense, though they may not realize it consciously.
If you're a nerd, you can understand how important clothes are by asking yourself how you'd feel about a company that made you wear a suit and tie to work. The idea sounds horrible, doesn't it? In fact, horrible far out of proportion to the mere discomfort of wearing such clothes. A company that made programmers wear suits would have something deeply wrong with it.
And what would be wrong would be that how one presented oneself counted more than the quality of one's ideas. That's the problem with formality. Dressing up is not so much bad in itself. The problem is the receptor it binds to: dressing up is inevitably a substitute for good ideas. It is no coincidence that technically inept business types are known as "suits."
Nerds don't just happen to dress informally. They do it too consistently. Consciously or not, they dress informally as a prophylactic measure against stupidity.
Clothing is only the most visible battleground in the war against formality. Nerds tend to eschew formality of any sort. They're not impressed by one's job title, for example, or any of the other appurtenances of authority.
Indeed, that's practically the definition of a nerd. I found myself talking recently to someone from Hollywood who was planning a show about nerds. I thought it would be useful if I explained what a nerd was. What I came up with was: someone who doesn't expend any effort on marketing himself.