wheres the loot

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 mainplayers 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 massesinto thinking that ‘risk is the key to success’. What they don’twant you to know is that risk is like sex—only those whoengage in it can benefit from it. If you want to be rich, do ityourself. There’s no other way. Read this book and you’llknow 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 positivecontribution made to Australia by its IT entrepreneurs . . .few are as well qualified to comment as Grant Butler, wholived vicariously their ups and downs as a journalist andcolumnist for the Australian Financial Review. The book is amust-read for entrepreneurs trying to understand why somestart-ups succeed and others fail.

—ANDREW GREEN, EXECUTIVE DIRECTOR,AUSTRALIAN VENTURE CAPITAL ASSOCIATION

A fascinating and informed insight into the players, thehighs, the lows and the lessons of the recent technologyinvestment roller-coaster ride in Australia—a must-read forall 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’sthe 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 & Unwin83 Alexander StreetCrows Nest NSW 2065AustraliaPhone: (61 2) 8425 0100Fax: (61 2) 9906 2218Email: [email protected]: www.allenandunwin.com

National Library of AustraliaCataloguing-in-Publication entry:

Butler, Grant, 1971– .Where’s the loot?: who really made the money during thehigh-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

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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

CONTENTS

Acknowledgements viIntroduction viione Interesting times 1two In it to win it 23three Seeing in the dark 50four Other people’s money 70five Case study: Magna Data (Davnet) 103six Case study: LookSmart 110seven Case study: One.Tel 118eight Case study: Macquarie Corporate

Telecommunications 130nine Case study: Spike Networks 139ten Lessons from the boom 152eleven Where’s the loot? 171epilogue Your next step 179appendix 1 Opportunities from tax reform 182appendix 2 Steps in the VC process 185Notes 187Index 198

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ACKNOWLEDGEMENTS

This book would not have been possible without the directcontribution of time and effort by many people. Special thanksto all those who participated in interviews, suggested ideas,assisted with research and provided invaluable feedback onearly drafts. It was inspiring to find so many business peopleand other individuals with a genuine interest in and concernfor Australia’s future as a prosperous and technologicallyadvanced nation.

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INTRODUCTION

My definition of success is very simple. He who’s

happy is successful. He who’s not is unsuccessful.

—RENE RIVKIN1

When Sean Howard was eleven years old hespent 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 ofa $13 million mansion in Neutral Bay, Sydney. According to thereal estate press, ‘Shell Cove’ is 200 squares, sits on 2,800 squaremetres of land and comes with a tennis court, pool, golf puttinggreen and bunker. Inside, I sat in a deep leather chair below abookshelf filled with antique books on Fiji. Howard owns landthere. A friend of Howard’s laughs when I ask him about thehouse, saying that he’s lost in the massive place. ‘He’s got thisone 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 andHoward needed one for the construction of his new yacht.

What on earth happened between 1970 and 2000? How dida boy go from the floor in blue-collar Melbourne to worryingabout which corner of his garage to park in at night? The shortstory is that during the 1980s and early 1990s Howard sold

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shares in Australian Personal Computer magazine to KerryPacker for a total of about $8 million. In 1998, he sold his partof Internet service provider OzEmail to American firm UUNET,part of MCI WorldCom, for close to $120 million. The longversion is more complicated, involving foresight, creativity,recklessness, marketing savvy, ruthlessness, luck and the oddtantrum or two.

This book tells the stories of Howard and other entrepre-neurs like him. Having spent most of the 1990s as a high-techjournalist for a range of publications, most recently as IT Editorat the Australian Financial Review, I had the dubious pleasureof watching a lot of people—mainly men, usually in theirtwenties and thirties—become very wealthy, very quickly, inthe Internet boom. In 1997, for instance, I worked at a companycalled Decisive Publishing, editing a small newsletter with thethen novel masthead on-Line. A copy dated 22 April 1997 nowseems even more dated than Howard’s antique books. There’sa story about Roger Allen and Roger Buckeridge from Allen &Buckeridge trying to raise their first $100 million high-techventure-capital fund and the already surpassed prediction thatthe number of people with Internet access at work wouldincrease from 12 per cent at the time to 48 per cent by 2002.There’s also a breathless story about two companies, AUSNetand Tetherless Access, that were trying without success todeliver high-speed Internet access in city centres.

The people who would eventually make their millions byoffering wireless data services around town, among otherthings, happened to be our landlord. Decisive Publishing sub-let an office in Castlereagh Street, Sydney, from the thenobscure Internet service provider Magna Data. They liked theplace for the same reason we did: it felt vaguely anarchicbecause the decor was awful and it was over the road fromTelstra’s colossal Elizabeth Street headquarters. As far as we

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could tell, Magna Data was out of control. Staff bitched, peoplesaid their network didn’t work and we waited for the day we’dbe evicted because they’d gone broke. What we didn’t expectwas that by 1999 the four founders of the company—JasonAshton, Luke Carruthers, Mark Cramer-Roberts and VivianStewart—would all become multi-millionaires before theirthirtieth birthdays. Magna was bought by the then even lesswell 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 worthreach as high as $47 million. He’d also bought a dark blueFerrari Mondeo 360. This was something that we, even asindustry journalists living next door to the guy, hadn’t seencoming. But he had. And when it comes to getting $300,000sports cars, it’s foresight that counts.

The central question in this book is why did people likeSean Howard, the ‘Magna Boys’, and others such as David andAidan Tudehope, the hundred million sibling co-founders ofMacquarie Corporate Telecommunications, make big money in the dot-com boom while others failed? To use a surfinganalogy: how early did they see their waves coming? Whywere they ready for them? What risks did they take? How didthey know how to ride once they’d been picked up by theswell? In short, how did they step into the multi-million dollarleague or even, in the case of Tracey Ellery and Evan Thornleyat LookSmart or One.Tel’s Jodee Rich, become billionaires insuch a short time?

Scratching the surface of these questions will take the restof this book. The good news is that the outlook for Australianentrepreneurs is improving. The recent reform of the taxsystem has created new incentives for people to seek capitalgains instead of salaries—owning all or parts of businessesrather than just working for them. Ongoing advances in

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computing and communications continue to create direct valuebut are also having a knock-on effect, enabling acceleratedinnovation and opening up opportunities in many other partsof the economy, such as agriculture, transport, medicine andmanufacturing.

There is also a renewed interest in, even public warmthtowards, entrepreneurship itself. A symbolic high point in thisthaw was the release from jail of Alan Bond, the man that didmore than any other to darken the word ‘entrepreneur’. Despitehaving spent four years in jail for defrauding Bell Resources of $1.2 billion and other crimes, he had the front to return topublic life by writing a series for the Sunday Telegraph explain-ing how he would never have been jailed if he had been triedby 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 theSeek.com.au jobs website. With the dot-com boom in fullswing, the mood was such that it seemed the public might justgrant it to him. Though, at the time of writing, things had welland truly turned nasty.

The scythes were out for many high-tech business people,particularly those presiding over newly listed companies withplummeting share prices. Johnson Wang, the former head ofthe Edge Group of computer companies who in 1996 receiveda business award from Prime Minister John Howard, wasdeclared 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’sdisastrous attempt to buy OzEmail’s consumer business formore than $300 million. If the OzEmail debacle wasn’t badenough, Brady really hit the rocks when he couldn’t validateclaims made in his company’s prospectus about his academicqualifications. Then there was American-born Chris Tyler,

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the former chief executive of accountancy software giantSolution 6, whose Australian visit came to a rapid end afterrevelations in Business Review Weekly that he’d been convictedin the United States fifteen years earlier for owning two garbagebags of marijuana and had once run a listed Canadian educa-tional software company into the ground. Greg Fisher, the bossof Australia’s first gay Internet and property developmentcompany, The Satellite Group, also felt the cool blades of publicdisquiet. In July 2000, the Sydney Morning Herald ran an articlepointing out that the company’s shares had performed poorlysince floating and claiming that Fisher too was struggling toremember where he got his Masters degree.2 He quit shortlyafter and began fighting to clear his name in a nasty stoushwith 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, smallinvestors like a friend’s mum who bought Solution 6 shares at$17 then watched them rapidly collapse to under $1 wouldprobably like to land a few directly. Fortunately, such storieswere the exceptions in an overheated market and we can onlyhope that the word ‘entrepreneur’ survives the 2000 correction.

And despite the flameouts, a lasting legacy of the dot-comboom is the notion that it is feasible to get seriously rich inone’s own lifetime.

The research for this book involved face-to-face interviewswith a number of the tech boom’s main protagonists, from theentrepreneurs themselves to lawyers, technologists, merchantbankers, venture capitalists and others whose fingers can befound in lots of pies including diversified investor RodneyAdler, then One.Tel chairman John Greaves and Telstrachairman Bob Mansfield. Other material was picked up duringmy six or so years of reporting on the industry. Indeed, I’ve feltJohnson Wang’s gentle handshake, had lunch with both

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Damien Brady and Greg Fisher, and was as impressed as anyjournalist when Chris Tyler dragged Solution 6 back from thebrink of insolvency in the late 1990s.

One bit of wisdom I have taken away from all this proximityto people making (and losing) fast money is that most of theones that really made it big began positioning themselves forsuccess during the recession of the early 1990s, if not before.At that time, telecommunications and the Internet presented anobvious high-growth opportunity but few people had thestomach, technical capacity or financial facilities to pursue it.Those that did were well placed when the ‘Big Wednesday’ ofbusiness opportunities came—1999’s global surge of moneyinto anything high tech. This was the time for guys like SeanHoward and David Tudehope (who can’t surf, by the way) toget out their metaphoric big-wave boards and ride for theirlives. Those that arrived late, like Damien Brady at Eisa andJustin Punch and Alison Harrington at failed ‘e-tailer’ TheSpot,were caught inside the break, often pummelled beyond re-covery.

Another question is whether entrepreneurs do the rest of usany favours—do these guys and girls really create sustainablewealth? I don’t just mean tipping well at restaurants. Or paying$3,000 for a $20 print of Dawn Fraser like Daniel Petre, ecorppresident and $100 million-plus father figure to us all, did at arecent charity event. I think the answer is ‘yes’. It’s a hit andmiss affair but those that operate in internationally high-valuefields such as computing and medicine are a positive force foreconomic renewal. Sure, there are some sharks in the water andplenty of flotsam, but any Australian that creates a new andviable enterprise helps to keep the rest of us in the First World.Yes, Jodee Rich is worth up to $1 billion—depending on themarket—but he has also helped to create thousands of jobs,here and overseas. As a nation, we love to hate these people but

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some of them are the young Frank Packers and Frank Lowys ofour time. Without them you can bet that we’ll be riding theproverbial sheep’s back until the Australian dollar reachesparity with the Mexican peso. One of the main reasons I’vewritten this book is the hope that it might encourage at leastsome 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 latesummer, 2000. As we wound our way through the narrow andpicturesque streets to the harbour, I asked what he thoughtabout the Internet entrepreneurs making millions on the stockmarket. I expected him to echo right-wing radio, tell me theywere all crooks, but he surprised me. Shouting through hisplastic security screen he said, ‘These blokes that are goodwith technology, we need ’em . . . Country bloody needs ’em.’

Finally, I would like to say in advance that some share pricesand even whole companies cited in this book may have changedsubstantially since the time of writing. This was difficult toavoid in such a volatile sector but I hope it isn’t too disori-enting. Readers may also feel that I have missed some importantfigures, such as Craig Winkler, chief executive of softwarecompany MYOB, who has quietly built a paper wealth in thehundreds of millions. But the goal was to try to draw widerlessons by concentrating on a small group rather than toproduce a comprehensive history of Australia’s dot-com boomor another ‘How to Get e.Rich’ book. The point is that for mostit’s too late to get seriously e.Rich. The challenge is to spot thenext wave—maybe Business Week will soon be talking aboutthe ‘x-rich’ as the human genome project spawns a newindustry. The result is, I hope, some valuable lessons aboutspotting opportunities and succeeding in what the Chinesemight call ‘interesting times’.

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oneINTERESTING TIMES

We live in interesting times. More was accom-plished (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 next100 years, driven by self-perpetuating gains in technologiesand globalisation. The question is: how will you fare? Will youembrace the opportunities or become a victim of the threats?Will these ‘interesting times’ prove to be your very own Chi-nese curse or a time of extraordinary success? Can you doanything about it?

This is a book about doing business and taking risks duringperiods of high technological change. The central premise isthat we can learn a lot from the Internet and technology boomof 1995–2000. This was a period of extraordinary change. Allsorts of scientific, social and geopolitical trends converged tocreate a period of unprecedented opportunity and danger inbusiness. In particular, the world’s stock markets surged out ofcontrol, enabling a lot of people to make ridiculous amounts of money in a very short period of time. Others lost vast sumstrying.

Take, for example, two university professors, David Skel-lern and Neil Weste at Macquarie University in Sydney, who

1

collected a large but undisclosed portion of US$295 millionwhen United States company Cisco Systems bought theircompany, Radiata Communications, in late 2000. Cisco’s targetwas Radiata’s world-class chip that enables high-speed wire-less communication between computers. Or David, Jon andStephen Shein, the South African-born businessmen who in1987 founded Com Tech Communications, an informationtechnology sales and training company. By 2000 they had soldtheir entire share of the company to global giant DimensionData, realising a gain in the hundreds of millions of dollars. ‘I guess both my brothers and I have done better than wecould have dreamt of,’ said David Shein, the 40-year-oldchairman of Com Tech who started the business from his carboot. ‘That’s one of the things about Australia—when you aregiven the opportunities and do a hard day’s work you will berewarded.’1

On the other hand, investors who backed companies such aswould-be retailers dstore and TheSpot lost millions. dstore, forinstance, had shareholders including LookSmart, ninemsn,Rebel Sports, the Besen family’s Sussan clothing chain, theLiberman family’s JGL Investments and investment groupHochma, run by Mark Leibler and Michael Naphtali. It was alsochaired 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 losearound $20 million before being acquired for around $5 millionby Harris Scarfe.2

What was it about the winners that made them successful?Why them? And who walked away with the loot? The quickanswer is that most of the people that succeeded during the dot-com boom—and I mean really succeeded, not just gottheir faces in the paper a few times—worked out where theworld was going early, committed themselves, then acted as

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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 someschools, banks, a couple of shopping centres, a pool, its ownpolice station and post office and other features of a medium-sized, suburban centre. At one point in the 1980s it hosted anadult bookshop until the conservative locals shooed it away. Formost of my childhood Hornsby’s most distinguishing featurewas the Pacific Highway—the main road connecting Sydney tonorthern New South Wales and Queensland. It cut the place inhalf, creating the ‘old side’ and another, more developed, areathat for some reason was never called the ‘new side’. The roadwas massive and dangerous, delivering a constant stream of carsand heavy trucks. It was always blocked at peak hour andaround holidays. To most Sydneysiders, Hornsby was a bottle-neck with a pub (The Blue Gum), two McDonald’s restaurantsand a KFC. But to many businesses, from the Repco motor parts store to Video Ezy, Keith Lord’s furniture and the petrolstations, the concentration of traffic made Hornsby a good spotfor passing trade.

In the 1980s, the Roads and Transport Authority built a newfreeway connecting Sydney to Gosford in the north. The roadbypassed 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 oncerancourous road. At least one petrol station and shops likeKeith Lord’s closed, but the change hasn’t killed Hornsby—justaltered it dramatically.

The tale of Hornsby might be compared to the much largerconstruction project going on quietly around us: the creation

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of the broadband Internet or, as US former Vice President Al Gore likes to call it, the ‘information superhighway’. Like theF3 to Gosford, it will deliver great benefits to some but alienateothers. It will make the economy faster and more competitive.It will also thrust Australia one step further into the fast laneof the global economy as the protection (not tyranny) ofdistance declines.

The flipside to this, as Telstra chairman Bob Mansfield isquick to point out, is that ‘if anyone does develop anything in Australia, whether it be a good or a service or software oranything else, your market’s the world. So it’s a positive and a negative.’3

One of the most stunning examples of this small worldprinciple in action comes from South Africa. In December 1999,software developer Mark Shuttleworth became one of thatcountry’s ten richest people when he sold his company, ThawteConsulting, to American giant Verisign for US$575 million.What made the deal extraordinary was that Shuttleworth was25 years old and had started the company in his mother’s garagein Durbanville, Cape Town, in 1995 as a way of reducing taxon his freelance work. When he sold it, Thawte still onlyemployed 50 people and Shuttleworth, who had studiedBusiness Science at the University of Cape Town, owned almost100 per cent of the company. What made Thawte so valuableto Verisign (now owned by Network Solutions, the companythat registers dot-com and other Internet addresses) was that ithad about 40 per cent of the global market for ‘digital certifi-cates’. 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 tech-nology into their web browsers, effectively making it availableworldwide. In buying the company, Verisign made itself theundisputed leader in the field.4

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Beyond the incomprehensible numbers, what I like about theThawte story is that it shows what a powerful concentrator andleveller the Internet can be. The computing technologies thatmake up the Internet represent the first truly global standardfor communications and commerce. The telephone networkand, to a lesser extent, the English language, come close but theInternet is the first truly universal system to be employed bymankind. You can go anywhere in the world and the Internetwill work the same way. And if you have something central to that process, like Shuttleworth did in the form of his com-pany’s Root Key, or ‘Thawte Certs’, then you have something ofpotential value to more than six billion people. Get a dollarfrom each of them and suddenly you’re Kerry Packer.

Also, because the Internet really is universal, it didn’t matterthat Shuttleworth was in Cape Town or Silicon Valley. If yourproduct or service is truly Internet-based, and you have a goodconnection to the network, then it quite literally doesn’t matterwhere 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, hascommented that people tend to overestimate the significance ofnew technologies in the short term but underestimate theirlong-term impact. I believe that the Internet will definitelyconform to this rule. Along with the rest of the media, I’vepublished thousands of words about the potential benefits

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of the Internet. I’ve gushed about the ability to buy yourcornflakes from any corner of the earth and talk dirty withAmerican 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 establishedorganisations. We are seeing the introduction of big, business-oriented systems that use Internet technology. While lessglamourous than Amazon.com, even boring, these will have aprofound 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 sheerusefulness of the Web, electronic mail and other network applications; and, more generally, globalisation. According toAustralian research group Paul Budde Communications, thenumber of people using the network has risen from next tonothing in the 1980s to about 180 million in 1999 and reached400 million in 2000.6 Notably, many of these people are undereighteen years of age—tomorrow’s consumers. Canadian authorDon Tapscott has dubbed this group the N-Generation,(‘network generation’) estimating that in North America andCanada alone there are 88 million children aged between 2 and22 who are ‘growing up digital’.7

The network really is the first truly global system. Holdingit together is a single computer at the Internet AssignedNumbers Authority, an incredibly powerful academic organi-sation with a really bad website in Marina del Rey, California.This holds the master address book for the Internet andcontains numbers like 123.123.12.11 that relate to easy-to-remember ‘domain names’ like CNN.com. If a computer isn’t inthat address database (which, for security and functionality isreplicated in other parts of the world), it isn’t part of the‘domain name system’ and therefore not on the Internet. Two

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other things that make ‘the Internet’ the Internet and not justanother computer network are the use of the Internet Protocol(IP) for basic data transmission and HTML, the HyperTextMarkup Language that makes the World Wide Web possible.

I like to compare the Internet age to the Pax Romana. Fromthe reign of the Roman emperor Augustus in 27 BC through tothat of Marcus Aurelius up to 180 AD there was a prolongedperiod of tranquility known as the Roman Peace. The Romans,in their wisdom, set rules for and protected the empire as awhole but allowed each individual province to administer itsown laws as long as they accepted Roman taxation and militarycontrol.8 This is a bit like a company that allows groups to dressdown or enter new markets as long as they meet their salesquotas. To me, the Internet is much the same. Geeks and theAmerican Government have, like some benign dictatorship,defined some basic rules that permit the entire system tofunction. In turn, individuals and companies worldwideremain exceptionally free to innovate and create value withinthe 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 BillReichert, being adopted more slowly than radio was.9 What is powerful is that people are making it an everyday part oftheir lives. They are finding information, doing their shopping,talking to each other, trading shares, getting counselling,checking bank balances and many other things online. Andbecause the Internet is an international system, they aren’tnecessarily doing these things in Australia. Research firmwww.consult estimates that Australians spent $253 milliononline 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 $355per annum in 1998 to $630 in 1999. What’s most frightening,

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from the point of view of Australia’s balance of trade, is thatwww.consult’s survey showed that Australian web surfersspent about half their time on US commerce sites, particularlyAmazon.com.10

I wouldn’t go so far as to say that Australian business isgoing to be totally wiped out by such net-enabled multi-nationals. Indeed, many stand-alone Internet players are failingand 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 orbeen bought out by established players. But every timesomeone buys a book from Amazon or books a flight to Europethrough a British website, for instance, they’re spending moneyoverseas, not here. That hurts. Equally, of course, people fromoverseas are buying from Australian websites. Unfortunatelythough, it appears certain that more money is leaving thecountry through the Internet than coming in.

The opportunities and dangers are even greater at the levelof trade between businesses. The Internet and related electroniccommerce systems make it possible for companies to tradegoods and services with an ease and efficiency approachingthat with which people trade shares on a stock exchange.Because the system is global, they can do this on an inter-national scale as easily as they could within a country. Thesesystems also make it very simple for companies to see howmuch other companies are paying for common items, such asstationery, and also allow them to increase their buying powerby combining their orders.

The promise of these systems is so great that many majorcorporations have begun spending millions to develop industry-specific trading environments. For instance, DaimlerChrysler,Ford Motor Company, General Motors, Nissan and Renault have teamed up to form a single electronic marketplace called

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Covisint (www.covisint.com). They are seeking to centralise the buying and selling of common parts and services used byall players within the auto industry. This totals more thanUS$250 billion per year.11 In their words, ‘Covisint will harnessthe power of Internet technology to create visibility within acompany'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 teamedup with GlobalNetXchange, a group of massive retailers whosemembers buy $350 billion worth of goods and services from70,000 suppliers per year. The other members include SearsRoebuck of the US, Carrefour of France and Germany’s Metrogroup.12 Domestically, the biggest initiative is CorProcure, aproposed purchasing group put forward by fourteen of thecountry’s largest companies including AMP, ANZ Bank, BHP,Coca-Cola Amatil, Coles Myer, Foster’s and Telstra. The planwas to team up on the purchasing of common items such asstationery, fuel and cleaning supplies.13

The goal with all these initiatives is to reduce by billions ofdollars the amount that major companies pay for productioninputs, from petrol to door handles and hops. Where are allthese billions in saving going to come from? Internal efficien-cies and supplier profit margins. What remains unclear is whichwill generate the most savings and the real intent behind theexchanges. Are they giant purchasing cartels designed to aggre-gate 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 helpto reduce waste by getting everyone in the industry to useidentical procurement systems, for instance. As a Covisintexecutive has said, ‘The prices are already pretty damn low. But the waste is still in the system, and the waste can only get

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out if we standardise our communication with our suppliers.’14

Whatever the truth, it’s all about reducing ‘friction’ or, toput a finer point on it, ‘people’. The Internet drives economicefficiency and efficiency often destroys the value of businesses.As Warren Buffett, the famous value investor and America’ssecond richest man, has commented, ‘[The Internet] will makeAmerican business, in aggregate, worth less than it otherwisewould have been.’15

Buffett’s contention is that the more automated thingsbecome, the less jobs there are for people. An example that mayhave sent shivers down his spine is an advertisement publishedby Internet auction operator FreeMarkets.com in The Economistmagazine.16 FreeMarkets is an independent e-marketplaceoperator with the slogan, ‘Redefining purchasing power for the Global 1000’. The ad said that at 8.30 a.m. a Global 1000company was being asked to pay US$24 million for an order ofprinted circuit boards. Instead of paying, it posted its order onthe FreeMarkets website. Twenty-four hours later it had aquote of just US$14 million for the same boards.

‘In one day, the FreeMarkets process reduced prices onprinted circuit boards by 42%,’ the ad crows, ‘leveraging aglobal supply base, and creating savings of $10 million.’

This is economy-shattering stuff. Companies will have to bevery large, and have massive economies of scale, to win ordersin the face of such brutal, real-time commoditisation. Theproblem for Australia is that, outside natural resources andagriculture, we’re not known for scale. While the e-marketsprocess may open up some opportunities for Australiansuppliers that were previously excluded from major overseasmarkets due to distance, we should be nervous. Though, nothalf as nervous as countries that are yet to be computerised ornetworked and therefore can’t access these new virtual market-places at all.

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The quick or the dead

Australia is, I believe, getting harsher. I have done no empiricalresearch to prove this but years of economic rationalism,exposure to international competition, improved reportingsystems within companies and other changes appear to haveleft both workers and executives with few places to hide. Ourbusiness and social systems have become much more open and cutthroat. More American. Such international meritocracyis good for people who are good at what they do but potentiallydangerous for those whose success depends on dubious fac-tors such as family connections, schoolmates or governmentlicences.

The US might crow about its economic strength and lowunemployment but median wages have been static or evendeclining 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 high-tech boom, you still get run-down bus stops and beggars on the street. One of my favourite urban myths is the story of theWorld Trade Organisation meeting in downtown New York.The Americans spent all day brow-beating a group of Europeanofficials about how they should adopt the US free marketsystem. For the most part, the officials listened, took notes andnodded. At the end of the day they all went outside and theEuropean delegation said that they would walk back to theirhotel. The US officials said, ‘No, please, take a car, it’s not safeto walk on the streets,’ to which the Europeans replied, ‘Ourpoint exactly.’

Buried within these statistics, however, is the fact thateducated professionals have been enjoying much strongerwages’ growth than their less educated peers. Since 1979,average weekly earnings of college graduates in the US have

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risen by more than 30 per cent relative to those of high schoolgraduates—the widest gap for 60 years.18 As First Worldeconomies become more and more information-powered, it’snot just the rich that are getting richer, the smart and theinternationally oriented are also doing well. This process isself-perpetuating as well-educated people are more likely to usethe Internet, which is in turn the most information-richenvironment the world has ever known.

Even TV is getting depressing, and not just because there’snothing on but repeats of The Benny Hill Show. One night I watched a union leader who was saying that a couple ofhundred people at an Australian plant that made fridges wereabout to lose their jobs. It seemed that the company could save$5 a unit—or about $2 million a year—having the wire bits atthe back made somewhere in Asia. These people were stuffed,basically. Their whole town was stuffed. The item seemed tofollow an endless succession of such stories: canneries, carfactories, clothing manufacturers and farmers. One of thesetales featured an ‘Australian’ call centre being operated out of New Delhi. Finance company GE Capital planned to savemoney by sacking 70 workers in Sydney and having its callsrouted to a group of English speakers in India. This was nowpossible due to the dramatic declines in the cost of internationaltelecommunications. In what the Sun-Herald described as ‘abizarre twist’, the foreign workers were expected to use namesreconstructed from the first and last names of the formerAustralian staff members.19 ‘Hi, this is Dawn Freeman, welcometo 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 ofred tape and the introduction of free-market strictures hasmade it possible for many of the entrepreneurs in this book to

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achieve quantum leaps in wealth and social standing in theirown lifetimes. The new world is even more democratic in aperverse sort of way in that it takes only money, rather thanlineage or social standing, to buy votes. Even better, anyone canmake money.

Since this is a book for would-be entrepreneurs rather thanLabor Party policy makers, I’m not about to try to propose anysolutions. There is also evidence to suggest that even thoughthe world is becoming more competitive, there has been a veryreal increase in wealth and well being over the past century. UShistorian Robert Fogel argues that it’s untrue to say that theworld is becoming more unequal.20 Despite the fact that about400 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 youfeel. You could be worth $1 million but if everyone else has $2 million you’ll feel poor. So I would advise people to bepragmatic. Powerful forces are at work and unless you get outof harm’s way you’re in danger of becoming a historicalfootnote. I think I started developing this pessimistic viewmany years ago in Europe. I was hitchhiking in some pictur-esque corner of Switzerland, admiring the lush green pasturesleading 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 andpropelled by a six-litre, lead-belching engine. After a few miles,I asked him whether he felt irresponsible driving such anenvironmental hazard through the pristine surrounds. He said,‘No, the world is over, anyway. You think anyone else is reallygoing to stop wrecking it? No. I’m not having kids and I’mdriving this car and I feel okay about that.’

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The guy was cynical, even selfish, but he had a point. He’sgoing to keep driving his Cadillac. The fridge manufacturer willkeep using those factories in Asia. The call centre will probablyremain in India unless bums on call-centre seats becomecheaper in Bhutan.

Another factor is that Australian companies, like most, havebecome less loyal to staff, firing people if it will help to achieveshort- or long-term goals. This breeds cynicism and mistrustwhich further undermine the ability of companies to hold goodpeople. I call this the ‘get them before they get you’ principle.The result is that talented people are identifying their uniquevalue and setting up as independent operators or startingwhole new businesses. In turn, this is leaving large companiesfull of the leftovers, causing internal weakness and increasingthe motivation to outsource key functions to external indi-viduals and organisations. A complementary trend is that ofincreased specialisation, where companies are focusing moreand more on doing a small number of things well and deliv-ering their services to a nationally or even internationallydispersed client base. Notably, the Internet is encouraging allthese trends by dramatically improving the quality of com-munications between companies and subcontractors, withincountries and internationally.

Again, there is nothing inherently wrong with this process.Indeed, British economist Adam Smith might have quite likedthe way it promotes the potentially efficient distribution ofwork from the people that need things done to the people most capable of doing it. But it is threatening both to sub-standard people that are currently protected within largeorganisations and even the apparent beneficiaries, externalconsultants and other third parties. The danger for the latter isthat in essence ‘outsourcing’ allows companies to devolve the risk to their subcontractors. The reason here is that the

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most dangerous situation for a large company is to be caughtwith a lot of people, and therefore a big salary bill, during abusiness downturn. This is particularly true today where listedcompanies are expected to show very steady earnings (profit)performance, quarter by quarter. By outsourcing key func-tions, from accounting to public relations and computerprogramming, companies may have to pay a premium in theshort term but they can quickly shut down many expenses atthe first sign of trouble. For the external party, however, thatcan mean gut-wrenching income fluctuations.

At a geopolitical level, the world might be seen as splittinginto the people that run things and the people that do things.Much of the pain you see in the First World today comes fromthe fact that, as in the fridge assembly example above, thepeople that run things are increasingly located in rich countrieslike Australia and the US while the people that do things are incountries like China and Mexico. This means that people inmanufacturing, particularly, are seeing their jobs going offshorewhile the salaries earned by people that organise things, likeexecutives and management consultants, continue to increaseexponentially. The latter group are also becoming part of aglobal elite that have more in common with one another—the magazines they read (Business Week, The Economist), thelanguage 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 owncountries. Notably, there are pockets of people within even thepoorest countries that are part of this global elite23

This is a very simple sketch of a complex situation that hasbeen dealt with in far more detail by authors such as ThomasFriedman in The Lexus and the Olive Tree24 and Hans Peter-Martin and Harald Schuman in The Global Trap.25 I raise itsimply as a way of introducing this question: to which group

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do you belong? And to which group would you prefer tobelong? If the answer is the latter, then you need to at the very least think and operate internationally, speak English andknow how to use the Internet. Fortunately, this comes natur-ally to many Australians, despite our reputation as yobbos who swim well.

The upshot is that the world is changing fast but presentinga lot of opportunities for talented, entrepreneurial peoplecapable of creating new, specialised products and services thatcan be delivered across a wide range of locations. It also meansthat if you’re waiting for your company or government to saveyou from globalisation—whatever that really means—thenyou’re in trouble. Maybe you should run that Asian fridgefactory or develop technology that makes it easy for companieslike GE to manage remote call-centre staff. Or perhaps youshould start an online counselling service for aging Swissnihilists—that guy in the Cadillac may need some warmth andencouragement one day.

Finance first

If you want to see where the world is going, look to thefinancial markets. There you will find the most potent mix ofmoney, power and technology. Given the almost completeautonomy of the financial system from any national govern-ment, you’ll also see how all business would behave if therewere no laws. In other words, you’ll see the future.

Money and the Internet suit each other. One is a virtualcommodity, the other a virtual network. Because money is anabstract concept it is, in effect, pure intellectual property thatcan be shuttled around the world as digital information. Longbefore the Internet arrived, the world’s major financial insti-tutions had taken to exchanging numbers rather than boatloads

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of cash and gold. With the Internet, more and more people arejoining this system, particularly in the area of share tradingwhere almost anyone can now not only trade shares but alsoaccess related information with almost the same ease as marketprofessionals. 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 NewYork Stock Exchange’s (NYSE) international and research oper-ations, Georges Ugeux.26 In his palatial offices within the NYSEat 11 Wall Street, he said that the world really only neededthree stock exchanges: one in the Americas, one in Asia and onein Europe. This, he said, would be enough to enable 24-hour-a-day trade in at least large securities such as financial servicesgiant Citigroup and software maker Microsoft.

British authors Patrick Young and Thomas Theys supportUgeux’s view. In their terrifying book about the forces at workin 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 ofthe economy, this consolidation of the world’s stock exchangesis already underway. Driving the process is the desire to enableinvestors to trade any security on any exchange or network, in

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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 ina global, electronic marketplace is to maintain relevance.Despite being the eleventh largest exchange in the world, theAustralian Stock Exchange (ASX) accounts for only about 1 per cent of world stock market capitalisation.28 Moreover, asmall number of companies such as AMP, News Corporationand Telstra make up the bulk of the market. Many of thesecompanies have assets around the world and could easilydecide to follow industrial conglomerate James Hardie, forinstance, in moving to overseas markets where there is greaterliquidity and better market research.

‘My big worry is, if you look at a profile of listed companiesin Australia, you find that the top 75 businesses represent 98%of the total value of the market,’ ASX chief executive RichardHumphry has said. ‘My job is to say how do I find a way elec-tronically to make these people happy so they will stay? Andhow do I give them access to what’s happening offshore aswell?’29

Fortunately, the ASX and the Sydney Futures Exchange(SFE) saw much of this coming and operate two of the mostefficient and well-managed exchanges in the world. Australiaalso remains a key centre of expertise for trade in mining andagricultural stocks so it’s unlikely to lose its role overnight. But,given the relative lack of local companies and related analyticaltalent, will we remain, or indeed even become, an attractiveplace for high technology stocks, for instance?

And as the Internet spreads, will we lose all relevance inindustries where we have no inherent expertise or competi-tiveness, like manufacturing cars, making watches or producingclothing? Today we largely have only distributors and resellersof other people’s goods in these areas. Even in cars, which we

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do ‘manufacture’ locally, we typically only assemble complexcomponents made overseas. Tomorrow these companies willeither have to be competitive participants on the global net-work, like ASX and SFE are trying to become, or go out ofbusiness.

Centre of the world

The catchcry of the financial revolution, and a pun by Youngand Theys on France’s liberté, egalité, fraternité, is ‘Liquidity!Accessibility! Transparency!’30 Ugeux says that the rationali-sation of global exchanges would create markets of immensedepth 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 tocover the world’s time zones.

At first glance this would seem indisputable. The NYSErepresents the pinnacle of global capitalism. It is over 200 yearsold and home to more than 3,000 listed companies, includinggiants such as Exxon, GE and IBM. In 1999 it had a combinedmarket capitalisation of US$16.8 trillion, easily eclipsing thenext two largest exchanges, National Association of SecuritiesDealers Automated Quotation (NASDAQ) and Tokyo, at aroundUS$5 trillion each. Behind the NYSE’s imposing facade of Corin-thian columns surges the famous trading floor, complete withits chaotic array of screens, booths and brokers in their brightlycoloured jackets. Upstairs the executive suites are quiet, thecorridors 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 efficientmarkets and alternative trading systems. The NYSE is a privateclub where all trading is handled by 1,366 members who have either inherited or bought their membership. Unlike the

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Australian Stock Exchange and other exchanges that havefully automated their systems using computers, trade on the NYSE is still handled manually by real, live people whopass pieces of paper to each other! A tour guide once assuredme that this process results in better treatment of stocksbecause the humans on the floor play an important role insmoothing the rise and fall of share prices.

However this process is as antiquated as the Americanaffection for imperial measurement. Many companies are insteadopting for faster, cheaper, heavily computerised exchanges withdifferent trading rules, such as NASDAQ. NASDAQ is America’ssecond largest exchange and home to most leading high-technology stocks. Some of these, such as Internet networkequipment maker Cisco Systems and software leader Microsoft,are as large as the biggest stocks on the NYSE. Cisco’s marketcapitalisation on NASDAQ has been around US$500 billionwhich was the same as GE’s, the largest stock on the NYSE. The venerable IBM has a capitalisation on the NYSE of aboutUS$200 billion.

Quality information is now also far more freely available toordinary investors. Punters like you and me can find a largeamount of information about listed companies on any exchangein the world, 24 hours a day, through official stock exchangewebsites such as nasdaq.com, nyse.com and asx.com.au.Indeed, that’s where I found the market capitalisations of Ciscoand GE on a Sunday afternoon in Sydney. They can also getadditional official information, news items and outright gossipthrough share-trading sites. For a small fee, punters can alsoaccess almost all the same real-time market information andexecution capabilities as professional investors. Moves by news-papers such as the Australian Financial Review, the FinancialTimes and the Wall Street Journal to make their archivesavailable online have only added to the wealth of information

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that is now available online. Online share trader E*Trade oncedescribed this as, ‘An Investor’s Dream. A Broker’s Nightmare’.32

Another act of liberation is the move by the Australian Secu-rities and Investment Commission (ASIC) to stop companiesholding private briefings for market analysts. Instead, ASIC is urging companies to treat all investors equally by makingstatements via the Internet. This is yet another example of theworld becoming more egalitarian with technology. In this case,entrepreneurial small investors have an opportunity to profitfrom better information. At the same time, market professionalshave lost another piece of unfair advantage.

One by-product of all this Internet-enabled awareness is thatamateur investors, particularly the millions of ‘day traders’around the world, are waking up to the fact that they aresecond-class citizens in the world’s financial markets. They arealso pushing for change in what might be seen as the twenty-first century equivalent of the French Revolution.33 A keytarget is the private trading networks, or electronic communi-cations networks (ECNs), such as Reuters’ Instinet. Theseenable the world’s financial institutions to trade securities witheach other at any time, even when the stock markets on whichshares are listed are closed. They also now account for around30 per cent of the business on NASDAQ and the NYSE, forinstance.34 In other words, there’s one market environment forthe institutions, and one for the small investor.

But the punters are rising and Instinet, for one, is in theprocess of launching trading services for consumers that wouldaccess this virtual ‘trading floor’ from their PCs. In fact, itappears most likely that mergers such as iX, the proposed jointventure between the London Stock Exchange (LSE) andFrankfurt’s Deutsche Boerse, will prove impossible due tonational pride and more mechanical problems such as harmon-ising share trading laws. Instead, the neutral, global and highly

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efficient ECNs may quickly become the world’s major marketsand even buy out traditional exchanges such as the LSE.

What’s happening in the financial markets is all aboutincreasing information flow and economic efficiency. In theabsence of international rules, the sector is doing the mostlogical thing. It’s opening for business at all hours, becomingglobal and cutting out intermediaries that do not add value. Nomatter how many Living.com’s go out of business, the Internetwill, 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 likegeography and customer loyalty is one of the few elementsprotecting many Australian companies from competitors.

For instance, our top four banks hold around one millioncredit cards each. How will they compete with Internet-enabledmega companies like HSBC and Merrill Lynch providing tensof millions worldwide? Or what if you could get a home loanfrom any bank in the world? Would you be patriotic and paymore to get it from an Australian bank or would you go to avery large, global institution with the scale to provide lowerrates, fixed for 25 years? The question can easily be extendedto all manner of goods, from airline tickets to books.

But if you’re a would-be entrepreneur, you shouldn’t beparalysed by fear. You just need to consider whether you couldbe crushed by such shifts or if they represent opportunities. Yes it’s a smaller, faster world but if you have a good idea, likeMark Shuttleworth with his Internet security tools, you canalso benefit enormously. The trick is to work out where valueis being created and where it is being destroyed and moveappropriately. Again, that is no simple task.

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twoIN 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

One of my favourite books is Burn Rate by USauthor and one-time Internet entrepreneur

Michael Wolff. Subtitled ‘How I survived the gold rush yearson the Internet’, it’s a hilarious account of Wolff’s transitionfrom simple journalist and writer to chairman and chiefexecutive of Wolff New Media—and back again almost asquickly. The company published the pioneering NetGuideand NetBooks series of Internet guides and in the early 1990swas briefly valued at US$150 million. At one stage, Wolff lookedlike entering a deal that would deliver him a paper worth ofUS$100 million. His banker suggested, with complete sincerity,that he give his old university a new building. ‘It’s interestinghow seamlessly you can move from being an ordinary middle-class working person to being a person with Medici level ofwealth,’ 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 workhard, you will succeed.’2

23


Among the legacies of the dot-com boom will be, as outlinedin the introduction, the notion that it is actually possible to getrich in your own lifetime, or even in a few years. Precedingdecades had sex, drugs and rock’n’roll. The nineties andnoughties seem to have business itself as a cultural movement,with all the same delusions regarding risk and the likelihoodof success.

Like most of the great fashions of the post-World War II era,this idea that doing business is inherently fun and easy, evencool, has been created in the US and exported worldwide. Thehub of this movement has been Silicon Valley, along with someother key centres such as Austin, Boston and New York. Maga-zines that mix entrepreneurship and high tech, such as IndustryStandard, Wired, Fast Company, Business 2.0, Red Herring andUpside, have not only sidelined yesterday’s icons such asPlayboy and Rolling Stone but have also grown so rapidly, andattracted so much advertising, as to resemble telephone books.According to The Economist, in the year to March 2000 thesesix titles had a combined monthly circulation of 1.6 millioncopies and generated collective ad revenues of more thanUS$270 million.3

At the same time, the top-selling business books on BusinessWeek’s paperback list centred almost exclusively on personalwealth, investment or self-improvement. They included: The 7 Habits of Highly Effective People by Stephen Covey, RobertKiyosaki’s Rich Dad, Poor Dad, The Millionaire Next Doorby Thomas Stanley and William Danko, The Roaring 2000s byHarry Dent, and Eric Tyson’s Investing for Dummies.4

Another indicator that a global trend has arrived is that theJapanese have gotten into it. It used to take an average of 34years for a Japanese company to float on the stock exchange.Buoyed by the hype, Japan has been going through a mini-boom in initial public share offers (IPOs) as twenty-something

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executives popped their companies onto the Mothers, anexchange opened by the Tokyo Stock Exchange for new high-growth companies. In 2000, almost all of the companies onMothers 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 Tues-day, 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 arguablyTinshed’s Kickstart for Startups conference in Sydney inMarch 2000. Tinshed was created by Janusz Hooker, thegrandson of real-estate mogul L.J. Hooker and a formermanager at the Asian Infrastructure Fund in Hong Kong, andVivian Stewart, one of the founders of Internet companyMagna Data. Their big coup was to win the participation of agroup of wealthy business people and heirs to fortunes inAustralia and Asia, including Rodney Adler, David Greatorex,David Lowy, James Packer, John Singleton, Norman Smorgonand Kevin Weldon.

The conference was a copy of the Bootcamp for Startupsoperated by American investment group and Tinshed allyGarage.com. It attracted about 900 delegates who each paid upto $995 each to hear one of the slickest pieces of financial

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marketing this country has ever seen. The organisers flew inspeakers from around the world and even got former PrimeMinister Bob Hawke to address the audience—though hedecided to speak about foreign policy rather than the art ofschmoozing, as scheduled. I should confess that I also spoke inone 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 focusedon how to raise venture capital and there were occasions whenentrepreneurs would have a minute to ‘pitch’ for money. Idescribe it as financial marketing because the subtext was thatto survive you need venture financing, and the coolest moneyaround was Tinshed money.

The conference party was held in a club called Home.Tinshed paid for drinks and put on a fashion parade. Olderventure capitalists (VCs) could be found in quiet corners tryingto work out how much money the young Turks were burning.The moment that sticks in my mind was the sight of the then28-year-old Jason Ashton walking through the crowd, wearinga broad silk tie and sharp suit, surrounded by attractivewomen. I stopped him to ask if I could interview him for thisbook. He smiled down—somehow he’d even become taller thanme—and said, ‘Sure.’ As the dance music pulsed through the room, he asked if I knew what price shares in Davnet, thecompany that bought Magna Data and in which he ownedeight million shares, had closed that day. I didn’t. ‘Five dollarsninety,’ 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: suddenlyand inexplicably wealthy.

I’ve been trying to think of a theme song for this gener-ation—my generation—that drinks decaf soy lattes, works all the time and doesn’t dance: some turn of the century

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equivalent to Elvis’ ‘Blue Suede Shoes’ or the Doors’ ‘Light MyFire’. The track that seemed most appropriate was VondaShephard’s ‘Searching My Soul’. This is the theme song to AllyMcBeal, the show featuring quirky but overworked and ulti-mately unfulfilled lawyers. U2’s ‘I Still Haven’t Found What I’mLooking 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 withinmonths of the Tinshed event. Then again, Ashton would stillhave been worth more than most people in that room. Therewas 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 crashedand the word ‘entrepreneur’ is once again in danger of becom-ing a dirty one. However, there are valuable leftovers from allthis irrational exuberance. Smart people should change thetitle on their business cards to ‘business builder’ or somethingeven more innocuous and get on with creating companiesbecause the changes in the tax system, business openness andthe Internet still present a once-in-a-lifetime opportunity.

Professor George Foster, an expatriate Australian at StanfordUniversity’s elite Graduate School of Business, argues that thereis plenty of genuine entrepreneurship occurring. He teaches onmanagement systems for startup and entrepreneurial companies

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within the Business School’s Center for Entrepreneurial Studiesin 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 amountsof money were continuing to flow into new Internet and tech-nology businesses even after the crash of early 2000. Accordingto PricewaterhouseCoopers, in the third quarter of 2000

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0

100

200

300

400

500

600

700

800

900

20001999199819971996199519941993

90 90 103 148190 190

349539.5

16 52 49

38119 31

56

292.4

Fiscal year end 30 June

Am

ou

nt

inve

sted

(A

$ m

illio

ns)

New

Follow-on

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

Amount of venture capital invested in Australia by year


venture capitalists in the US invested US$17.6 billion in new or expanding companies. This was even more than double theUS$8.9 billion they committed in the third quarter of 1999, the height of the dot-com mania, and light-years beyond theUS$1.7 billion invested in the third quarter of 1996, forinstance.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 millionin 2000.

10A study by PricewaterhouseCoopers and the Depart-

ment of Industry released in mid-2000 forecast that this stronggrowth would continue after a survey revealed that institu-tional fund managers—the group that supplies around 90 percent of VC funds—expected to increase the amount of moneythat they invested through VC funds by 130 per cent over thefollowing three years.11

IN IT TO WIN IT

29

0

5

10

15

20

25

30

35

40

45

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

Year of fund formation

Nu

mb

er o

f fu

nd

s fo

rmed

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

Number of Australian VC funds by year of fund formation


0

1,00

0

2,00

0

3,00

0

4,00

0

5,00

0

6,00

0

7,00

0

8,00

0

9,00

0

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14,0

00

15,0

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16,0

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17,0

00

18,0

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19,0

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20,0

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1,28

31,

434

1,41

31,

278

1,00

499

973

271

270

776

067

175

565

868

157

555

644

055

147

2

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1996

1997

1998

1999

2000

$1,6

922,

451

1,71

42,

148

2,25

02,

988

2,93

93,

306

3,03

23,

753

3,78

93,

684

4,31

37,

648

8,91

014

,683

17,0

9519

,813

17,6

24

$1,1

831,

631

1,13

81,

362

1,46

62,

044

2,07

02,

477

2,21

22,

717

2,87

02,

997

3,66

06,

786

8,06

213

,887

15,9

5418

,822

16,9

27

$178

235

227

372

313

622

503

565

489

935

1,00

498

91,

948

3,88

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098

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810

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Weeds in the street

I once read an article that described Internet companies as likeweeds growing through cracks in the footpath. These gapswere open anywhere that there was inefficiency, deregulationor existing companies hadn’t exploited new business oppor-tunities presented by technological change. The mental imagehas stuck with me. It seems to capture much of what entre-preneurship 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 theequivalent of an earthquake that causes the traffic to stop longenough and opens up enough cracks, then you just might beable to grow through.

As big dot-coms fall from the sky, there is plenty of debateabout whether the Internet really is such a ‘disruptive’ tech-nology. Whatever the pundits decide, the network is helpingdrive a much wider trend that is opening up significantopportunities for entrepreneurs. This is the deregulation and internationalisation of just about everything. That mightsound vague, but it’s a profound trend. Prodded by the WorldTrade Organisation and other forces, national governmentsworldwide are opening key sectors of their economies tocompetition and trying to reduce red tape. Advances in com-munications, including the Internet, and the harmonisation ofsystems from passport controls to accounting standards, aregreatly simplifying cross-border movements and trade. Theformation of the European Union and the establishment of afree-trade zone between Australia and New Zealand are justtwo examples.

These shifts create cracks in the system. David Tudehope at Macquarie Corporate Telecommunications might still beworking for Westpac if it wasn’t for the deregulation of

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Australia’s telecommunications system. LookSmart’s TraceyEllery and Evan Thornley would be nowhere if the Americanshad outlawed foreign ownership of Internet addresses in theway that a country like China might have. Sean Howardwouldn’t have a big house on the harbour if the Australiangovernment had forbidden US company UUNET from buyingOzEmail due to foreign investment concerns. Sydney’s SpikeNetworks could not have launched Spike Radio in Los Angelesif the US government had restricted online media in the way ithas Internet gambling.

When it comes to sectors experiencing periods of rapidtechnological change, a key opportunity may in fact be a lackof rules. Sometimes you can get away with anything whilesociety catches up with reality. One group that used this togreat advantage during the Wild West days of the Internet wascybersquatters. In the absence of related laws, these oppor-tunists simply registered web addresses such as Rolex.com andforced the companies to buy them back. A Sydney Internetindustry figure named Brendan Yell, for instance, is rumouredto have got around $50,000 from AOL for the addressaol.com.au. It seems he may have settled for less when it cameto selling another name in the year 2000, CDNow.com.au,because the World Intellectual Property Organisation hadfinally begun to release rulings that made it easier for com-panies 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.

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32


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 Bloom-berg News. He was commenting on NetJ.com, a company thatin early 2000 enjoyed a market capitalisation of US$22.9 millionon NASDAQ but which said, unashamedly, that it conducted no business. Indeed, it said it didn’t even plan to conduct anybusiness. Cashed up and without operational considerations, itwas, in Lewis’ words, in a state of ‘pure possibility’.

The days when you could float an Internet address or beatprofessional investors by using a monkey and a dartboard tochoose net stocks, as Monkeydex.com did, have passed.However, it is still easier to raise money today than in therecession of the early 1990s, for instance, because key struc-tural changes have been made.

At an educational level, there are now courses in entrepre-neurship at institutions such as Swinburne University inMelbourne and Murdoch University in Perth. The governmenthas also been actively seeding innovative sectors of theeconomy such as information technology and Internet througha range of initiatives.

Lobby groups such as the Australian Services Network(ASN) have also raised awareness in the big end of town. ASNrepresents many of Australia’s leading services companies,including AMP, IBM and Telstra, and recently published areport titled The New Entrepreneurialism: Opportunities withinAustralia’s reach.13 The report’s key message, according toexecutive director Judith King, was: ‘We think that now it’sabsolutely imperative for the services sector to be acting in acreative, risk taking manner because that’s where the busi-nesses of the future will come from.’

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The Australian Stock Exchange also did its part by openinga sort of secondary, and ultimately temporary, meeting room for new and high growth companies and investors called Enter-prise Market. More a matching service than an exchange, thisventure was designed to provide a virtual arena in whichprivate investors can identify companies seeking investment of up to around $5 million. In mid-2000, Enterprise Marketboasted that $20 million had been raised through its system intwo months.14

The most significant change, however, was the reform ofthe tax system by the Howard Coalition government in 2000.This should substantially increase the capital available to high-growth businesses in Australia by increasing incentives forinvestors and encouraging the growth of the domestic venturecapital 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 environ-

ment, compared to what was there.

—BOB MANSFIELD15

When it comes to getting rich, the only thing more importantthan making money is keeping it. Fortunately, the governmenthas introduced a range of measures designed to make Aus-tralia’s tax environment much friendlier to both businessbuilders and investors.

As part of the overhaul of the tax system in 2000 which sawthe introduction of the goods and services tax (GST), theFederal Government introduced six key reforms aimed at

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34


stimulating investment and improving the lot of entrepreneurs.These centred on lower company tax rates, reductions in capitalgains taxes and improved incentives for foreign superannuationfunds to invest in Australia (see Appendix 1).

OzEmail founder Sean Howard believes that the new taxsystem will help Australian entrepreneurs both to raise moneybut also to exit their investments. Since leaving his Internetcompany, he has become a director of a company called FTRHoldings which is chaired by Malcolm Turnbull’s wife, LucyTurnbull. It is also one of Australia’s few listed venture capitalfunds, a status which Howard argues will make it attractive toentrepreneurs 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 aboutprivate school education. I went to a public school, Nor-manhurst Boys’ High School in Sydney. It was a nice public

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school—all boys, strict discipline, prefect system and blazers,leafy part of a quiet suburb—but an outlying public school allthe same. A science teacher once told us that he’d recentlyvisited a wealthy private school up the road, Knox at Wah-roonga, and discovered that we had better classroom facilitiesfor chemistry. We were lucky, he said. We felt good about thatat the time but even then, as teenagers, figured that all theeducation in the world wasn’t going to help us beat the oldschool tie business networks that schools like Knox create andperpetuate.

It has been refreshing to be proved a little wrong inadulthood. Yes, a lot of the business people featured in thisbook came from wealthy backgrounds. Jodee Rich, for instance,was the son of Traveland founder Steven Rich. Even when hewas ‘down and out’ after the collapse of the ImagineeringGroup in the early 1990s, he lived in the opulent Sydneysuburb 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 ofother figures in this book including James Packer and DavidTudehope.

But according to Rodney Adler, also a former classmate ofRich’s, family wealth and connections might get you throughthe door but after that you’re on your own.

‘Sure, it didn’t hurt that Jodee came from a wealthy back-ground, that he had wealthy friends and well-connectedfriends. But that’s not a hindrance, it just makes it a little biteasier,’ he says, pointing out that people like Malcolm Turnbullhave risen to the top of the tree in Australia without rich orconnected parents.

‘You don’t have to be rich and you don’t have to beconnected. You have to work very hard and have a good idea.’

The son of high-profile entrepreneur Larry Adler, founder

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36


of FAI Insurances, Rodney Adler speaks from personal experi-ence. Indeed, he’s living proof that people who inherit wealthface their own set of challenges as they try to establish inde-pendent reputations. Now a diversified investor, Adler hasaround $100 million invested in a wide range of companies,from big outfits such as One.Tel to startups like business-training company Business Thinking Systems and NetX, a webdevelopment firm. Despite being born into a wealthy familyand graduating from Cranbrook, he argues that many ‘easternsuburbs, son of lord of such-and-such’ lack the mettle to suc-ceed and that he’d usually put his money on tougher, hungrierentrepreneurs.

‘I like the people who are rougher; gutter fighters who havedone it the hard way. Most of the people that I’ve invested in,that I’ve done well with, have not been from Cranbrook. Mostof the people I’ve backed have been hard yakka, putting in thehard work,’ says Adler, naming Stan Sarris, who started as aMcDonald’s manager and now runs Adler’s exclusive Bancrestaurants, and Brad Cooper, the head of FAI Home Securitywho left school at fourteen and started out selling EncyclopaediaBritannica door-to-door.

‘They’re hardworking, honest; they have a vision and theywant to build something and they become friends. I don’t carewhere they’re born,’ says Adler.

Staying power

Adler might find an affinity with Tracey Ellery at LookSmartwho comes from the other side of the tracks but agrees with hisviews on grit. She spent most of her childhood in the working-class suburb of Geelong, Melbourne. Her parents togethernever earned more than $23,000 a year. Ellery’s father was afitter and turner and her mother worked as a waitress and

IN IT TO WIN IT

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a receptionist. Her husband, Evan Thornley, also came from a‘very, very modest’ background, being raised by his singlemother in the coastal town of Gosford, near Sydney.

‘I think that growing up in an environment that is not thateasy actually builds part of the character and the tenacity thatyou 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 hadvery, very comfortable middle-class backgrounds and I justdon’t think the fight is in them.’

I happened to speak to Ellery on 19 April 2000. Keen dot-com watchers will know that this was two days after one of thenastiest days for Australian tech stocks and that by thenLookSmart had listed its shares on the Australian StockExchange as well as on NASDAQ. Despite LookSmart shareshaving just fallen from around $5 to less than $2 on ASX thatmonth alone, and with no bottom in sight, she seemed calm andin 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 gentryand offspring of former politicians are being outclassed, or atleast out-earned, by business people emerging from high-growth industries such as the Internet and telecommuni-cations. Even more importantly, these figures are reinvestingand pulling their friends and associates up with them in anenvironment where speed, intellect and technical know-how

WHERE’S THE LOOT?

38


mean a lot more than family connections or your ability tospeak French.

You may be thinking of Alexander Downer, our lacklustreForeign Minister who found his way to office via a politicalheritage and the South Australia Club. Or perhaps Former NSW Premier Nick Greiner who thought he was onto a goodthing when he decided to chair online advertising companyBMCMedia.com, gaining options to buy 375,000 shares at 60 cents each. These were briefly worth more than $2 millionbut worthless by the time of writing. In early 2000, whenBMCMedia’s shares were flying like pigs ($6.45), I asked Greinerwhether he thought the stock was overvalued. He was non-committal but encouraged investors by saying that the companywas trading ahead of prospectus forecasts. The company laterannounced a loss of $6.87 million on sales of $2.2 million for sixmonths to 30 June 2000. The shares closed that day at 63 cents.

My favourite exercise is to compare the dot-com boom ex-periences of Nick Whitlam, son of former Labor Prime MinisterGough Whitlam and high-profile former chairman of NRMAInsurance Group, and the co-founders of Sabela Media, GourLentell and David Turner.

The running men

Gour Lentell, 39, and David Turner, 38, co-founded SabelaMedia in June 1998. The company was created to commercialiseonline advertising technology that the pair had originallycreated for OzEmail. Lentell and Turner were working at theInternet service provider in 1996 when chief executive SeanHoward invited them to the boardroom and suggested theydevelop technology for putting ads on websites. This was heresyat the time as the Internet was still a largely non-commercialenvironment. But Howard, with his background in computer

IN IT TO WIN IT

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40

publishing, was sure that online advertising would eventuallybecome big business and wanted a seat at the table.

Lentell and Turner had previously worked for the world’stop database company, Oracle, and had the expertise to com-plete the task. They came back with an ‘ad-serving’ technologythat worked, placing them at the cutting edge of the fieldinternationally alongside US giant DoubleClick Inc. and a small number of other players. OzEmail took the service tomarket through a new company called Web Wide Media, whichshortly entered into an international joint venture withSoftbank and became Softbank Interactive Marketing.

Then came the stroke of luck that would enable Lentell andTurner to make their fortunes. Softbank Interactive Media wassold to a US company called Zulu-Tek, renamed Zulumediashortly after. Under the terms of the deal, Zulumedia providedthem with exclusive rights to their ad-serving technology inAsia in exchange for providing technical services to thecompany. They also gave the pair non-exclusive worldwiderights to the technology should Zulumedia go under—whichit promptly did. This enabled the Australians to regain controlof 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 otherwisegetting down to business. They funded the company’s growththrough cash flow and by selling OzEmail shares they hadgained. But they soon had more than 50 staff and needed moremoney to catch up to the likes of DoubleClick. In April 1999,they raised US$2 million in funding from their new Americanchief executive James Green and Japanese company Tokad inexchange for 20 per cent of the company’s stock. By December1999, they had pulled together a much larger second fundinground, organising to raise US$14 million from a wider group ofinvestors.

WHERE’S THE LOOT?


The week before the funding deal was to be closed, Sabela’sworld caved in. DoubleClick, then the largest ad-serving tech-nology company in the world, was suing it for infringingpatents it held in the United States. The next day it offered toacquire Sabela, a move that would have given it control of theonly other company in the world with comparable advertisingtechnology.

If Lentell and Turner had been running for two years, theynow had to sprint. Their potential venture capital investorswouldn’t give them the US$14 million while the legal suit hungover their heads and they otherwise couldn’t afford to keep thecompany going for more than a few months. Desperate, Lentellcalled the OzEmail foursome: Sean Howard, former presidentDavid Spence and key investors Trevor Kennedy and MalcolmTurnbull. It was a good time to call. The group had just takenaway $237 million by selling OzEmail and agreed to stump upUS$750,000 on the same terms as the earlier US$2 millioninvestment, giving them 7.5 per cent of Sabela. Two otherinvestors, Neville Miles and Simon Tripp from MTM FundsManagement in Sydney, who had been involved in organisingthe larger capital raising, also chipped in.

Granted a brief reprieve, Lentell and Turner flew to NewYork to see about selling the company. Intending to see whatDoubleClick was offering, they then had their second piece of good luck in as many years. Through a business contact inNew York, another major US Internet advertising companycalled 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-servingtechnology. If 24/7 Media could buy Sabela and its technology it would be on almost level terms with DoubleClick, which hadboth ad sales and technology operations. This would mean a

IN IT TO WIN IT

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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 headlockthat 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 secretlywith 24/7 Media. DoubleClick’s opening offer was for slightlymore than US$40 million worth of its shares. 24/7 Media wasalso offering shares but, after discussions, was prepared to offerUS$70 million in shares. After a few crazy days, the pair did the24/7 Media deal, walking away with shares worth aroundUS$25 million each and flew home to see their wives. Provingjust how easily the rich get richer, Howard and the otherinvestors got seven times their money back in a month.

Lentell and Turner had technical expertise and commercialacumen but became wealthy by believing in themselves whenthe opportunity arose to regain control of their invention. Theyalso understood their business at a very deep level. It’s a shamethey were eventually taken out by the Americans, one way or another, but they ran the gauntlet better than most andemerged with their shirts and then some, even if their 24/7 Media shares have since lost significant value. At the timeof writing, they also continued to work within 24/7 MediaTechnology 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

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42


It’s artificial to do this, but compare the Sabela story with NickWhitlam’s troubled tryst with that other Internet company,LibertyOne. Whitlam became chairman of LibertyOne inNovember 1999. At the time, the company was expandingrapidly and was valued by the stock market at more than $600 million. Management also talked about listing on theNASDAQ. Making the picture even prettier, LibertyOne hadthe rights to market Excite, the US online directory service,across parts of Asia Pacific and had holdings in web design andother Internet-related ventures around the region. This shouldhave made it an easy sell to US investors which were sodesperate to get ‘exposure’ to the Internet in Asia, the world’smost populous region, that they were bidding up the price ofshares in US-listed Internet companies such as Chinadotcom tostratospheric levels. Whitlam decided to join the company,even though it was already mired in controversy and had losttwo chief executives in a year.

The former prime minister’s son was so confident in thecompany’s prospects that he chipped in and bought a millionshares for a total outlay of about $1.2 million. As the Liberty-One story fell apart during 2000, the value of these sharesplummeted to less than $100,000. Indeed, less than a year afterWhitlam joined, LibertyOne had made it to what has beendubbed ‘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 ofcompany founder Graham Bristow and the sale of a controllingstake in the company for just $2.6 million to Hong Kong’siReality Group.

What went wrong? As a reporter I followed the companyclosely and there was always plenty of controversy surround-ing it.21 At the end of the day, it appears to have failed by bitingoff more than it could chew then failing to raise the money

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needed to get over the line. Bristow had a kaleidoscopic visionthat saw the company enter into web design, online auctions(uBid), search engines (Excite), website creation for celebritieslike Greg Norman, and many other projects and joint ventures.Ultimately it was a house of cards that blew over in the first chillwind from the capital markets. But it was also a sexy story andthe volume of media coverage generated in the good times madethe stock a hit with speculative ‘day traders’, who had in turnbeen liberated by low online brokerage fees. It was a potent,self-perpetuating mix; a case of the Internet feeding on itself inan almost beautiful cycle of apparent wealth creation.

Another problem was that LibertyOne only had one businessthat had worked: Zivo, the Sydney-based web design firm thatwas acquired by the LibertyOne juggernaut, then found itselfproviding most of the company’s revenue.

LibertyOne’s inability to make money became horriblyapparent to investors in late 2000 when it announced a stag-gering loss of $58 million for the six months to June 2000.Revenue for the period was $14.6 million, of which Zivo kickedin $10.2 million. The company’s shares closed at 12.5 cents onthe day of the announcement, down from an all-time high of $2.70. The process was rather the opposite of embour-geoisement—the gradual shift of the working class into themiddle class—which Whitlam once claimed to have deliveredthrough the demutualisation of the NRMA.

Death of the club

Another feature of today’s more open and merit-based businessenvironment is the growing irrelevance of old school tienetworks and Australia’s traditional clubs such as the Mel-bourne Club, the Australia Club in Sydney and the SouthAustralian Club.

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‘[The old school tie system is] very much close to being allover,’ says Bob Mansfield, the ocker 49-year-old chairman ofTelstra who went to school at Barker College, a mid-tier privateschool on the upper North Shore of Sydney.

‘I don’t say that critically . . . there was definitely a Mel-bourne establishment, there was definitely a Sydney establish-ment when I first started work and they were factors . . . Now,it’s totally irrelevant . . . Today, it’s very open. It’s much morecutthroat.’22

While clubs tend to be old-fashioned, often even sexist, theydo offer privacy and a place for members to retreat while in thecity and mix with the powerful. The Australia, for instance,counts the Packers as members. In the British tradition, it isfrowned upon to do business in such Australian clubs, placingthem a world away from places like Baby, the new-style clubfor dot-commers in Amsterdam.23

Not being the right sort of chap, I can’t tell you much aboutthese clubs. However, I was once invited to a luncheon at theexclusive Union Club in Sydney to hear Bill Ferris, the executivechairman of Australian Mezzanine Investments, speak aboutthe fund’s investment in LookSmart. The club is within a multi-storey, dark brick building that wraps around the corner ofBent and Phillip Streets in the heart of Sydney’s financialdistrict. The entrance is so discreet that it doesn’t have so muchas a brass sign out the front. The idea is that if you don’t knowwhat it is, you shouldn’t. The room featured a lot of wood anddark leather. Bill, a member, delivered an inspiring speech aboutLookSmart and the need to back more high-tech innovation inAustralia. The food, wine and company were splendid.

It wasn’t until a few months later that I realised the irony ofthe situation. Flicking through a Sunday paper I saw a piecethat said that the Union Club’s members had voted againstproviding full membership to women. I wondered what Tracey

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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 theClub’s building but wouldn’t be allowed in the door as a fullmember 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 elsewhile 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, hebelieves, to the whole system. In recounting this exchange to someone, I found myself paraphrasing Mansfield, saying, ‘Ifyou 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? BecauseI’m going nowhere if I stay inside my comfort zone.”’ Morewords 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.’

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For many people, the risk that they’re itching to take is to tellthe boss to sod off and start their own company. A recent pollby American firm CareerPath.com found that 40 per cent of1,400 workers surveyed planned to change jobs within a year.25

The advice from the experts seems to be in tune with Nike andthe heavy rock star, Henry Rollins: ‘Just Do It’.

If the thought makes you too nervous, there’s a good chancethat you’re not the right type of person to become an entre-preneur. Charles Handy, the social philosopher and businesswriter, argues that there are entrepreneurs and administratorsand that, to a certain extent, the twain shall never meet. Hisadvice is to find something you care about and learn throughimmersion.

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 givemanagement consultants a go. And, as above, the conditions forentrepreneurs are only getting better. But we also face realchallenges.

For starters, expenditure on research and development(R&D)—the source of the raw intellectual property behindmany high-tech ventures—is declining to dangerously lowlevels. The Federal Government has put in place tax rebates for R&D but official numbers released with the May 2000federal 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 AustralianBureau of Statistics has found that all business R&D spending

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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 projectinga further 10 per cent fall to $3.6 billion in 1998/99.27

We also face the problem of brain drain, both at the obviouslevel of good people leaving to work overseas and also throughthe Internet. During a trip to Silicon Valley in late 2000, I wasshocked at the high calibre of Australian business people I metthere. They were seriously sharp, well-informed and switchedon—and not in Australia. Then there is the more subtle formof brain drain where foreign companies are employing peoplebased in Australia via the Internet. An article in the AustralianFinancial Review, with the memorable title ‘Internet head-hunters leave bodies behind’, describes how two Australiancomputer scientists, Paul Mackerras and Andrew Tridgell, quitas researchers at the Australian National University to work forthe San Francisco-based IT startup, Linux Care. The twist wasthat they worked from a new office 200 metres away from theANU campus rather than catching a plane to the States. Theauthor didn’t know by how much the pair increased theirsalaries in making the move, but noted that Australianacademics often earn less than $60,000 a year while top-classIT talent in the US might garner $190,000.28

An unpleasant fact about the high-technology multi-nationals with major offices in Australia is that they alsocontribute to brain drain. They do this by identifying toptalent through their foreign operations then transferring thosepeople to their mother ships, usually in the US, to join globalproduct development teams. As above, these talented indi-viduals almost always go because they get paid two or threetimes, if not more, what they might earn here. They also getto work with the best people in their fields. Though as figuressuch as Daniel Petre, the former chief executive of MicrosoftAustralia and now executive chairman of PBL Online, have

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shown, some do return and put their experience back into thelocal 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 largecompanies that have the resources to support such projects. Asthe 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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threeSEEING 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

The most important attribute you can have inhigh 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 toread the clues and work out where the world’s going.

Most of the people featured in this book achieve this byreading widely and talking to a lot of people. Bob Mansfield, forinstance, reads major business magazines such as Business Weekand tracks numerous smaller titles. Sean Howard tries to readfor at least an hour a day, taking in both the major business titlesbut also wandering obscure corners of the Internet in his questfor knowledge. They also build and use business networks.Mansfield’s energy, upbeat personality and famous memory fornames make him a master networker. Through his thousands ofbusiness and social contacts here and overseas, he has built anintelligence network that the CIA would be proud of.

50


Whichever method you use, the important thing is to keepyour ear to the ground. You’re waiting for that lurching soundas a crack in the pavement opens up, allowing you to grow anew business. Others describe this as finding a vacuum thenfilling it.

2Whatever your metaphor, the idea is the same. At

any point in time, the valuable parts of the economy—thosethat provide the staples like food, shelter, transport, communi-cations, entertainment and sex—are pretty much stitched upby large companies. If you’re looking to become a majorcompany yourself, then you have to either find and exploit achink in the armour of an established player or help to createan entirely new industry. This takes two very different typesof entrepreneur.

The first is like media tycoon Rupert Murdoch or Australianretail king Gerry Harvey. Both have been able to walk intoestablished markets and, through exceptional talent, nerve andsheer brute force, beat the incumbents. Murdoch, for instance,arrived 40 years late to the US television industry and stillmanaged to do the impossible: establish a fourth major net-work. For a feel for how he achieved this, try WilliamShawcross’ biography, Murdoch: The making of a media empire.3

At the time of writing, Murdoch had seen his personal wealthsoar as high as $17 billion. He was also the first person thatmost interviewees for this book mentioned when asked to nameAustralia’s top entrepreneur.

Gerry Harvey has, through his Harvey Norman retail chain,carved out a $400 million a year hole in Australia’s highlycompetitive retail sector. He has also seen his personal wealthrise to the billion dollar mark. Even more impressive is thatHarvey Norman, founded in 1982, is Harvey’s second big retailsuccess. The former vacuum cleaner salesman and real estateagent previously built Norman Ross into a national chain in the1960s and 1970s.

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‘There are some people who can move into established mar-kets and make a bundle—they are the really, really talentedpeople,’ 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 growthcurves. These are the economic equivalent of the swells that rollinto a beach, starting small on the horizon then taking shapebefore crashing on the shore. But Howard also adds a note ofcaution.

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 alsomanaged to slip past IBM without getting swatted like a fly. I won’t seek to add to the volumes written about Microsoft butit’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 losecontrol. This is a very delicate balancing act. Gates does, ofcourse, have a better spin on this.

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‘We did start the PC industry,’ he told the AustralianFinancial Review Magazine in 1998. ‘We had a vision thatthere could be a thing called the PC and at the time it was asilly idea. There were no companies thinking about that andthe notion that we would just focus on software was evencrazier . . . Because of timing and our foresight, we’ve beenlucky 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 canquickly muddy. According to David Tudehope, co-founder ofMacquarie Corporate Telecommunications (MCT), Australia’ssecond largest supplier of telecommunications services tocorporate customers after Telstra, it’s pretty hard to maintainan 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 veryhigh level of understanding about the field they work within.One of the myths of the dot-com boom was that the entre-preneurs that made it big were ‘overnight’ success stories. The reality is that almost every success story had at least a ten-year history in their field. There’s a great passage in The Monk and the Riddle, a book by Randy Komisar, a Silicon Valleybusinessman turned venture capitalist and mentor, aboutentrepreneurs seeking cash for pet-related Internet sites:

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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 SandHill Road venture capital firms at the heart of Silicon Valleywere full of people that wanted to make money quickly, ratherthan build businesses that they had any interest in or wereinherently more likely to succeed at. He calls this The DeferredLife Plan, saying that you can tell when you’re following oneif you can’t honestly say that you’d be happy to do what you’redoing now for the rest of your life. An even better test iswhether 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 creamedby someone who understands your chosen business muchbetter than you. In a roundabout way, Komisar is saying thesame thing that many others have before: do something you’repassionate about and good at, otherwise you’ll fail. Or as yourgrandmother might say, ‘stick to your knitting’.

The laws of economics might have been suspended duringthe dot-com boom, allowing all sorts of consultants with PowerPoint presentations to get millions of dollars in venturefinancing, but you’re unlikely to see such blind greed and

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stupidity often. The surfers that get the great waves not only seethem coming on the day, they know what time of year to be atthe beach. They also know what the weather is doing a day ortwo out and choose which beach to go to, which board to take,which wetsuit to wear to avoid being too hot or cold, and thechances of the place being crowded with other surfers or fullof bluebottles. If surfing can be that complicated, imagine howmuch 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 theright place at the right time. But having just read bucketloadsof success stories and seen a fair few for myself, I would arguethat luck has very little to do with it. Take for example PierreOmidyar, the French-born founder of online auction houseeBay. The company seemed to burst out of nowhere, carryingits founder, his partner Jeff Skoll and many others to seeminglyinstant and staggering wealth.

The popular myth is that Omidyar was inspired to start eBayafter thinking of a way to fuel his then girlfriend’s passion forcollecting Pez dispensers. However, by then he was alreadywell advanced on the idea of creating a global level playingfield for buyers and sellers of just about anything—a sort ofegalitarian exchange for the little guys. The first manifestationof the idea was AuctionWeb, an online auction service thatOmidyar operated part time from his apartment in 1995 andthat would become eBay.

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In fact, the story starts even earlier. As David Bunnellrecounts in The eBay Phenomenon,10 Omidyar was born in Parisin 1968 and taken to the US by his parents as a young boy. Hewas into computers early and ended up studying computerscience at Tufts University, near Boston. He became a pioneerof Internet commerce in 1991 when he founded Ink Develop-ment Corporation, an early online retailer that was later re-named eShop and sold to Microsoft. In other words, his visionfor an Internet-based ‘people-to-people’ marketplace followedat least four years of thinking about online commerce. Hislucky break, if you like, was that his parents took him toAmerica.

Another person that put himself in ‘the right place at the right time’ was American David Perry, the founder ofChemdex.com, now Ventro Corporation (see www.ventro.com).Chemdex was founded in 1997 and very quickly became theworld’s largest online marketplace for specialty chemicals, bio-chemicals and reagents. That might not sound very sexy butthe worldwide market for these products is worth more thanUS$4 billion. Specialty chemicals themselves are sold as phys-ically small but expensive packages, making them suitable formail order or courier distribution. The market was also veryinefficient, with more than 300,000 scientists in 28,000 researchinstitutions and laboratories around the world typicallyordering via catalogues owned by major distributors. Not onlywere these printed infrequently—once every year or two—they would be several inches thick, filled with microscopictype and impossible to search quickly. Distributors were alsoexploiting weak supplier and buyer market power to mark upproducts by 40–200 per cent. Finally, as academics and profes-sional researchers, potential buyers for these goods werealready heavy Internet users.11

The Internet may have lost some of its allure when it comes

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to retail sales but it was, and remains, highly suitable for thissort of industrial application where large numbers of buyersand 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 thanUS$400 million from venture capitalists and the public marketsand seen its value on NASDAQ soar above US$10 billion in thecraziness of March 2000. It was back to about US$100 millionat the time of writing after the company announced a secondquarter net loss of US$119.6 million on revenue of $25.2 millionafter a period of aggressive expansion. Ventro had also said itwould close Chemdex, along with other initiatives, and lay offstaff as it shifted its business model. History is proving unkindto Perry, but there is still a lot to learn from his entrepreneurialexperience.

First, why was Perry the person to start this business? Surelythere were plenty of people that understood the specialistchemicals market and the Internet? Maybe. But in many waysPerry was unique. As Laurence Katz from Harvard BusinessSchool describes in his paper ‘Chemdex.com’, Perry grew up inHarrison, Arkansas, a town of 8,000 people where his father rana business selling crushed limestone and fertiliser. When itcame time to go to university he enrolled in the Air ForceAcademy because he couldn’t afford a private education.Forced to leave after sustaining a football injury that cost himhis pilot’s licence, he transferred to the University of Tulsa andstudied chemical engineering. At the same time, he workedtwenty hours a week as a lab assistant at oil company DowellSchlumberger.

After graduation, he worked as a process engineer at anExxon 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

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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 melike dominos,’ Perry told Katz. He later added that he hadalways expected to run his own business because his fatherhad.

In his first year at Harvard Business School, Perry got a parttime job at Booz Allen & Hamilton in the management consul-tancy’s energy and chemicals practice in San Francisco. He alsobegan working with some fellow classmates on a business planfor a company called Immutech that sold HIV-related antibodiesand antigens to researchers. And he immersed himself in entre-preneurship, taking every course he could: entrepreneurialmanagement, entrepreneurial finance, entrepreneurial mar-keting, venture capital and private equity, and running andgrowing a small company.

‘At Immutech, I was in a unique position as both a supplierand buyer of specialty chemicals to witness the inefficienciesof this market,’ Perry told Katz.

By early 1996, Perry was actively searching for ideas for anew business. Based on his experience, he came up with anInternet exchange for the chemicals industry. The idea wascrystallised in the form of a business plan that won secondprize in the First Annual HBS Business Plan Contest. Amongthe seven contest judges was Henry McCance, a partner at theprestigious venture capital firm Greylock. McCance’s interestencouraged Perry to try to start Chemdex.

The rest is entrepreneurial history. According to UpsideToday,12 Perry got US$25,000 in credit by signing up to threecredit cards. He also sought funding from his business schoolclassmates and professors, eventually getting US$25,000 froma man in Nebraska he’d never met in return for 1.1 per cent

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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 toSand Hill Road where he eventually won investment fromCMGI, Kleiner Perkins Caufield & Byers and other American VCroyalty.

Let’s hope that Perry is still in business when you read this.With such steep losses and a share price capable of swingingbetween 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 makeit usually have relevant specialist knowledge that pre-dates theinnovation that enables them to rise above the pack—in thiscase the Internet. Perry’s story is also one of cumulative expe-rience. He was obviously smart enough to pass his chemicalengineering degree and good enough to be put in charge of aUS$200 million business before his 30th birthday. He also kepta foot in his industry while studying. By quitting Exxon andrunning up his credit cards, Perry also freed himself up to takeadvantage of any opportunity that presented itself. If thismakes Perry a ‘visionary’ then so be it.

The only piece of ‘luck’ I can see in Perry’s story is that theopportunity that came along was the Internet—the engine forwhat KPCB partner John Doerr is fond of calling ‘the greatestlegal creation of wealth in the history of the planet’. Let’s hopePerry managed to sell some shares before the company startedfor 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

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Sean Howard’s vision was that people would use electronicmail to communicate between companies as well as withinthem. It seems extraordinary now but when email was firstintroduced around 1990 most companies used proprietarysystems such as Lotus’ cc:Mail. People inside a company couldmessage each other but they couldn’t reach people at othercompanies. At that time, Howard was working at AustralianConsolidated Press, managing the computer publicationsdivision which he had founded a decade earlier. He took apunt, sold his remaining 40 per cent share of AustralianPersonal Computer magazine to ACP for around $7 million andin 1992 founded OzEmail, the company that would ultimatelymake him fifteen times richer.

‘I could see that the world was going to deliver informationelectronically,’ he says. ‘That might sound self-evident todaybut at the time email was a new phenomenon and there wereplenty of doubters. I remember very well an editor of one of thecomputer magazines . . . saying to me, “Why do you think thisbusiness is going to work? Who wants to send email to eachother, between companies? I mean, I can see it working withina company but who are people going to send email to?”’

Another doubter was ACP itself which agreed to let Howardtake his email-related research and development work withhim as part of the separation of the two companies. Howardsays he was driven on by the speed with which people atcomputer publications had embraced the new electronicmessaging system. He noted that not only did it drive downtelecommunications costs, which would make it a hit withbusiness, people seemed to prefer it to the phone.

During 1992, OzEmail’s main activity was to create systemsthat enabled companies with different corporate email packagesto exchange messages. This quickly ceased to be necessary asbusinesses shifted to using email systems based on the common

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Internet standards used by the world’s academic community.However, OzEmail stayed in business by embracing openstandards and adding Internet access to its product line.Notably, Howard wrote some of the key software that gave thecompany its competitive advantage at this time. By 1994,OzEmail had plenty of customers but Howard was rapidlyburning through his ACP nest egg. In two years, he’d pouredaround $3.5 million into the company and was consideringcalling it quits rather than sliding back into poverty afterfourteen years of hard work.

‘I remember saying to a mate of mine on the golf course oneSaturday, “Oh stuff it, I’ll close the thing down on Monday. I’mjust not going to lose any more dough,”’ says Howard. ‘ByMonday I got cold feet and couldn’t bring myself to fireeveryone and close the business.’

In retrospect, that looks clever but Howard says that con-tinuing was an act of blind faith and recklessness. Asked if atthe time he had put money aside, he says, ‘If I’d burnt five[million dollars] on OzEmail and I had the choice of continuingto burn—and hopefully succeed—or putting the two millionaway, I’d do the former. A bit like one of those pathetic gamblerswho are sitting beside the roulette table at three o’clock in themorning having lost almost all their money, determined that thelast few dollars they have in their pocket will recover all of theirlosses.’

Many people in the Internet industry see Howard assomething of a cowboy that got lucky. There are also mutter-ings around town about sharp deals or broken promises, themost common being the oft-repeated claim by the owner ofanother ISP that he set up OzEmail’s entire network and wasnever paid. Howard is familiar with this story and says it’s‘bullshit’. The more you drill into the Howard story, the moreyou get a sense of someone that had a good eye for which

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technologies and industry trends had value, the drive andcreativity to act on his instincts, and a clear understanding ofhis 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, Howardcringed, 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 onthe NASDAQ exchange in the US, back in 1996. This was onlyone year after Netscape floated and long before the Internetcraze hit Australia. However, Howard also presided over anumber of unsuccessful ventures such as OzEmail Phone andan online advertising venture called Web Wide Media—thoughthe latter would prove to be the starting point for AnthonyBertini, founder of BMCMedia.com and Gour Lentell and DavidTurner, co-founders of Sabela Media, all of whom have becomevery wealthy in their own rights. According to David Spence,the former president of OzEmail and savvy accountant whokept OzEmail’s finances straight (Howard admits that eventoday he still struggles to read a balance sheet), there weretimes when OzEmail tried too many new things. He attributesthis to boredom, conceding they would have probably built a

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

Blue sky mining

In times of rapid technological change, vision takes on a valueall of its own, one that can often be realised in the form of verylarge amounts of cash. If you type the words ‘Chris O’Hanlon’and ‘vision’ into the news database at John Fairfax Publicationsyou get an extraordinary 38 results. In the Australian Internetscene at least, he owns the word.

O’Hanlon, the 45-year-old founder of web design firmSpike Networks Ltd, understands better than most that inuncertain and dangerous environments people look for vision-aries. Like people lost at sea, the public desperately wantssomeone to climb a mast and shout ‘I can see land’. In oneinterview O’Hanlon said, ‘If you feel strongly driven by yourown vision, the chances are that with a bit of personality you can compel others to see it with you. And to follow it intocomplete darkness on the faith that you see something thatthey 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 ofdollars. While others were charging basic hourly rates to makepretty web pages, O’Hanlon, the son of famous novelist MorrisWest, was selling something far more seductive: corporatetransformation. Not glorified desktop publishing but a gate-way to the untold riches of cyberspace. Big companies likeToyota paid hundreds and thousands of dollars for web pagesthat they could have had done elsewhere for a fraction of the cost.

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‘He’s got the art of the gab and the schmooze,’ industryanalyst Ramin Marzbani says. ‘There was a time when thisindustry didn’t exist. Chris was the first person to go out thereand say, “Give me $400,000 to build a site.” No one else had theballs to do that.’14

O’Hanlon’s vision for Spike as a creative, anarchic environ-ment also defined its culture. Michael Mesker, one of thecompany’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 webrought life and daring to the corporate Internet world.’15

A key part of the Spike story—one that you can findrepeated, almost word for word, in various press articles—isthe moment of epiphany at O’Hanlon’s family home in PalmBeach, Sydney. O’Hanlon spent the afternoon with AndrewEordogh, a computer technician that first showed him theInternet in late 1994. A couple of hours quickly turned into awhole 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 nocontact details or sample sites or anything, just a black pagewith the word ‘Spike’. By helping to explain and define theInternet and online marketing during the mid to late 1990s, andChris’s own affinity with journalists, the company gained a

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very high profile. When he was really fired up, O’Hanlon couldout-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 AustralianStock Exchange in early 1999 at an extraordinary valuation of $120 million. The high price tag was based largely on thepotential for SpikeRadio to become a global media outlet. Bymid-2000 however, O’Hanlon had left the company, the radiooperation was haemorrhaging cash, and the services side of the businesses was being taken over by Hong Kong’s PacificCentury CyberWorks. Nor had Spike made the transition frombeing a supplier of corporate production services to being a media company like News Corporation. Reflecting this andas 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 millionshares, worth around $5 million—a fraction of the $100 millionthey had once been worth.

While O’Hanlon’s vision of the Internet has been provenremarkably prescient—Spike’s Internet radio station, Spike-Radio, was one of the most interesting and cutting-edge siteson the Internet—his business foresight was myopic by com-parison. He missed all sorts of big, dangerous objects that werelurking in the dark room that his business had become by early

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2000. The good thing about O’Hanlon is that he will admit asmuch. 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 shouldstudy at the feet of the master: American serial entrepreneurJim Clark. I’ve only met Clark once. It was early 2000 and I wasin Auckland for a conference timed to coincide with theAmerica’s Cup. Along with several other billionaires, Clark wasthere as a spectator with his US$50 million yacht Hyperion. Ifyou have read Michael Lewis’ The New New Thing,19 you’llknow that Clark spent a couple of obsessive years building thistub in a Dutch shipyard. When it hit the water it had the tallestmast of any sloop in the world at 189 feet, was 157 feet long and had 25 big computers onboard. The funny thing aboutAuckland—to me, at least—was that not only had someAmerican shopping mall developer built a taller yacht, he’dparked it next to the Hyperion. Still, for a guy that grew up dirtpoor in regional Texas, Clark had come a long way. He was alsobuilding a bigger yacht.

Clark’s entrepreneurial successes are legendary. He made his first fortune as the founder of the high-end computingcompany, Silicon Graphics. He made his first billion when he floated his second company, Netscape Communications, in1995. ‘I had this basic instinct that the Internet was going to be a big opportunity,’ Clark told a dinner audience inAuckland, ‘so I bet about a third of my net worth on Netscape.’

He won and also changed the rules of high finance. TheNetscape float is taken as the start of the Internet stock marketcraze because the company had little revenue and no profits butwas experiencing massive growth. As Lewis puts it:

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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 infomediaryHealtheon. Clark’s idea was to position this company at thecentre of the US$1.5 trillion health care industry. By using theInternet, Healtheon could reduce inefficiencies, Clark argued.And by taking just a small cut on those savings, the companywould very quickly become a multi-billion dollar enterprise.Clark sketched this dream out on a piece of paper and it formeda diamond cornered by Doctors, Payers, Providers and Con-sumers. He then sold this ‘magic diamond’ to the investingpublic at more than US$1 billion and eventually saw the sharesrise to levels that valued the company at more than US$10billion.

After Healtheon, Clark started yet another company calledmyCFO. This idea was even bigger than Healtheon. Clark hadcome to realise that one of the downsides to being really richis that it becomes tricky to manage your personal finances.He’d also discovered that 50 per cent of the world’s privatewealth, or about US$25 trillion, was controlled by just 1 percent of its population. Enter myCFO.com, a website that wouldprovide financial services to and, just as importantly, aggregatepurchasing power on behalf of the world’s rich. In its first six months of full-scale operation to February 2001, myCFO

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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 companycalled WebMD and seen its market value cut back to aboutUS$2 billion. Netscape had been bought out by AOL but, interms of Internet browsers at least, was being obliterated byMicrosoft. Rather than help pick up any of the pieces, Clarkhad moved on to the newest thing, biotechnology, andlaunched his fifth startup, DNA Sciences.

In a sense, Clark has become something between an entre-preneur and a venture capitalist, an almost pure creative forcerather than a manager. Clark discovered that he wasn’t cut outfor senior administration at Silicon Graphics, which he foundedin 1982 after being a lecturer at Stanford University. Like manyentrepreneurs, he became bored and irritable once the companyhad become a large corporation and clashed regularly withother senior executives. As The Economist has said, ‘Jim Clarkis very rich because he learned what he is bad at, as well aswhat he is good at: he can start companies, but he can’t runthem.’22

For all his wit, Lewis’ portrait of Clark is also harsh. The New New Thing leaves the reader with the impression of Clarkas difficult, manic and obsessed by wealth. I asked Clark whathe thought about Lewis’ character sketch. He said that whilethe book was largely accurate it was ‘kind of hyberbolic’ and ‘narrow’. He didn’t elaborate but you could tell it wastrue; Clark is obviously technically gifted and more complexthan Lewis gives him credit for. He has proven himself to be agenius at creating big ideas for a market prepared to dream. Hehelped to create, then rode, the popular belief that the Internetwould change the world. If nothing else, he has perfected theart of building to flip—creating concept companies that don’t

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necessarily work but are attractive to investors23—and gaineda personal wealth of around US$3 billion. That’s not neces-sarily morally defensible but, like I said, this book is largelydesigned to help you improve your station in life, not fix theworld.

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fourOTHER 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

If you want to make serious amounts of money, youneed 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. Noone showed up to Anthony Bertini’s house with a van anddumped $230 million on his front lawn when shares in hiscompany, BMCMedia.com, hit $7.75. The public markets giveyou inferred wealth only where the suggested value of yourholding in a company is based on the latest price some suckerpaid for a single share. The ability of this system to get out ofwhack was amply demonstrated during the Internet boomwhen all sorts of suckers paid some really stupid prices forstock.

For a few crazy moments, this gave people like WaynePasslow, chief executive of Open Telecommunications, aninferred wealth of $1 billion. This was enough to get him on thecover of the Sydney Morning Herald as Australia’s fastest everbillionaire. It was also enough for him to get rid of his kids.

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During a post-float media lunch, Passlow, a happy, unassumingguy who reminds you of Santa Claus, laughed that he couldn’tget his children out of home so he’d left them there and boughtanother one. He must have had some of that money in cash.

The other, more appropriate, reason to look to the publicmarkets is that you need capital to grow your business. Some-times, no matter how hard you work or how effectively yourespond to change, you will find that there is a gap between the money coming in the door and the amount you need tospend to develop a product, meet payroll, build a new facilityor otherwise grow. This is most pronounced in high-techcompanies that must conduct months or years of research anddevelopment work to create a product to sell. At this point—and, old-fashioned types would argue, not before—you shouldconsider hitting your family and friends for money, borrowingfrom a bank, seeking to sell a share of your company to aprivate investor, joining a business incubator, raising venturecapital (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 anhour. Well, money is much the same. There is nothing betterthan other people’s money. OPM. Caviar capital. The good stuff.Yes, whether you get it from your parents, a venture capitalist

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or Joe Public, when you’re building a business it’s almostalways better to spend OPM than your money. Why? Becauseyou might lose it, and there’s only one thing worse than thefleeting shame and regret associated with losing OPM and thatis the irreversible pain of losing your own money.

Fortunately, lots of people have more money than they needand like to give it to other people if they think they’ll use it to create even more. One of the revelations that came withworking for the Australian Financial Review was just how manyloaded people there are in Australia. With the exception of theoccasional rogue like Alan Bond, who shouldn’t be allowednear OPM, this system tends to lead to the efficient reallocationof capital from people who have it to people who know whatto do with it. Venture capitalists, for instance, take money frommassive superannuation funds and channel it into small, poten-tially high-growth companies. In theory, the money will worklike fertiliser, the small company will become large, and the VCwill return the money plus some profit to the fund.

If you’re a new player entering this system then yourchallenge is to create a compelling enough story to persuadepeople to give you their money. I say ‘story’ because if you’retrying to raise money to fund something that hasn’t yethappened then you are by definition operating in the realm offiction. The trick is to make your sketch of the future moreplausible than the next person’s. You should also have some sortof 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 venturecapitalists and other professional investors, including so-called‘angels’, would invest in bright ideas alone. I was duped bythis. Believing I had a good idea, I once had a conversation withtop Australian venture capitalist Roger Allen over coffee at aconference. It went something like this:

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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 tobelieve that Fast Company magazine crap’ glances, I learnedthat VC money was going to be extremely hard to come by.These guys didn’t become rich by being stupid so the chancesof one accidentally giving me money, let alone too much, wasup there with life on Mars.

The reason that investors like to perpetuate the myth thatthey supply money freely to very early stage companies is two-fold. First, it sounds good at parties. Second, it increases thenumber of people that might approach them for money andtherefore ‘deal-flow’. Even if they think the entrepreneur is notready or the business too small, at least they’re on their radarfrom 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 well-established 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, andVCs for $1 to $5 million. Beyond that, most entrepreneurs look


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to the public markets, though VCs have been known to investtens of millions, particularly when funding management buy-outs 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, familyand ‘fools’. The Internet service provider Magna Data, forinstance, was started with $100,000 from the fathers of two ofthe company’s four founders.

The nice thing about friends and family money is that it’snormally given as debt rather than equity. In other words,someone who wants to see you get on gives you the money youneed and asks you to pay them back when you can. This cansave a new company the trouble, and legal expense, of givingthe investor a defined share of the company and preparing anassociated shareholders’ agreement.

‘Fools’ is the term applied to a third party investor thathands over money without making you sign up to a strict termsheet 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 andfamily but want a share of the company in return for theirmoney and mentoring. As above, they typically invest between$250,000 and $1 million in new companies. In return, they’llusually seek about 30 per cent of its shares.

Angel investing is not new but has become a lot sexierfollowing the arrival of groups such as Tinshed, the investmentnetwork of rich and powerful business people in Asia Pacific

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brought together by Sydneysiders Janusz Hooker and VivianStewart. Hooker and Stewart, both under 30, act as talentscouts, reviewing business plans, meeting entrepreneurs andeventually lining up meetings where entrepreneurs pitch theirideas to as many of the group’s wealthy backers as can attenda meeting. If these ‘angels’, including figures such as JamesPacker and Rodney Adler, like what they hear, they’ll investbetween $500,000 and $3 million then go back to the polo fieldor whatever it is that rich people do. Past investee companieswho have benefitted from Tinshed’s services include onlineretailer dstore, Internet grocer ShopFast, and media and gamesproduction house Imagination Entertainment.

Another angel network coordination group is Sydney’sHarbour Angels, run by former merchant banker Nick Mountand Australian-born but Silicon Valley-based entrepreneurDavid Doust. Doust is building a company called Software-markets.com and is one of those frighteningly smart Australianexpatriates. Together, Mount and Doust seek to coordinateinvestment into new companies by a group of 40 or so wealthyfriends and associates. In 2000, for instance, they invested $1.2 million in Digital Media Group, an online share tradingdiscussion website and technology company.

Groups like Tinshed and Harbour Angels are the tip of amuch larger iceberg. Angel investors are estimated to investmore than $1 billion each year across all sectors of the economy.4

Much of this money is supplied through well-establishednetworks of private investors that review deals presented bycoordinators such as the Australian Business Angels (ABA), runby 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 inavailable capital. The organisation works to bring entrepreneurs


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and investors together at monthly forums. Its services rangefrom advising entrepreneurs on their business plans to helpingpotential investors learn about the process of putting money into expanding companies. ABA supports its operations bycharging investors an annual subscription but is aimed atdeveloping the business community as a whole.

From the entrepreneur’s point of view, the key challenge isgetting the organisers of these angel groups to consider yourbusiness proposition. If you can persuade them that what youare offering is valuable, you will have to stand up at one of theabove forums and present your idea to potential investors. Butdon’t be intimidated. Having been to some of the these sessions,I can tell you that some very average people with even moreaverage ideas get as far as presenting. In many cases, they evengot money.

Finally, one of the biggest complaints from people that havetaken angel investment is not that investors try to exertexcessive control over the company but rather that they ignoreit altogether. According to Alex Adamovich, the Australian-raised head of Equity Partners Asia in Hong Kong and aTinshed investor, many angels will kick in money but rarelyspeak to an entrepreneur until there is a major issue to dealwith, such as an acquisition or a capital raising. He says thathe tries to do better but the problem is that angels are typically,and almost by definition, busy and successful people who canonly spend so much time with the companies that they investin. Because angel investments tend to be relatively small andentered 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

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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 suchfacilities were created more than twenty years ago. It alsoalludes, of course, to chickens sitting on eggs. After the shinewent off the term incubator during the 2000 tech crash, someswitched to calling themselves ‘accelerators’ (while unkindcommentators adopted the term ‘incinerators’) but the idea isthe same.

The theory is that someone sets up a facility that has lots ofdesks, computers, phone lines and other facilities that makesmall companies run, such as shared reception desks and coffeemachines. Larger ones might also offer management advice andconnections to accountants, marketing specialists, lawyers,venture capitalists and other service providers. Really largeones will maintain such service groups in-house. Incubatorsthen take in small teams that are starting up new companies andlet them use all this equipment and office space for up toaround eighteen months. After that time they are expected to have a competent management team in place and be able tomove out to premises of their own. In return they typically take


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cash from the company in the form of rent and fees as well asdemanding an equity stake in the startup.

Notably, the ‘cash’ is often the incubator’s own money thatthey have given to the startup when it signed up. As one USanalyst has said, ‘It’s an interesting scenario. I give you thismoney, and basically, over the next six months you’re going togive 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 itdoesn’t have to commit to multi-year commercial leases or takeon other potentially crippling costs such as paying reception-ists before it has cash flow. With lawyers, public relationspeople, web designers and others on tap, they should also beable to grow quickly. Good incubators also lend credibility tosmall companies. This can be very useful both in marketing as well as getting past the credit rating checks at big legal firmsand other top flight service providers that fret about the abilityof client’s to pay their bills.

Universities and government bodies have been runningincubators under various guises for many years. These havetypically been non-profit organisations designed to help grad-uates or underpin regional development initiatives. Large,research-driven companies such as Lucent Technologies, ownerof Bell Laboratories, have also had systems for supportingindividuals or small groups that want to ‘spin off’ and pursuenew projects on a semi-external basis. However, with thesuccess during the Internet boom of large US Internet industryincubators like CMGI, idealab! and Internet Capital Group, theidea has taken on a life of its own. For a time, these companiesachieved multi-billion dollar valuations by taking substantialstakes in a large number of small high tech and Internetcompanies then floating them as soon as possible on a nearbystock market, usually the NASDAQ.

In the process they came to be seen as alchemists. For a while

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at least, Internet floats delivered pure gold almost every timeand the incubators seemed to have discovered the secret tocreating them. The largest, CMGI, has backed 70 companiesincluding search engines AltaVista and Lycos, email manage-ment company Critical Path, and online auctioneers GoFish.comand uBid. In 2000, CMGI shares changed hands on NASDAQ atprices that gave it a market valuation of US$48 billion. To putthat in perspective, the highest valuation achieved in the sameyear by the Ford Motor Company was US$38 billion.

There were more than 300 such incubators worldwide inearly 2000, about a third of which were located outside of theUS.7 Australia was no exception and boasted around twentyincubators, including ten groups that have received $78 millionin funding under the Federal Government’s Building on ITStrengths Scheme. These are now scattered around the countryand have cool names like Bluefire, ePark and ITem 3.8

One privately funded Internet incubator is Powderbox. Thisis operated by chief executive Richard Poole in cooperationwith Silverstream Corporate, a financial advisory firm and VCplayer. For a chunk of equity, Powderbox provides qualityoffice space for small companies in downtown Sydney andoffers hands-on management assistance. Its incubatees includethe online women’s magazine SheSaid.com.au, a related ad salescompany Tempest Online, a gay portal called Outbiz.com and the wine e-tailer Winepool.com.au. According to theentrepreneurs inside Powderbox, the company has a good setup. While it took around 25 per cent equity stakes in thecompanies, they don’t have to pay cash for their office space andother 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 wasplaying largely with his own money, Poole could make decisions


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quickly when startups needed assistance. He also kept hiscompanies out of trouble, checking their legal activities closelyand lending an imposing—he’s about six foot three, charmingand sharp as a tack—presence at meetings. To me, Powderboxis what incubators should be—small, intimate and creative. Aplace where a successful person mentors a few new companiesbut also makes a quid on the side.

Financial institutions such as Macquarie Bank have alsoestablished incubator facilities, backing companies such asAnnounceTV and Ozestock.com.au. These typically make morestrategic investments in activities close to the bank’s heart,such as financial information.

If you’re thinking of joining an incubator or dealing withany outside group, you should find out what direction they’recoming from. Their motivations will have a big impact on theway they behave and the type of value they deliver. The keyquestion, and again this goes for all forms of investment coveredin this chapter, is whether their interests are aligned withyours. If not, when push comes to shove, something will breakand it’ll probably be the smaller, weaker entity—you.

A benefit of the incubator system, and more broadly, VCinvestment networks, is that new companies would get to workalongside other new Internet companies, enabling them toshare ideas and resources. Brought together by the guidinghands of incubator owners such as idealab! founder Bill Gross,they can also form ‘synergistic’ alliances. These might bedesigned to help drive traffic to one another’s websites, forinstance. Functioning well, this would be known as a keiretsu—a Japanese word coopted by the US venture capital industryto describe a network of new companies. Morten Hansen andassociates, writing in Harvard Business Review,9 have dubbedthese ‘networked incubators’, saying they offer young com-panies the best mix of facilities, entrepreneurial drive and

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industry networking, particularly preferential access toindustry leaders. They hold up US incubators like Campsix,CMGI, Hotbank and idealab! as examples. However, Hansenand friends also caution that networked incubators suit somestartups better than others and some simple questions need tobe asked: What other companies are in the incubator portfolioand is their focus consistent with your own? How strong is theincubator and its networks of partners and advisors? How dothe companies inside the incubator work together and howconcrete are the links between them?

After the tech stock crash, people have begun to questionwhether the commercial incubator model is viable without a highly irrational stock market buying the end product—typically extremely immature companies with great presen-tation skills but unproven business models. Groups like CMGIsuddenly began to look like the houses of cards that they wereand saw their valuations slashed to around a quarter of theirhistoric highs. Some of the most high profile success storiesthat made the incubator model so attractive were also strug-gling to survive in the real world. One of idealab!’s prizedgraduates was eToys.com. The online toy shop was rampedvery quickly onto the public market at a time when everyonewas convinced that traditional retailers such as Toys ’R’ Uswould be wiped out by Internet newcomers. The company’smarket valuation soared to more than US$10 billion beforecollapsing back to about US$500 million at the time of writing.This was still a healthy price for a company with a net loss ofUS$59.5 million on sales of US$24.9 million for the threemonths to 30 June 2000.

Worse still, punters that bought the stock at the top of themarket lost up to US$82 a share. Who collected a healthy partof the difference? You guessed it, guys like Bill ‘Aw shucks, Iwas just giving the kids a leg up’ Gross and other professional


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investors. The moral of the story, once again, is that the peoplewho make the money in periods of rapid change and uncer-tainty are the ones who know when to pass the hot potato.

Entrepreneurs considering entering incubators need to thinklong and hard about the credentials of the facility they’reseeking to enter. As bi-products of the Internet boom, mostcommercial incubators are even younger than the companiesthey’re planning to support. More than 80 per cent of 350 US incubators surveyed in June 2000 for a Harvard BusinessSchool report were less than one year old.10 Most Australianincubators are even fresher. They were also developing a nastyreputation for being expensive. Some of the worst incubatorshave also been taking a cut on payments made by theircompanies to external providers. The question you have to askis, if these guys are taking cash for all these services then inwhat way are they earning their share of your company?

The value of being put in a facility with a group of other newcompanies is also questionable. Yes, you’ll probably have a lotof fun because everyone’s young and wearing black. You mayeven get to do some interesting deals. But the situation isbasically one of the blind leading the blind unless there is ahigh ratio of good operations or mentors to entrepreneurs.Entrepreneurs should therefore ask whether they couldn’tacquire all the services they require independently and onmore flexible terms? If you have no revenue, you might be ableto sell a share of your company for some straightforward cashthen buy the services you need. Incubator managers will tellyou that having to look after all these small decisions yourselfwill only cause you to waste time. That’s true. However, Romewasn’t built in a day and there is value in staying independentbecause no one cares as much about you and your company asyou do. It may even enable you to move more quickly becauseyou will be able to sack under-performing service providers, for

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instance. While you might be able to do that while inside anincubator, you won’t be able to sack the facility if it owns partof your company.

More generally, if you give away too many shares too early,you will also very quickly lose voting control over yourcompany. This may in turn leave you paralysed and frustratedas you spend all your time lobbying shareholders rather thansimply implementing your plans. And if you give up a largeshare of your company in your first year then you won’t havemuch left to play with later when you’re trying to attractadditional investment or staff. Venture capitalists in particularlike to see at least 60 to 70 per cent of a company owned by itsfounders and employees and often won’t invest if first roundinvestors have taken too much.11 The reason is threefold. First,the angel or incubator will have a lot of power over thecompany. Second, there won’t be enough stock to providefuture 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 RupertMurdoch. Admittedly he got a running start after inheritinghis first media assets but News Corporation has becomemassive and continues to perform in part because Murdoch hasgone to great lengths to maintain control (voting power) andhas never taken his hand off the tiller. Microsoft is the same.Bill Gates still has enough power to make the lightning-fastdecisions that the company needs to remain successful. So,don’t sell yourself short in your first year if you can see pastthe fifth.


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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 possiblebefore they take it on. So if you can make it through your firstfew years without outside investment—provided you are stillin business and your market ‘window’ of opportunity remainsopen—you’ll be in a much stronger position to negotiate withventure capitalists. But first things first. What is venturecapital, or VC?

The difference between angels and VCs is that the former are typically rich individuals who invest their own moneywhile the latter are professionals who invest funds on behalfof financial institutions and other groups. In other words,venture capitalists have bosses. This means that they typicallytake the conservative approach of putting larger amounts of money into more mature companies. It also means they’remore 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 manyVCs were in a deep panic trying to explain why they’d pumpedhundreds of millions of dollars into flimsy Internet companies.The real answer was that the market was so hot before theApril 2000 correction that they thought they’d be able to floatthem and get their cash back before anyone noticed how flaky they were. You try sitting in a Hawaiian shirt and Birken-stock sandals and explain that logic to a sober, dark-suited

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institutional investor from New York who just lost severalmillion dollars.

Fortunately, not all VCs are cowboys. As Australia’s VCveteran Bill Ferris has said, ‘[Venture capital] certainly isn’tabout quick trading profits in the stock market. At its best, itis about helping entrepreneurs grow really great companies.’14

Good venture capitalists take an active role in the day-to-daymanagement of the company—or, more accurately, in choosingthe people that will manage the company day to day.

‘There are two schools of thought on VCs,’ says George Fosterat Stanford University. ‘One is that they’re just sources offinance. The other is that they’re very effective partners orarchitects of businesses and I actually firmly believe in thelatter.’

According to Foster, who also consults to VC firms, the mostimportant role a venture capitalist can play is to build a


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Entrepreneurs and venture capitalists are different butdependent breeds. Smart business builders take the time tolearn about and understand the VCs that they’re approaching.


company’s management team. In a lot of ways their skill,beyond raising and then investing money, is not far removedfrom that of recruitment consultants. They identify goodpeople then place them into their investee companies, often inplace of the founders. ‘If they do their jobs effectively thenthere’s less need for them on a day-to-day basis,’ Foster says,but cautions that professional investors can also take on toomany 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 thanany other type of investor they are interested only in short-term capital gain. ‘They just want to make money, and that’s allthey want to do. It’s easy to lose sight of that but you reallyshouldn’t,’ says one embittered Sydney entrepreneur who wassacked from his company after it was taken over by a venturecapital firm.

A smart entrepreneur therefore understands what theventure capitalist needs and exactly what that will mean goingforward. VC fund managers need to be able to see the potentialof being able to make at least ten times their money in aboutfive years, preferably less. The reason is that they can onlyexpect about two out of every ten companies that they investin to deliver such stellar returns. Another two or three willbreak even or deliver a small profit and five will completelybomb. That receiving venture capital is no guarantee of success

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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 fromfunds, including Bill Ferris’ prestigious Australian Mezza-nine Investments (AMI) and Macquarie Bank’s MacquarieTechnology Fund, but still collapsed as a business in 2000 afterspending too much, too quickly on information technologydevelopment.

The only way venture capitalists will get the sort of returnthey need is by floating your company on a share market orselling it to another company for a good price. They won’t getthe sort of big bang ‘exit’ they want—where the value of theirminority shareholding is realised in plenty of cold hard cash—by taking a share of your annual profits or letting you repaymoney with interest. So, if you take VC you should expect toeventually either float your company or sell it to somebody.There’s nothing wrong with this but many entrepreneurs failto think it through and later squirm like hell when their VCsstart to look for a way out.

When it comes to getting VC, entrepreneurs must thereforenot only explain why they have a good business but also howit can deliver rapid capital gain. These are very different things.The first could be something like a medical practice thatdelivers $1 million a year in profit to a couple of doctors. Thisis a good business but inseparable from the professionals thatrun it. Preferable is a company like McDonald’s that is definedby its systems, intellectual property and brand and can be runby any pimply fifteen-year-old. These sorts of companies canbe bought and sold and are therefore the only type that interestfinanciers like VCs. For a much fuller discussion of buildingcompanies that you can walk away from to play golf, seeMichael Gerber’s best-selling book, The E-Myth Revisited.15

The second element in rapid capital gain is that it is usually


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to be found in fast-growing markets. This is why the burgeon-ing Internet was such a hoot for professional investors. I usedto sit in press conferences and be mystified at the way peoplealways held up charts from analyst firms showing incrediblystrong growth projections for their types of products. Afterseeing one that implied that every man, woman and child inAustralia would buy some obscure piece of computer net-working equipment within five years, I realised that they were simply a key element in the bullshit process of sellingcompanies.

The reasoning goes like this, ‘People bought $10 millionworth of headless chickens online last year. That was 100 percent higher than the year before. If you follow that growthcurve, in five years people will spend $320 million buyingheadless chickens via the Internet. Better still, we think we cancut off 50 per cent of that market.’ This argument would befunny if it didn’t work so well. Part of the reason that it doesis that most people are basically optimistic and everyone wantsto 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 thatfly extreme skiers into dangerous mountain ranges. They takemore risk than airline pilots and get paid more (when theydon’t crash into cliffs), but they stop short of plunging downsteep and fearsome slopes alongside their passengers. In otherwords, they have the means to enable risky endeavours buttend to keep themselves relatively safe. Indeed, some of the bestVCs are former entrepreneurs. Roger Allen at Allen & Buck-eridge is an example, having previously built the ComputerPower Group into a multinational with 3,000 staff in twelvecountries. His entree to the world of venture capital came in themid-1990s when he sold out of the company and pocketed

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around $35 million. Rather than investing in real estate likemost cashed-out Australian entrepreneurs, he decided toreinvest in the industry that had made him rich, the high-growth technology industry. Though he admits he does havesome bricks and mortar in his portfolio. Another is GeorgeKepper, the founder of Datacraft, a computer networking andservices firm that was sold to South African conglomerateDimension Data in 1997 for $320 million. Kepper pocketed acool $160 million from the deal and now invests through hisprivate company, KFT Investments.

Figures such as Allen and Kepper, who have done well in thetechnology industry then returned to pass on their capital andexperience as investors, are rare in Australia but play a vitalrole. Because they’ve ridden the treacherous slopes of globalcapitalism they’re unlikely to drop you into an avalanche—unlike some newcomers to the VC game. The strength of SiliconValley is that it’s chock-a-block full of former entrepreneursthat now invest, either informally as angels or as VCs. The hopeis that no matter how insubstantial many of the companies thatmade money during Australia’s dot-com boom, a legacy of theperiod might be the presence of more experienced, cashed-upbusiness players.

Golis’ rules

One of Australia’s foremost authorities on venture capital isChristopher Golis, executive chairman of Nanyang Manage-ment, a Sydney-based fund with around $80 million undermanagement for St George Bank and other parties. Companiesthat Golis has backed include audio production tool makerFairlight ESP, entertainment group Garner MacLennan Groupand point of sale technology provider PEG Technologies whichis now listed on the ASX. In the absence of literature about the


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local VC industry, his book Enterprise and Venture Capital issomething of a bible to Australian entrepreneurs.16 Accordingto Golis, the entrepreneur/venture capital game has seven rules:

1 A rapidly growing business is always short of cash and theover-financed company does not exist.

2 Raising cash is done by a series of capital placements whichresult in continual dilution of the equity holders and formerinvestors and founders.

3 The founders play a game of divide and conquer with theirinvestors. Their objective is to have a mix of investor share-holdings while their own shareholding is diluted below 50 per cent. What the founders aim at avoiding is havingone shareholder with a greater than 50 per cent holding andsingular control of the company.

4 All shareholders are driven towards the goal of maximisingafter-tax profits and an eventual public listing, even thoughthey 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 usuallyhave nothing to worry about.

6 There is no limit on what you can do or how far you cango—if you don’t mind who gets the credit.

7 The probability of success of a small company is inverselyproportional to the size of the entrepreneur’s office and theamount 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 moneythat you need in exchange for as little of your company aspossible. This process is called ‘dilution’ and, executed well,follows a fairly logical path.

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0.00.51.01.52.02.53.03.5

FloatRound 2Round 1Start-up

1 Funds raised in stages

0

20

40

60

80

FloatRound 2Round 1Start-up

2 Dilution of founders’ equity

0

5

10

15

20

Post-floatFloatRound 2Round 1Start-up

3 Increasing value of founders’ equity

Founders34%

Angel 16%

Angel 26%

VC115%

VC211%

VC311%

Public17%

4 Example of a shareholding post listing

%

The above four figures from Chris Golis’ Enterprise andVenture Capital show that venture capital funding is raisedin a series of stages, with the amount of money raisedincreasing at each step towards an initial public share offer(1). Because the company’s founders are selling more andmore of their company to raise this money, the percentagethey own steadily declines (2). However, even though theyown a smaller share of the company, that stake is worth morebecause the entire company is valued more highly at eachstage (3). The fourth figure shows the typical shareholding ina venture-backed company after a public listing. While thefounders own a minority of the company, it will typically beworth many times more than their original shares.


Using the twin arguments that they add a lot of value andtake a lot of risk, VCs will tend to demand a sizeable chunk ofequity in return for their money. There is no set proportion, buttypically entrepreneurs will hand over about one-third of theircompany in return for VC. Some real-life examples come fromAllen & Buckeridge’s mid-2000 portfolio. At knowledge-management company 80/20 Software the founders had 36 percent and A&B had 16 per cent; at games maker Micro Forte thefounders had 42 per cent and A&B 36 per cent; and at bio-medical imaging company Torson the founders owned 22 percent 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 publicthrough a float. He quickly lost control and then interest inworking there as the other shareholders took the company ina 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 notagainst the IPO play, just because I trusted the wrong peopleand conceded a lot of the power that was in my hand immedi-ately before the IPO. That was my naivety, my hubris, if youlike. But if you can find a big pot of funding from privatesources, 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 thatif you’re obsessed by voting control you probably won’t everobtain enough funding to achieve your business goals. Thisis fair enough and well argued in Golis’ book. It is also backedup by the story of LookSmart (see Chapter 6) which demon-strates the speed with which companies can grow if they

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‘lie back and think of England’, as Spike’s venture capitalist John McGuigan once joked. However, you should expect a VCto tell you not to worry about equity because, at the end of theday, their business model is short-term and depends on youceding equity while yours, unless you’re the ‘get rich then getout type’, is likely to be more long-term and control-centric.

I’m also fond of point 7 in Golis’ rules because it remindsentrepreneurs that good venture capitalists—ones that havereal, hands-on experience building companies rather thanthose that have just walked out of the lofty environs ofmerchant banks, management consultancies and other placeswith nice toilets—like thrift. If you appear to be wastingmoney on fancy offices, designer suits, flash cars and glamorousparties, VCs are unlikely to give you more.

Due process

VC funds typically have strict processes for investing money.Because they are ultimately accountable to superannuationfunds and other higher investors, they need to have a systemin place that ensures their investments are sound and thereasons behind them defensible.

Nanyang Management’s investment process, for instance,comprises six structured steps that involve finding deals tofund, screening potential investees, formal due diligence andthen legal work if the deal goes ahead. Nanyang says itreviewed 808 business plans in the three and a half years to theend of 1999. Out of those, only about 2 per cent of potentialdeals got to due diligence but 75 per cent of those moved on tosettlement. If all goes well, the entire process takes 10–14 weeks (see Appendix 2: Steps in the VC process).


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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 historyas among the most bizarre ever. The US market saw 319 initialpublic 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 servicesaround an operating system it didn’t even own, Linux, saw itsshares rise nearly seven times during their first day on theNASDAQ. The next four craziest first-day gains were onlinecommunity theglobe.com (606%), data processor FoundryNetworks (525%), and e-marketplace operator FreeMarkets(483%).20

In Australia, more than 90 companies floated during thelast six months of 1999 alone. Companies like Open Tele-communications rose four times on their listing day. WaynePasslow, the chief executive of Open, went from being worthabout $64 million to $280 million in one day. It was crazy. Thepublic markets became a form of venture capital for manyuntested companies. Real venture capitalists noted that manyof the companies which floated during the period had previ-ously failed to raise money privately. Proving their point,shares in almost 60 per cent of the 1999–2000 floats proved tobe dud investments, finishing the year trading below theirissue 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.’ Theacademic maintains that good companies tend to find privateequity while the public market enables the rest to raise money.

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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 dispro-portionate number of lemons because people tend to hang onto good cars and pass off low quality ones to car yards. Theuninformed shopper, whether for cars or stocks, finds it hardto tell the difference.21

By this logic, you could have floated a Leyland P76 in late1999. While it may not be quite so easy to raise money from the public these days, the ASX and other markets do remain agood source of expansion capital for established companies orpeople trying to test a new idea using other people’s money. A rule of thumb is that you shouldn’t go to the public marketfor less than $5–10 million. The reason is that it will cost youat least $500,000 to conduct a share market float and up toseveral million dollars if you pay a stock broking firm a shareof the raised capital to ‘underwrite’ the offer. This is a form ofinsurance and typically runs at about 5 per cent of the fundsraised, depending on the risk profile of the company that isseeking 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 operatinga public company. Even the smallest company will spend up to$1 million each year dealing with the market, holding annualand extraordinary general meetings, creating and distributingannual reports, paying high quality public relations firms tomanage their image, dealing with analysts and all the otherobligations that go with being a public company. These includethe need to use top-shelf legal and accounting firms.

Another reason to avoid the market if you’re small is thatyour revenue and earnings are likely to be inconsistent. Onebad quarter and you could be dumped by investors andstruggle to recover. Also, if the value of your publicly traded


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shares is less than about $150 million, institutional investorswon’t buy your shares because it’s not worthwhile for them toanalyse their value. This will leave you with a shareholder basemade up of individuals, most of which will have no long-termloyalty to your company.

Whether you’re big or small, you’ll have to get used tohaving to open your books to the whole world, including your customers. David Tudehope at Macquarie Corporate Tele-communications says that this was the biggest change heexperienced in going public. ‘I’d say that the top five issues forcompanies going for a public listing are, number one, publicprofile. It’s a big change if you’re not used to it.’22

Other key issues included the distraction of staff before thefloat and after listing. This included the extra work involvedin floating the company but also questions such as which staffwould receive stock options. The third key issue was the intro-duction of independent directors to the board, as requiredwhen a company goes public, Tudehope says.

The fourth issue, according to Tudehope, is the cost of thewhole process. Since much of the cost of floating is wrapped upin paying fees to advisors, you can lose a lot if you don’t listsuccessfully. There are plenty of companies around Australiathat are still licking their wounds after preparing to float inearly 2000. Many in this group paid tens of thousands of dollarsin fees only to find that their underwriters wouldn’t supporttheir floats after the market turned sour. Notably, the definitionof ‘sour’ is usually agreed in writing in underwriting contracts.It will usually take the form of a clause saying that the under-writer reserves the right to cancel the float if the NASDAQComposite Index falls below 4,000, for example.

Finally, there’s the sheer workload involved in floating acompany. Tudehope says that floating is completely absorbingfor its chief executive, in particular, and takes immense

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stamina. For instance, he conducted 92 investor presentationsin the lead up to Macquarie’s successful float on 27 September1999 which raised $135 million.

‘Number five is the enormous amount of work before thefloat,’ he says. ‘From 1 July to 27 September I worked for the company for about three or four days—about a day amonth—the other 30 days were working for the brokers.That’s the most intense period.’

Finally, it’s worth remembering that despite all the hypeabout IPOs, very few companies ever conduct one. Out of thehundreds 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 Govern-ment’s National Office for the Information Economy, made an interesting comment before he quit the public service for private enterprise. We were watching entrepreneurs andinvestors mingle at a First Tuesday event in Sydney. I saidentrepreneurs seemed to be finding it hard to swallow handingover large amounts of equity to the high-tech incubators thathis office had just furnished with $78 million. A formerMcKinsey & Co. consultant with a passion for Byzantine his-tory, he said that our entrepreneurs seemed to be strugglingwith the idea that to create large companies you have to cede alot of equity and control to financiers. He summed this up withthe Chinese question: ‘Do you want to be head of chicken or tail of ox?’

It’s a powerful question. Twomey’s point was that manyAustralians would rather have control of something small thanpart of something big but ultimately beyond their control. This,he felt, was one of the reasons that we struggled to create large


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corporations. I would add that Australia’s larrikin tradition andhealthy distrust of authority could be a contributing factorhere.

The big question for you as an entrepreneur is what youwant from investors and just how much control you’re preparedto cede. Is it just cash or are you also seeking guidance or someform of strategic assistance? Thinking back to Golis’ third rule,do you have to get those from the same person? Perhaps mostimportantly, can the person you’re talking to really deliver anddo you think that you can get on with them in a high pressurebusiness relationship that is going to last several years?

These are difficult questions. Investors dress it up in differ-ent ways but money is a commodity. Friends and family willtypically offer pure cash and say, ‘I don’t understand whatyou’re doing but I believe in you so here you go and God bless.’Angels and incubators will say that they can save you frommaking a lot of silly mistakes in your formative months oryears. Venture capitalists will also promise to save you frommistakes but will also talk about their ability to ‘plug you in’to their business networks.

Investors may also offer to help you develop strategy. Thisis one to be particularly wary about. The reason is that a profes-sional investor’s core competency is usually raising and placingmoney, not identifying opportunities and creating businesses.Andy Rachleff, a general partner at leading US venture fundBenchmark Capital, put this well in an interview with RedHerring magazine. ‘Our industry is made up of a bunch oflemmings. When was the last time you heard an original ideafrom 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 entrepre-neurs are the true heroes. They’re where most of the good ideascome from.’

23

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Just as important as knowing what you want is consideringwhat your investor wants. In particular, ask yourself whetherthey’re there for the long haul like Bill Ferris, who spent sevenyears with Datacraft Asia Ltd and five years backing AustalShips, or are they a paper-shuffling shark? Perkins again has adisturbing 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 thismakes me one of 400,000 Australians who would also be JamesDean. To end up in this situation, I attended some ridingcourses, passed a test, then got married and was told my rid-ing days were over. I was also told that my drinking and manyother types of days were over too, but I won’t burden you. Themotorbike exercise did however leave me with a useful analogyfor what too much capital can do to an immature company.

Also sitting my riding test was a guy called Tony. He wasabout nineteen and had been forced to get his licence again after


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losing it a year earlier. He’d got his learner’s permit and goneout and bought the most powerful 250cc racing bike he couldfind. 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 carefullybecause the steering system was still slightly mangled afterthe accident that had cost him his licence. He’d gone flyingaround a blind corner in an industrial estate only to meet a lowconcrete wall at about 80 kilometres an hour. He hadn’t foreseenthat this might happen but I’m sure that everyone that knewthis guy expected him to hit something sooner or later. Theydidn’t give him his licence again.

Money is power, as they say, and too much of it can do moreharm than good. As Randy Komisar says in his book The Monkand the Riddle, ‘When too much money is pumped too fast intoa startup, there’s no room for mistakes. The initial product andthe 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 thatlasted only six months after launching in late 1999. Thecompany 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 inLondon. The company also failed to get its technology systemsworking. Ironically, quickly calling the kettle black was AlisonHarrington at TheSpot who suffered an almost identical fateone month later after burning through $12 million in one year.27

She told the Sydney Morning Herald, ‘[Boo.com’s] site launchwas delayed, they had heaps of technical problems and theyhad an incredible burn rate. Plus, you need a compellingoffering and I’m not sure selling clothes works on theInternet.’28

One factor in building companies in periods of high tech-nological change is that there is a lot of uncertainty about how

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quickly consumers will adopt innovations, from mobile phonesto genetically modified food. One of the reasons that e-tailerssuch as TheSpot collapsed was that they overestimated howquickly people would take to shopping online. Working fromoverly optimistic projections of demand, they spent too muchon advertising and infrastructure too early and were quicklycaught out when sales failed to match expectations. ‘I think wewere spending too much money on marketing, particularly inthe off-line world,’ Harrington said in late 2000, adding thatmanagement also spent too much time chasing joint venturedeals.29

A lack of money, on the other hand, ensures that companieshave no choice but to operate profitably and build capacity inalignment with market demand. In other words, povertyimposes discipline. This is the opposite of ‘If we build it theywill come’ and says ‘If they really want it they’ll pay me tobuild it’.

Another sober voice is Richard Foos, president of RhinoRecords in Los Angeles. Rhino offers re-issues of rare record-ings and was acquired by Warner Music in 1998. In aninterview 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 sofast 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 justright, like OzEmail did, you’ll be in the box seat. Vivian Stewart


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believes that it would not be possible to launch Magna Dataagain without substantial external finance. ‘We’d never be ableto afford to do that again. The pace of the industry is now sofast that you can’t afford to grow organically,’ he says.31

Ironically perhaps, the history of Magna Data shows justwhat can be achieved without formal venture capital if you’reprepared to enter a market very early and work hard.

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fiveCASE 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

In 1993, the Internet was a place that geeks andacademics went to use online bulletin boards,

send simple electronic mail messages and occasionally down-load text files. The Internet in Australia was basically theAustralian Academic and Research Network (AARNet), ownedand operated by the universities. It was a monochrome worldwhere you had to know how to use programs with names likeTelnet and Gofer. An understanding of Unix programming alsocame in handy when things weren’t working and the WorldWide Web was yet to be set loose from the labs.

At the same time, four former schoolmates were graduatingfrom university in Sydney and looking for something to do.Jason Ashton, Luke Carruthers, Mark Cramer-Roberts andVivian Stewart decided to create one of Australia’s first com-mercial Internet service providers. Ashton had studied atSydney Grammar. Carruthers and Stewart had been to Kings

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and Cramer-Roberts had been to Cranbrook. All of them hadbeen around computers since they were young. Ashton, forinstance, says he saw one of his first laptops in about 1983. Itwas a $15,000 machine from Compaq that his father hadbrought home from work and so heavy that it might havebroken 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, contributedequally. Their fledgling company was started with a 486 server,a modem and a router from Cisco Systems—the three key piecesof equipment that enable ISPs to connect subscribers to theInternet. The money tided them over for their first four monthsof 1994 by which time they’d started to make money, sellingbasic Internet access services for $39 per month, $10 more ifyou wanted technical support. By the end of 1994 they wereoffering PPP (if anyone can remember that) access to the webat $49 per month and turning over $250,000 a year.

The Magna boys, as they’d become known, realised theywere on a winner when their revenue surged to $1.25 millionin the year to June 1996 and $4 million the year after. By coinci-dence, 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 asmooth transition. The company’s network was a hastilyconstructed mess, held together by the computing equivalentof Perkin’s Paste. They didn’t have enough modems leading to frustration among customers who couldn’t get online. Theirtelephone support was so bad that people used to come in andsit in their foyer until someone dealt with them. Yet they con-tinued to expand rapidly, helped in part by the fact that everyInternet provider in town was suffering under the weight of the same unexpected surge in demand. They were evenwinning a majority of the corporate business around Sydney,

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snapping up clients before the behemoth Telstra could workout how to sell Internet time. Indeed, the first Sydney MorningHerald website was hosted at Magna Data. And every weeknew staff were added to the point where they quickly began toburst out of their Castlereagh Street offices.

One of the reasons they emerged from this chaos as profitableand with full control of their company was their policy ofcharging three months in advance for all services. This gavethem the cash flow they needed to cover the growth in staff and the network. And they didn’t try to be the ideal providerfor everyone, preferring profitability over perfection. Ashtonconcedes that the company took the approach of keeping 80 percent of customers happy rather than going broke trying to get100 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 customerdemand than try to second guess the nascent market andpotentially get it wrong.2

The other reason was the management team. The fourfounders of the company all played important roles. Carruthersled the company’s technical, marketing and regulatory rela-tions. The latter role was crucial in the late 1990s as the Internetgradually passed from academic to commercial hands in a seriesof steps, any of which could have proved fatal to Magna Data.He has since left the company, working as an investor andbusiness development adviser with Internet startups such asNetPort Hospitality Systems (now inter-touch). Cramer-Robertswas the corporate salesman and is today major account servicesmanager at Davnet, the listed telecommunications companythat bought Magna Data in February 1999. Stewart was also insales, marketing and general business development. As above,he went on to become an investment mediator at Tinshed aftera stint at Intel in Hong Kong.

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However, it is Ashton, who studied physics and mathematicsat the University of Sydney and has a Masters in Commercefrom the University of New South Wales, and Carruthers, whostudied marketing, that people credit most with making MagnaData a successful business.

Ashton’s drive and discipline helped carry the companythrough its early years and saw him emerge at age 28 as chiefexecutive of Davnet Australia, with eight million shares in thecompany. When Magna Data started, Ashton knew he still hada lot to learn about business. Without much family money tofall back on he also had to earn a living and took a job withinthe operations and finance division of the Sydney printingcompany Diamond Press. While printing was a long way fromtelecommunications, he learned a lot about the basics of busi-ness 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, andStewart’s father who was also an executive.

After a full day at Diamond Press, Ashton would go in toMagna Data in the evenings and join Carruthers until the earlyhours of the morning. He kept this up for two years, oftenworking sixteen to eighteen hour days, six or even seven daysa week. Ashton left Diamond after it became clear that MagnaData needed the other half of his sixteen hour day as well.

‘We used to work insane hours,’ says Carruthers. ‘Throughto the early hours of the morning every night of the week. Wenever thought of it as working hard though, we were just soenthusiastic about what we were doing.’3

‘We were always very tight with cash,’ Ashton says, addingthat despite what his former partner Stewart might say, thingsaren’t so different now. ‘Hard work is still a substitute for lots of money. I know lots of very successful guys buildingbusinesses without VC in the Internet.’

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Carruthers maintains a lower public profile than Ashton butcommands a lot of respect within the Internet industry as anentrepreneur and technological innovator. Given that he tookhis $4 million almost entirely in cash and has since activelyreinvested it in other new high-tech ventures such as inter-touch, he may well be the wealthiest, post-Internet crash, of thecompany’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 theearly years but points out that the company broke a lot of newground.

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 wasshowing just how quickly you can build a company with largeamounts of capital. While OzEmail was eventually sold formuch more money than Magna Data, it never recorded a fullyear profit. Magna Data on the other hand was always profit-able and secured the lion’s share of corporate customersthrough focus, corporate demeanour and the very early intro-duction of services such as HDSL (high-speed digital subscriberline)—a service that allows big companies to get 1–2 megabit-per-second links to the Internet over normal copper phonelines at a fraction of the prices they would have paid Telstra.Today Davnet is still outfoxing the giants but the stakes haverisen to much faster gigabit per second systems.

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Magna Data also had a sense of mission that was shared bythe company’s young and idealistic founders. They wanted tomake a difference—a common factor among many startups thatset off blindly into their chosen areas of a new economy. Theyenjoyed running rings around Telstra. Indeed, their office wasdirectly across the road from the incumbent carrier and theyused to illegally park their cars on Telstra’s footpath down-stairs as a sort of convenient taunt.

By the time Davnet paid $16 million in cash and shares forthe company, making each founder a millionaire four timesover before their 30th birthdays, Carruthers and Stewart hadalready left. Both took more cash than shares in Davnet, thena listed but largely unknown player from Melbourne. Cramer-Roberts was still within Magna Data but also took more cashthan shares. Ashton was the most committed to the company—or the last one standing after a period of tension between thefour founders, depending how you see it—and a believer inDavnet CEO Stephen Moignard who had started the companyin 1997 with $130,000 from his father.4Ashton took eightmillion shares in Davnet, then worth about 30 cents each, anda small amount of cash. This was the move that made him a dot-com poster boy as Davnet shares climbed as high as $5.90 in thefollowing year. The most significant was the November 1999move by Japanese carrier NTT, the world’s biggest telephonecompany, to buy just under half of Davnet Telecommunica-tions for a staggering $119 million.

‘Philosophically, we would never have sold to Telstra,’ saysAshton. ‘If we were going to merge, it was going to have to besomeone small.’

Magna Data’s decision to merge with Davnet followed aperiod 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

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how to package and sell the slippery and technically compli-cated commodity of Internet access. Ashton believes thatMagna Data, with its large and established base of corporatecustomers, could have held out longer and been bought for more. OzEmail, for instance, was looking down the samebarrel but waited until December 1999 before selling for $520 million. However, he says that he and Cramer-Robertsliked where Davnet was going. The company was also smallenough for them to maintain leading roles.

About that Ferrari. Ashton is unapologetic and says he hasalways liked powerful cars. His first car was a 4.1-litre V6 thathe got for $150. Next was a $2,000 V8. At Diamond Press, hetalked them into giving him a new, 5-speed V8 Commodore asa work car. Testament to the hours he used to work, this dark-blue 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’dalways been passionate about cars. I just couldn’t afford fastcars.’

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sixCASE 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

One company that accepted the rules of theAmerican 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 abarrel of laughs. However, it has helped make Ellery and herhusband multi-millionaires.

The idea of LookSmart was hatched in an apartment in NewYork City in 1995. Ellery was laid up in bed, pregnant withtwins Max and Ruby. Thornley was working in the new mediadivision of McKinsey & Co.’s New York office. In anotherexample of ‘domain experience’ leading to venture success,Thornley specialised in advising clients about online adver-tising. Ellery, who had previously managed a small computerretail chain in Australia and edited a magazine on studentfinance, was spending her days surfing the World Wide Web.Leaning back on the pillows, she realised that people weregoing to need a lot of help when it came to navigating the massof material on the network.

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‘Our business model is actually quite simple—we havedeveloped the world’s premier Internet directory and use it toprovide outsourced search solutions,’ Thornley says in manage-ment consultant-speak in the company’s 1999 annual report.

While Yahoo! and other online directory and search com-panies were already operating, Ellery and Thornley believedthat such automated systems were only so useful. To makedirectories truly valuable to users, they reasoned, someonewould have to go out and look at websites then organise and ratethem. They also figured that once they’d gone to all the effortof having their own ‘webrarians’ review and categorise sites,they would have a proprietary database of information thatwould differentiate them from their competitors. They couldthen also license the content contained within the database toother Internet companies, placing them in the informationsyndication business. Akin to Yahoo!, LookSmart also took theapproach of organising its directory according to categoriessuch as ‘sport’ rather than centring it on keywords like ‘soccer’.Beyond helping users, this was designed to maximise potentialelectronic commerce revenue. Another benefit of manuallyorganising 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 alsotargeted its directory to people aged over 30.2

Despite being just about to become parents, Ellery andThornley were looking to get into a venture of their own after having travelled from Australia to Malaysia and now theUS for McKinsey. In October 1995, the pair returned toAustralia and founded HomeBase Directories Pty Ltd. Seeingthat they were on the right track but under resourced and along way from the main game, they did a deal with one ofThornley’s former clients, Reader’s Digest Association. Reader’sbought 85 per cent of HomeBase in July 1996 through a new

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Delaware-based company, NetGet Ltd. This was later renamedLookSmart Ltd in the same year. All this time, Ellery andThornley had editors, located mainly in Melbourne, churningout website reviews using seed money from Reader’s.

In July 1997, LookSmart moved its headquarters to SanFrancisco but its relationship with Reader’s was souring. Elleryand Thornley were concerned that the directory was not apriority for the larger company and felt hampered by itsbureaucracy. In October 1997, they convinced Reader’s toallow them to buy back its 85 per cent of the company inexchange for warrants to buy nine million LookSmart shares,or 10.5 per cent, and a US$1.5 million promissory note—aform of IOU.

While they were lucky to get out on these terms they foundthemselves as the major shareholders in a company that waslosing money fast. Ellery says that they could very easily havegone bankrupt at this stage. The company had almost 50 peopleand 350,000 hits a day on its website but was selling onlyUS$120,000 per month worth of advertising. Its ‘burn rate’, orloss per month, was running at about US$300,000.3 The pairtemporarily moved back to Australia in late 1997 with a lot of personal debt and potentially large tax liabilities caused bythe change in country. With their credit cards at the limit andstaff cutting them slack on wages, Thornley set out to raiseventure capital. Paul Riley, the partner at Sydney venture firm Australian Mezzanine Investments (AMI) that savedLookSmart, says that when he first met Thornley the companywas about two weeks from failing to meet payroll. In a snapdecision, AMI chose to invest US$1.5 million through itsAMWIN fund, a joint venture with the US fund Walden Inter-national and a recipient of money under the government’sInnovation Investment Fund scheme.

The money was finally committed in March 1998 and

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bought AMWIN 15 per cent of LookSmart. Just two monthslater, US cable company Cox Communications invested anadditional US$6 million under a deal that valued LookSmart atUS$15 million. A crucial booster around this time was aSeptember 1998 licensing deal with Microsoft under which the company would provide its directory information to thesoftware giant for US$80 million over five years. According toGeorge 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 decisionin May 1998 to spend the entire US$6 million that it had raisedfrom Cox on a marketing deal with Netscape. Netscape makesthe Navigator web browser that was then used by a majorityof Internet users. For this reason, its home page was one of themost ‘hit’ sites on the Internet and Netscape had been chargingmulti-million dollar fees for companies to advertise theirproducts and services. For its US$6 million, LookSmart wouldbe featured as a leading search engine on the site, raising it tothe upper echelons of the global Internet industry. Fosterbelieves that this deal was among those that made LookSmart.He also says that it illustrated Thornley’s speed, flexibility andpowers of persuasion.

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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 thatLookSmart could be floated and added to its fundraisingmomentum. Yahoo!’s success on NASDAQ was also reassuring.Australians that put up money included Australia’s MacquarieBank and Kerry Packer’s private company Consolidated PressHoldings. LookSmart also split off about 15 per cent of thecompany’s shares for staff to ensure that the whole team re-mained squarely focused on capital growth in the lead up to thecompany’s now famous NASDAQ float in August 1999. Withjust four years of hard work and a total of about US$70 millionin venture capital behind it, LookSmart was taken to mar-ket at a valuation of US$1.46 billion, raising net proceeds ofUS$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 aboutUS$290 million. Within two months, the shares had risen morethan 100 per cent and seen the pair’s paper wealth brush the$A1 billion mark. AMWIN, which by the time of the float hadinvested a total of $5.4 million, was sitting on a profit of around$280 million. The return was also a win for the AustralianFederal Government that had put money into AMWIN throughits Innovation Investment Fund scheme that enabled the VCfund to take the risky, snap decision to invest in LookSmart.

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Beyond the trials of raising money—which became Thorn-ley’s full-time job from 1997 to 1999 while Ellery, as companypresident, oversaw its operations—the company has also hadplenty of growing pains. Some of the company’s US staff be-came so disaffected with what they described as an oppressiveand uncaring environment at the San Francisco headquartersthat they created a ‘LookSmart survivors’ discussion group,dubbed LookStupid. It makes sense that writing websitereviews could be oppressively dull, but Ellery comments thata challenge of doing business in the US as an Australian hasbeen that American employees are highly sensitive to criticism.No doubt there has been some rough and tumble as the com-pany lurched from financing round to financing round, but it’shard to tell whether LookSmart has unfairly exploited staff orif its Aussie management simply lacked tact.

In the same way that travel photos fail to convey the heightof a mountain range, it’s hard to describe in words the scale ofwhat Ellery and Thornley have achieved. And how quickly. I remember watching Evan Thornley speak at the AustralianFinancial Review’s Internet Awards in Sydney in late 1998. Thecompany had won a prize and Thornley got up to accept. Noone knew much about the company except that it was run byAustralians and presumed to take on the likes of Yahoo!. Itseemed destined to fail and become yet another example, likeSabela Media and data networking equipment manufacturerJNA Telecommunications, of Australian innovation being extin-guished by American capital. When Thornley announced thatthe company was going extremely well and would make itsinvestors ‘richer than God’ it sounded like so much hot air.

LookSmart took on the elite of the global Internet industryand emerged as one of the major players. It has also establishedone of the few global Internet brands to come out of Australia.Beyond the wealth—which was dwarfed by about a factor of

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ten by the amount made by the founders of Yahoo!—the sitehas become one of the most popular in the world. LookSmartalso has alliances with the likes of Sony and Time Warner andhas begun building web directories in 30 countries.

By mid-2000 LookSmart was on track to take in annualrevenue of more than US$100 million and was gradually reiningin losses that continued to run at about US$30 million a year.Asked if their life had changed with all the money, Ellery saidno. ‘It’s so unreal for us,’ she said, adding that about all they’ddone was buy a car—a Jaguar, mind you—and had startedflying their friends and family to the US for get-togethers. Shealso took as much delight in watching the company’s staff buyhouses as feathering their own nest. ‘I really think that wederive an enormous joy and pride from building a great com-pany. Doing what’s almost impossible and continuing to growthat.’6

LookSmart watchers will know that the company’s stock fellunder pressure in late 2000, dropping to under US$10 per shareon NASDAQ. So have Ellery and Thornley lost the money theyonce had on paper? Yes, but not entirely. In a practice that ismore accepted in Silicon Valley than other parts of the world(where people think it shows a lack of faith), they have beengradually 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 averageprice 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 helpedraise the reputation of all Australian business people both there and around the world. LookSmart is also a genuine next-generation 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

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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 experienceas an angel investor. As above, success breeds success andLookSmart’s achievement can be expected to pay subtle divi-dends for years to come.

However there is also a lesson in the LookSmart story. Thecompany is a winner but nowhere near as successful as Yahoo!and the key reason for this is that LookSmart was starved ofcapital in its early days after its founders retreated from San Francisco to Melbourne. Yahoo!, on the other hand, wasfast-tracked through the cream of American venture capital acouple of years before LookSmart, giving it a head start thatLookSmart could never hope to match. If we are to help createfuture Yahoo!s, Australia needs a much more sophisticatedventure capital industry and risk-oriented business culture.

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sevenCASE STUDY: ONE.TEL

Rodney Adler is probably right when he saysthat there are a lot of people that grow up in

wealthy families but never win the support of business peoplelike James Packer and Lachlan Murdoch. But then again, thereare 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 com-munity. It starts in 1991 when Rich sold the remains of Imag-ineering, 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 andanother $11.57 million in the six months to 30 June 1990.1 Thecompany’s shares, which had once climbed to around $8, wereworth only about 10 cents when the company was taken over by Hong Kong group First Pacific in 1991. However, thecompany had briefly catapulted Rich into the BRW Rich Listand, as Rodney Adler points out, even though it was sold offat fire-sale prices, Imagineering never collapsed. Indeed, thecompany lives on today in the form of Tech Pacific Australia,a large and successful operation that still distributes high-techproducts and services in Australia.

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With his business reputation in tatters, but still worth acouple of million dollars, Rich spent a few years skiing, learningto fly and studying molecular biology and nanotechnology. Healso did an executive program at Wharton business school inthe US and started a family with his wife Maxine.2 That mightsound like fun, but it was a harrowing period for the formerhigh-flyer. Most galling was a continuing stream of humili-ating media reports, the worst of which suggested that Rich haddisappointed his father. Even today, he still has enemies in thebusiness community from his Imagineering days.

In 1995 Rich re-entered Australian business life with a planfor a new telecommunications company that would resellmobile phone services provided by Optus, operator of thecountry’s second largest digital (GSM) mobile phone network.Optus had decided to appoint five resellers and invitedcompanies to pitch for the positions. While others such asHutchison Telecoms, now called Orange, said they would targetbig-spending business people and others showing an earlyinterest in mobiles, such as trades people, Rich proposed totarget run-of-the-mill consumers—customers Optus thoughtcouldn’t be serviced profitably. Rodney Adler, who supportedthe development of One.Tel and became a foundation investorin 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

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The first Optus knew about Rich’s plan was when chiefexecutive Bob Mansfield got a call out of the blue from Rich.The call was passed on to John Greaves, then Optus’ financedirector, whose first thought when he and Jodee met was thathe 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, whichwas 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 con-sultation with one of Adler’s business analysts from FAI.According to Adler, FAI then agreed to invest $1.5 million tobuy 20 per cent of the company. Optus also came to the party,buying 30 per cent. Rich received around 25 per cent of thestock for having the idea and bought another 20 per cent byputting in $1.5 million of his own money. Rich’s formerassociate at Imagineering and now joint managing director ofOne.Tel, Brad Keeling, was given about a third of Rich’s shares.James Packer completed the picture a few months later, buying5 per cent for the now higher price of several million dollars.Without the cost of building a phone network, the companywas cash flow positive from the day it started trading in May1995 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, Mansfieldsays:

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.

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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 wouldset Rich on the path to becoming a billionaire. ‘He would havebeen a brave man if he thought he was going to be a billion-aire from that meeting because I certainly didn’t think it wouldbe that way,’ Mansfield says today. One unexpected factor was that from 1995 to 2000 the mobile phone market grewalmost four times more quickly than anyone expected. This waslucky for One.Tel which rode the wave and was resellingOptus’ network services to 285,000 mobile customers by late2000 and had another 57,000 subscribers on a new GSMnetwork of its own. Adler believes this was the only thingOne.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 cus-tomers, 1.2 million of whom are located in Europe and about

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70 per cent of whom use the company’s cheap long distancephone services. ‘We are the only Australian brand, other thanFoster’s, you recognise when you get off the plane in London,’Keeling has said.6 This was amusingly reinforced in late 2000when London’s Financial Times incorrectly ran a photo ofTelstra chief executive Ziggy Switkowski, describing him in the caption as the head of One.Tel, the telecommunicationscompany that Brits now most readily associate with Australia.One.Tel achieved this rapid growth in Europe through amassive consumer marketing blitz, made possible through thebacking of News Corporation which owns England’s largesttabloid newspaper, the Sun, and many other media assets inEurope.

News Corporation became an investor in One.Tel in February1999, promising half of $700 million alongside Packer’s Pub-lishing & Broadcasting Limited. The money had been suppliedin cash and kind (advertising) but One.Tel still unveiled astunning loss of $291 million on revenue of $653 million for theyear to mid 2000. Announcement of the loss coincided withrevelations that One.Tel had paid Rich and Keeling $7.5 millioneach in the same financial year. The massive cash payouts werepartly the result of their success in raising One.Tel’s marketcapitalisation 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 valueto around $1.5 billion. The slump also brought Rich back fromthe billionaire club, reducing the value of his holdings toaround $200 million.

As chairman of Telstra, Mansfield finds it awkward to talktoo positively about rival One.Tel, but he tips his cap to Keelingand Rich, saying that it’s important for more Australian com-panies to succeed offshore.

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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 havemade One.Tel what it is today. The first was winning the rightto resell Optus’ mobile phone services in Australia and focus onobtaining customers. The second was the company’s decisionto spend $9.5 million to buy some leftover blocks of wirelesscommunications spectrum in Australia in September 1998. Thisenabled it to start creating the above mentioned GSM networkon its own and enter into direct competition with the nation’sexisting GSM network operators: Optus, Telstra and Vodafone.While contradictory to the company’s oft-stated preference forowning customers rather than infrastructure, the move wasexpected to deliver higher profit margins and give One.Telmore freedom to introduce innovative services. The other pointwas the spectrum was dirt cheap and gave an opportunisticOne.Tel an asset against which it could borrow further moneyto fund its international expansion. In particular, US giantLucent Technologies gave One.Tel a billion-dollar line of credit,enabling it to build networks now but pay for them later. Inretrospect, it seems like an obvious move. But at the time, thecompany ran a very real risk of destroying its relationship with Optus. Even worse, Adler says, it just didn’t have themoney.

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

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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 Com-petition and Consumer Commission (ACCC), it meant thatOptus, Telstra and Vodafone would be forced to allow One.Tel’scustomers to use their networks for a reasonable fee. Thismeant that even though One.Tel had only bought patches ofcommunications spectrum in some capital cities, it offered a

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‘national’ service from day one. Subscribers wouldn’t realise,but when they left One.Tel’s direct coverage area, their callswould be carried by another phone company. In the end, the ACCC did mandate roaming but the decision could havegone either way. The existing players had a strong argumentthat it would undermine their incentive to invest in futurenetwork infrastructure and degrade the quality of tele-communications for all Australians. If the ACCC hadn’t stuckto its guns and resisted the lobbying might of Telstra and theothers, One.Tel’s spectrum investment would have been a writeoff. 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 and2000, wireless spectrum became one of the hottest commoditieson earth. At the height of the global boom in Internet and tele-communications shares, licences to the same sort of spectrumsold for more than A$100 billion in the UK and Germany alone.Just a few months later, a similar auction in Italy for comparablefrequencies netted only half the amount.

However, the increase in the value of spectrum also costOne.Tel dearly when it sought to augment the $9.5 millionworth of capacity. For all its bravado, the company had onlysecured 2.5 megahertz (MHz) of spectrum in most cities but,according to the Australian Financial Review, needed up to10MHz in each place to run its wireless networks. By the endof this second auction in March 2000 it had paid 55 times itsoriginal investment, or $523 million, for licences to 12.5MHzof spectrum in Sydney and Melbourne and 10MHz in Adelaide,Brisbane and Perth. The high price was met almost entirely by

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News Corporation and due in large part to aggressive competi-tion from another carrier, Hutchison Telecoms. The AustralianFinancial Review went on to suggest that One.Tel had becomea ‘casualty in a global turf war’ between the Murdochs at Newsand the Li family of Hong Kong, owner of Hutchison Telecoms.7

Most reports about One.Tel focus on the big, often frighten-ing, numbers. But big deals will only get you so far. There aremany other factors that have made One.Tel a real and fastgrowing business. The first is Keeling and Rich’s managementstyle. The pair were previously together at Imagineering andwork extremely well together. While interchangeable, they also complement each other. Rich focuses more on high-levelstrategy while Keeling is known more for his operating andmarketing expertise. In 2000, for instance, Rich moved toEurope to continue the company’s expansion there while Keel-ing took over day-to-day management in Australia. Althoughboth are into yoga and are slightly ‘new age’, Rich dreamed upthe idea for One.Tel and remains the company’s visionary, whileKeeling has been more focused on the nuts and bolts of makingit a business. Both John Greaves, the company’s chairman, andRodney 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 com-pany in the form of a unique buddy system. Like scuba divers,

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everyone in One.Tel is ‘buddied’ to another person that coulddo their job if required. This is a central element in One.Tel’steam-oriented culture. It also means that business can continuewhen a person is sick or resigns, which is a major issue with alarge, young and transient staff doing mainly call centre andsales work. In telecommunications, it’d be seen as building asystem 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 hand-painted signs adorn every corner. There are also very fewmeeting rooms. Instead, staff meet on a loose collection of officechairs behind palm trees located at one end of each floor. Thereare no meeting tables. Even Rich and Keeling don’t have offices,preferring instead to work at two massive antique desks thatlook back over one floor of their building. They don’t makeexceptions for important visitors either. The day that LachlanMurdoch and James Packer met at One.Tel to announce theirjoint investment in the company, they were to be found sittingaround Rich’s desk on standard chairs, not cooped up in aprivate conference room. In other words, it couldn’t be furtherfrom Optus and Telstra.

A book that has influenced One.Tel’s management approachis Ricardo Semler’s Maverick.8 This inspiring volume, recom-mended to me by John Greaves, talks about Semler’s companySemco, a Brazilian industrial group that has introduced manyindustrial innovations such as allowing factory workers toorganise their own shop floors, paint walls and even decidetheir own pay packets.

It’s not all laissez-faire at One.Tel though. For instance, andironically, you won’t hear the sound of ringing phones at thecompany. Rich hates it and, in addition to banning staff fromhaving their mobiles on in the office, has mandated that alloffice phones be answered within two rings or automatically

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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 companyannouncements.

The company has also built its own customer managementsystem, designed from day one to enable it to treat its mobile,long distance and Internet access subscribers as single cus-tomers. It is also key to the company’s ability to chase up baddebtors quickly and, despite the warm and fuzzy decor, comeswith a sophisticated system for tracking staff performance.

‘No longer is [the telecommunication] industry dominatedby ex-Baby Bell executives,’ Rich once laughed in an interview,taking a swipe at then Telstra chief executive Frank Blountand 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 usingeach 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 capitalleads to the creation of Australia’s first global telecommunica-tions player. The alternative is that One.Tel has bitten off morethan it can chew and ends up crippled by a weak balancesheet. By late 2000, the company was failing to win capacityat the European spectrum auctions. It was also sending outconfusing messages to analysts and media about its intentionstowards its Australian network and plans to team up withSpanish carrier Telefonica. There was a feeling that One.Tel wasup on a high wire and that its safety net—the abundance ofcheap capital for telecommunications companies—was shrink-ing 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

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

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eightCASE STUDY: MACQUARIE CORPORATE TELECOMMUNICATIONS

Once we define ourselves in terms of others, we lose

the freedom to shape our own lives.

—JIM COLLINS1

If someone offered you and your brother a coupleof hundred million dollars in cold hard cash would

you turn it down? Think about it. Enough money to neverwork again. Enough money for your children to never workagain. Or their children for that matter. Aidan and DavidTudehope did.

Crackpots, right? Perhaps.Macquarie sells telecommunications services to big busi-

nesses in Australia. It was the third major provider in thetelecommunications market after deregulation began in 1991.The company set up shop before Optus but after AAPT (nowowned by Telecom New Zealand). At the time of writing itsturnover was around $200 million a year and had a marketcapitalisation on the Australian Stock Exchange of about $400 million. That was a drop in the ocean next to marketleader Telstra, with revenues approaching $20 billion and amarket capitalisation of about $50 billion. But it wasn’t bad for an eight-year-old company built by a couple of twenty-somethings—certainly good enough for large, foreign tele-

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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 StockExchange. Prior to then, it was highly secretive. With a focuson corporate clients, there was no need for it to go out andadvertise on the sides of buses. In 1999–2000, its $200 millionin revenue was sourced from only 1,300 customers. Indeed, Iwas the first journalist to interview David Tudehope for a majorpaper. In May 1998, I was called in to meet a young guy insecond-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 mostprofitable provider of telecommunications services to corporatecustomers. He also said that it was doubling in revenue everyyear and had almost 100 staff.

Having got used to the plush offices at the other majorcorporate providers, AAPT and Optus, all this seemed a littlehard to believe. But when Macquarie released its financialswith its prospectus, it showed a history of strong, steadygrowth. As a ‘service provider’, Macquarie resold services fromother carriers rather than owning its own networks. Its corebusiness proposition was that it could add enough value in theform of better billing information and customer service toattract big customers away from the carriers that did have theirown networks. It also meant that it did not have to sink millionsinto building networks then wait years for a payback likeOptus, for instance.

Macquarie first became profitable in 1995, recording sales of$4 million in that year. By 1997 it had revenue of $51.1 millionand a post-tax profit of $2.7 million. In 1999–2000, it achievedsales of $194 million and delivered a post-tax, operating profitof $9 million.

However, the most surprising piece of information in the

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company’s prospectus was that through their private companyClaiward, Aidan and David basically owned the entire com-pany. The reason for this unusual situation was that, until thefloat in 1999, they had never sold a share of the company togain venture capital. Instead they’d grown by reinvesting theirprofits and operating as leanly as possible.

‘Macquarie, of all the telecommunications companies, startedthe most frugally and today has a culture which is very cost-conscious, which is a good thing in any business,’ says DavidTudehope, pointing out that the boardroom table we’re seatedat was bought from a client that went into receivership.2 He also has a grubby 15-inch monitor for the computer on hisdesk, one of many second-hand machines that the company hasbought.

According to David, the brothers started Macquarie with thesavings of ‘normal’ individuals. In a short time, every dollarthey owned was in the business and they quickly learned toredefine what it meant to have no money. They also learnedhow to run the new business on the smell of an oily rag bykeeping its infrastructure light. However, David says that heand Aidan never faced financial ruin because they retained anability 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, dilutingClaiward’s holding in the company down to around 60 per centto raise a total of $135 million.

For those that aren’t lawyers or stockbrokers, this meansthat David and Aidan pocketed a tidy $50 million in cash to goand spend on things like holidays and car stereos. The brothersalso retained about 60 per cent of the company, worth about$240 million at the time of listing and leaving them firmly incontrol of its day-to-day management. In March 2000, the

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company’s shares went as high as $3.25, valuing the brothers’shareholding at almost $400 million and easily winning themplaces 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 PacificLtd (PPL). At 25 he was part of the team advising the KaloriConsortium, the group that was competing with Optus for the government licence to become Australia’s second tele-communications carrier. David stresses that it was a minoradvisory role but says it opened his eyes to the world oftelecommunications. Aidan joined the company at 22 afterstudying at Harvard Business School. Both brothers had studiedCommerce at the University of New South Wales.

In a fortunate twist of fate, Kalori was unsuccessful, leavingDavid free to enter the industry directly without encounteringconflict of interest accusations. ‘I left PPL and could see theopportunities 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 howthat market had been transformed since deregulation com-menced in 1984. David found that despite his age and lack ofbackers, American service providers were more than happy to meet and tell him what they could about the industry. Healso witnessed how large companies such as MCI and other new entrants had grown. Fired up, he returned and foundedMacquarie in 1992 with Aidan. The pair estimates that they putless than $500,000 into the company over the first couple ofyears, either up front or by not drawing full salaries. A keyearly executive was Peter Muspratt, a senior banker who joined


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in 1993 after having managed Westpac’s operations on the westcoast of the US.

In retrospect, it doesn’t sound very courageous for David tohave left banking in favour of telecommunications. But this was 1992. Market liberalisation had made banking hot and PPLwas a leader in the then new industry of mortgage securiti-sation. Telecoms, on the other hand, meant Telecom and OTC.It was a government-run utility and about as sexy as water orelectricity. There was no World Wide Web, mobile phones werebricks and Al Gore was yet to utter the words ‘informationsuperhighway’. 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 atall. Beyond Telstra its first two major competitors for corporatecustomers were AAPT and Optus. Both had literally millions attheir disposal, flash buildings, nice brochures and large salesstaffs. Yet, like many stories in this book, Macquarie hadtechnical focus, innovation and hunger on their side. Amongthe first and most important was its billing system that enabledit to tell executives exactly how much they were spending ontheir telecommunications, not only down to the day but also bycost centre within their organisation. By buying Telstra andOptus carriage services at a wholesale discount, Macquarie wasable to undercut the giants on price. It was also operating in a green field, meaning that there were plenty of customers towin and no one had fixed ideas about service—pretty muchanything was better than Telstra.

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Even so, the early days for the company were hard yakka asthe company pushed through the deadly catch-22 of beingunable to win customers because it didn’t have customers.Having a 26-year-old chief executive and a 22-year-old chiefoperating officer couldn’t have helped either.

‘There’s no doubt that the toughest period in your businessis getting those first few customers,’ says David. ‘When theysay, “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 leastexpected—and not always from the people that they thoughtthey could rely on. While many of their contacts in the finan-cial community and elsewhere proved reluctant to try theyoung Macquarie, others that they’d only met in passingstepped up and gave them a go. Interestingly, the recessionhelped Macquarie because businesses were hurting and willingto try anything that might reduce their telephone costs.

David notes that there was also plenty of argy-bargy forMacquarie to muscle through as Telstra got used to the idea of competition. ‘There’s been some pretty disappoint-ing activity by Telstra staff. In the early years there was somefrankly almost illegal activity by Telstra staff which I thinkwas part of the adjustment from a monopoly to a competitiveregime.’

Macquarie never let its problems with the incumbent destabilise its business. The most serious issues for all the newtelecommunications companies in the early days of deregu-lation centred on billing. Telstra had never sold services on awholesale basis to other companies before and now encoun-tered 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


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fighting. Since it was their own money they were spending,Macquarie kept a very tight handle on the quantity of servicesit used and quickly spotted any problems with the bills itreceived from Telstra. The company was in negotiations monthsbefore any other provider, says Tudehope, and managed toresolve the problem without having to resort to legal action.

Despite the changes in recent years, Macquarie has also paidconstant attention to its customers. David is the face ofMacquarie and its lead salesman. Despite the extra workload inrunning a public company, he says he still tries to see two orthree 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 trackrecord. Maybe if I’d known the right individuals that mighthave been different, but I didn’t.’

There was pressure around 1996 and 1997 to take on venturefinance in order to fund the company’s growth, however Davidsays that by that time Macquarie had become ‘culturally con-ditioned’ to growing by reinvesting its profits. By 1998 itbecame clear that Macquarie would need to invest in its ownnetwork infrastructure if it was to make the transition to data-centric telecommunications and the Internet. It would alsoneed to do this to achieve higher profit margins. Needing atleast $10 million to build a new data network, Macquarielooked both at venture capital and the increasingly hot publicmarket. 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

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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 youtake.’ If you ask for the single most important factor behindMacquarie’s success, he’ll tell you that it’s the company’speople. A lot of chief executives say that but you get the feelingthat 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 tohire older staff, particularly former Telstra employees in theirthirties and forties. They spend a long time deciding on eachperson and are especially shy of anyone that has seemed tomove through a lot of jobs. If you visit Macquarie, you’ll noticethat the result is a sober, very business-like company culturewhere the word Tudehope almost seems to permeate the air.Sitting in the foyer one day, I overheard one receptionist say toanother, ‘Make sure you remember to lock the drawer [to thereception desk] or else Aidan will have a fit.’ I don’t thinkyou’ll find too many large companies where the major share-holders not only run the show but still spend twelve hours aday in the office and micro-manage down to drawer locks.

There’s a lot to like about the Macquarie story even thoughthe company’s shares plummeted in 2001 after announcingunexpected losses and other controversies. The first thing isthat you probably haven’t heard it before.


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Second is that they saw where the telecommunicationsindustry was going very early and decided to build a newbusiness around it. They then grew the company the hard way,using elbow grease in the absence of outside capital. Onepositive side-effect of this is that they really understand theirbusiness. People that raise lots of money to grow their busi-nesses tend to end up as experts in just that: raising money.David and Aidan Tudehope, on the other hand, had no choicebut to develop a deep understanding of their customers, indus-try regulations and technology. Finally, Macquarie appearsintent on becoming a standard bearer for Australia in theregion’s telecommunications industry, recently completing itsfirst move offshore with an office in Singapore.

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nineCASE 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

The biggest challenge when operating in highgrowth, capital-fuelled and changeable environ-

ments is keeping control of your company. For every successfulmega company like Microsoft that is still run by its foundingentrepreneurs, there are thousands of others that are controlledby financiers, have merged with other enterprises, or simplyfailed. Few, it seems, manage to ride the big waves all the wayto the beach.

Selling the majority of your company to investors is anobvious way to lose control. However, nothing is black andwhite. Sir Peter Abeles, for instance, owned only about 1 percent of transport conglomerate TNT but ruled the company like a personal fiefdom. There are also many examples of com-panies in which investors have a large or controlling stake butrarely find themselves in conflict with founders because theirinterests are aligned and there is a healthy mutual respect

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between the parties. Another good way to lose control is todistribute so much equity or influence to partners duringalliances and other deals that you end up hamstrung bycompeting interests. Worse still, you could run the whole vesselaground and collapse into bankruptcy.

There are also other more subtle ways to lose control. Youmight end up in a situation where you own the whole box anddice but find that none of your staff support your decisions. Orperhaps the company goes through so much change over timethat you just don’t want to be in it anymore. Another way tolose control of your company is to lose control of yourself. Oneentrepreneur that lost control of his company on all sorts oflevels was Chris O’Hanlon, founder of Spike Networks. What-ever becomes of Spike—and as someone that knows a lot ofpeople at the company and wishes it well—it won’t be whatO’Hanlon had in mind.

Spiked

‘There is no question that Spike would not have the excitingand dynamic future that it does ahead of it if it had not beenfor the drive and vision of Chris,’ a strained John McGuigantold Spike Networks shareholders on 8 June 2000.

The executive chairman was addressing an extraordinarygeneral meeting of shareholders in the light and airy surroundsof The Atrium restaurant on Castlereagh Street, Sydney. On theagenda was a vote on a multi-million dollar alliance with HongKong Internet and telecommunications conglomerate, PacificCentury CyberWorks (PCCW). Wide-screen televisions pro-claimed that the deal would make ‘Spike CyberWorks’ Asia’sleading e-business services company. But there was nothinglight or airy about the mood at the meeting. That morning the Sydney Morning Herald had published what McGuigan

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euphemistically described as a ‘rather detailed’ story about thedeparture of the company’s founding CEO Chris O’Hanlon on17 April. Beginning on page one and titled ‘How Denim Vadercame to a sticky end in the web’, the article ran to more than2,000 words and was highly critical, on both personal andprofessional levels, of the noticeably absent O’Hanlon.

Herald journalist David Higgins wrote that O’Hanlon wasfacing a potential sexual harassment claim from a former USemployee and that his former ‘mistress’—O’Hanlon was singleat the time, having earlier separated from his wife GivenRozell—had allegedly stolen US$53,000 from the company.Higgins also wrote that O’Hanlon had overseen an extrava-gant US$267,000 party in Los Angeles in 1999 to launchSpikeRadio.com, the company’s online radio station. The storywas the result of extensive research as well as input fromdisgruntled insiders at the company.

The resulting Herald article said that McGuigan had forcedO’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 allSpike duties and called a board meeting over the weekend. Hewanted Mr O’Hanlon out, and the board approved a motionthat Mr O’Hanlon be asked to resign,’ the Herald stated.

A follow-up Herald article on 14 July 2000 said that thecompany settled the claim privately by paying out US$750,000to the former Spike DJ, Stefanie King. Neither the company nor O’Hanlon would confirm or deny the figure which wasattributed to two unnamed sources. McGuigan, who previ-ously ran the world’s largest legal firm, Baker & McKenzie, didgo on record as saying that the matter had been settled.2

O’Hanlon maintains that no harassment suit was ever actuallyfiled and that, despite the settlement, he never admitted anyguilt. He has also denied that there are other suits pending, as

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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—wellbelow their issue price of $1.45 when the company raised $32.6 million from the Australian public in mid 1999. (Theywould later go as low as 20 cents). The twenty or so share-holders at The Atrium meeting were outnumbered by Spikestaff, merchant bankers, accountants and media representa-tives. The PCCW deal—one that could yet see Spike become avery successful services company—was sullenly passed.

It was also a world away from the sunny Sunday morning inlate summer 1999 when I first met McGuigan at O’Hanlon’shouse in exclusive Double Bay, Sydney, to report on the com-pany’s upcoming float. In a scene that now seems unreal,McGuigan bounced in late, fresh from a morning swim anddressed in a casual, open-necked shirt. He looked every bit thewealthy, successful lawyer having a bit of fun in the zany newInternet business. The sun streamed in through the windowsand Chris gushed about Spike’s upcoming float in a gravelly,American–Australian accent and Given served coffee andmuffins. It was the beginning of an outstanding business part-nership, even friendship, between O’Hanlon and McGuigan.

Even a year later, in late January 2000 when I first inter-viewed O’Hanlon for this book, he was still enthusiastic aboutboth McGuigan and John Atkinson, McGuigan’s partner atHunter Bay Innovation, the venture firm that owned about 25 per cent of Spike. Speaking by phone on a Sunday morningfrom a hotel room in Tokyo, he said, ‘My partnership with

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John McGuigan is a partnership on a number of levels. Samewith John Atkinson. There is a great deal of filial and fraternaldepth to it . . . There is a great deal of fun and laughter andmockery.’

The trio had gotten to know each other very well, travellingthe world selling Spike in gruelling road shows that would seethem address up to eight, often sceptical, groups of investorsper day. O’Hanlon described McGuigan and Atkinson as‘shrewd and active’ shareholders and praised them for attract-ing other heavyweights such as John Greaves from One.Teland Timothy Mainprize, the former FAI Insurance Groupdirector. This momentum also led to Lawrence Maltz, theformer chief operating officer of Starbucks Coffee Company anda family friend of O’Hanlon’s, joining Spike’s board in May1999. With the money in the bag after the April float, the sky seemed to be the limit. When the company announced thePCCW 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 potentialmember of the PCCW clan that would later include Telstra, a big future ahead of it. Yet despite all the money, power andconnections that the team possessed, they just couldn’t lift thecompany’s share price off the floor.

The trouble started the day Spike floated. The company had the misfortune of listing during a week where Ameri-can and Australian investors were dumping technology and

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Internet stocks. Despite the success of its capital raising and thecompany’s super-high profile, once on the market the company’sshares gradually slipped below their issue price. The com-pany’s executives blamed the negative market sentiment but theexcuse seemed increasingly weak as other Internet companiesrecovered but Spike shares stayed ‘underwater’.

The rumour on the street was that Salomon Smith Barney,the stockbroking company that had backed the float, did notgo out of its way to support Spike’s stock in the market afterlisting. After such an apparent vote of no confidence from itsown financial institution, Spike’s stock languished. Also nothelping was the disdain among conservative brokers andanalysts for Chris O’Hanlon’s habit of wearing denim jeans and T-shirts to meetings, drawing parallels between theInternet and heroin, and the other colourful antics that histrendy, young staff adored.

‘It was like saying “fuck you” to the market,’ says onefinancial analyst in Sydney.

The heat from the market led to a rapid build-up in tensionand a lot of soul searching. Was Chris upsetting the fund managers? Should Spike become an e-business company ser-vicing major corporations or should it stay true to O’Hanlon’soriginal, more quixotic, vision of becoming a global youthmedia company?

The passing of the PCCW deal, an e-business tie-up withaccounting 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 wasconsistent with McGuigan’s view, borne no doubt of his successat Baker & McKenzie, that profit lay in doing fee for servicework. Spike planned to ‘sell the picks and shovels’ in theInternet gold rush, he said. That was also sensible, given that

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the company was bleeding cash chasing its dreams for Internetradio and global presence. In the year to June 2000, Spike lost$27 million on revenue of $19 million, attributable mainly tothe cost of the Internet radio operation as well as closing thecompany’s failed US web design group and the creation of newoffices in Australia and Asia.

The problem was that O’Hanlon, the entrepreneur, stillwanted to chase the gold. He also believed that he was onto arich seam—the first group of young people in history that hadgrown up with the Internet—and had assembled some ofAustralia’s, and to a lesser extent America’s, best creative talentto deliver media product to them. The most obvious result wasSpike 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,

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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 hecould float Spike on the stock exchange and not expect tobecome ‘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 shareprices and divergent visions. By all reports, including his own,O’Hanlon became highly erratic in early 2000. O’Hanlon hassuffered from bi-polar depression, or manic depression, sincehe was ten years old. In early 2000 he pushed himself to thelimit on an international investor road show, during whichSpike’s share price briefly recovered and soared to $3.99. Thenhis illness hit him like a freight train. While he was stillappearing in upbeat articles such as a ‘24 hours in the life of’ piece published in the Sun-Herald in April,6 he was alsoignoring a longstanding personal health regime designed to stave off his blackest periods. In the first four months of2000, he made around 30 flights between his home in Tulsa,Oklahoma and Los Angeles, New York, San Francisco, HongKong, Tokyo, Singapore, Sydney and London, never spendingmore than a week in one spot.

He was also becoming aggressive towards staff, many ofwhom were already fed up with the cramped, chaotic workingconditions at the company’s Double Bay offices.

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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 toblame for the blow-out in the company’s finances. For instance,O’Hanlon points out that he was not running the Los Angelesoffice of Spike at the time of the company’s infamouslyexpensive $267,000 coming out party in Los Angeles. He saysthat he approved a budget of US$100,000 and that was prettymuch 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

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design companies. He was also only a shade of the characterthat had the wit and charisma to persuade Australia’s firstgeneration of super-bright but semi-anarchic Internet special-ists to build corporate websites rather than hacking intogovernment networks. He had basically also managed to builda 24-hour-a-day Internet sweatshop in an exclusive Sydneysuburb, of all places. But many staff loved it. Michael Meskerwas among the first people employed by Spike and remains a supporter of O’Hanlon to this day. During my research, hewrote 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 bankersarrived to take Spike to another plane it had become more of a

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cult than a company. The company that the rest of the industryloved to hate made up for a woeful lack of business systemswith attitude and a sort of collective willpower. It was, in short,cool to work for Spike. It was also ‘cool’ to use Spike, whichkept the dollars rolling in.

Today, O’Hanlon cherishes the culture and loyalty that hebuilt. As he recovered in mid 2000 and quietly prepared tolaunch what he described as ‘the next next thing’, he wouldoccasionally fax or email articles that he felt explained hisposition. The most notable was from the US magazine Talk. Itasked whether the New Economy hadn’t really been a newreligion and whether the high priests of dot-com mania hadn’tbeen ‘quasi-delusional, fanatical visionaries’. It also suggestedthat while figures like Jim Clark from Netscape, Steve Jobs atApple and Michael Saylor from MicroStrategy were manic theywere 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 chanceto 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

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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 whetheryou aren’t missing a bit of spark in your life. It’s also a remin-der that many high-growth companies, operating in periods of rapid change, are often run by charismatic individuals more as cultural movements than conventional companies. Ieven wrote back, saying that the world certainly did needmore mountain movers. However, the reality remains thatinvestors have lost millions of dollars on Spike. No one ismore conscious of this than John McGuigan and his partnersat Hunter Bay who, despite receiving some criticism in thepress around the time of O’Hanlon’s departure, have beenworking very hard in the background to try to save the com-pany from collapse. The result was a deal in November 2000 thatsaw PCCW’s stake in Spike CyberWorks (Spike’s main revenueearner) sold to Hong Kong investment company techpacific.com.Under the agreement, techpacific.com emerged with 51 percent of the company, meaning that it has left Australianhands.

I have written at length about the Spike because I think itshows the extremes of the entrepreneurial experience. Thelaunch of Spike Radio, the establishment of overseas offices, thePCCW deal and other events showed just how formidable aninnovative company, working with strong backers and largeamounts of capital can be. But, whatever Chris O’Hanlon’sfailings, it also shows what a smoking heap can be left behindwhen an entrepreneur’s dream gets derailed. For those whowould still follow him down the path of entrepreneurship—and why not, he did make lots of money—O’Hanlon offers thisadvice:

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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, ficklepersonality-driven media, and unrealistic shareholder expec-tations in high growth markets. However, at the time of writinghe didn’t seem to want to talk about it.

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tenLESSONS FROM THE BOOM

It may be a new economy but it still often pays to

take your money and run.

—GERARD MINACK1

One of the more blackly humorous footnotes tothe dot-com boom was the emergence in 2000

of a US website called www.fuckedcompany.com. A play onFast Company, the magazine for web-savvy entrepreneurs, thiswas America’s own tall poppy cutter. The site was created bya Philip Kaplan in New York City and profiled failed dot-comcompanies, tracking staff layoffs, missed prospectus forecastsand other events that confirmed that in the latter part of thetwentieth century it was easier to float an Internet companythan actually make money. However, at the time of writing,reality was returning and many companies were running outof cash, leading their founders back to business basics likevaluing customers and profits ahead of website traffic andalliances with other cash-strapped, implausible businesses.

For those that don’t want to find themselves lead story onFuckedCompany, there are a great many books on how to runcompanies well. Here I would like to pass on some specificadvice for people trying to do it during periods of rapid tech-nological change.

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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 ofadvice as mind numbingly obvious, but lately making a profithas been optional for many new companies. With share mar-kets running hot worldwide, low interest rates and a popularappetite for speculative investing meant that people with a good high-growth story could survive for years withoutmaking a quid. Top online retailer Amazon.com almost madeit 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 fireevery second it would still take you 185 days to burn thatmuch money.

‘In the end, you must make money,’ says Rodney Adler. ‘Youcan only survive so much by raising equity to pay wages and to pay the losses. The Amazon.com’s of the world havedone an absolutely unbelievable marketing job but in the end,unless they get their margins up, they won’t survive. They’llbe taken over.’3

Adler believes that the almost decade-long economic boomof the 1990s and early 2000 led investors to take many morerisks than they normally would. In turn, all sorts of businesseswere funded and many entered into a mad scramble to winmarket share. This was the great Internet land grab, a periodwhen many potentially lucrative economic positions weregoing super cheap to those that realised their value early.

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Take, for instance, the people that first registered Internetaddresses like Business.com and later sold them for millions of dollars. However, there’s no point being first to do some-thing in business if you can’t see a way to make money. AsAdler 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 TimeWarner), equipment maker Cisco Systems, online auction house eBay and directory provider Yahoo!. Sure, they have beenmassively overvalued, but at least they are businesses that arecapable of generating profits.

Among the better ‘famous last words’ I’ve read came fromCraig Winn, the (former) chief executive of a one-time high pro-file online shopping company called Value America that floatedin April 1999, achieving a market valuation of US$3.2 billion.On 11 August 2000 it filed for bankruptcy. Among Winn’sfamous comments was that ‘[in the Internet economy] the oldmodels 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

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Successful business people and observers almost always list‘focus’ as a key attribute of successful entrepreneurs. Focus canmean a lot of things but, for the most part, it’s about beingsingle-minded, identifying the most important parts of yourbusiness and ensuring that you get them right. It’s also aboutavoiding distractions, something which can be particularlydifficult in a high-growth environment where everything lookslike an opportunity but nothing has yet taken on a definedvalue. As Bill Ferris says above, it’s also about being able to keepyour eye on the micro and the macro at the same time or, putanother way, see detail from a distance.

David Tudehope at Macquarie Corporate Telecommuni-cations says he has made an effort to keep the company focusedon servicing only corporate customers. This move has seenMacquarie remain smaller in overall revenue terms than itsmain rivals, AAPT and Optus, but enabled it to beat them inthis niche. The alternative would have been to enter the retail,or consumer, market for telecommunications services alongsidecompanies like One.Tel. Even though the business case oftenmade 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


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Another factor unique to high growth markets is that, likethe automobile industry in the 1920s, they tend to consolidatevery quickly. Megabrands like Cisco and Yahoo! absorb largenumbers of small companies to form the new Fords and GeneralMotors. The purchases of OzEmail by American giant UUNETor advertising technology group Sabela by 24/7 Media were noexception to this rule. In a rapidly consolidating environment,you either want to be a megabrand, a specialist worthy ofacquisition or a company that has built a defensible, inde-pendent position such as Macquarie. The challenge is forspecialists to resist the temptation to build fragile empires,such as the failed Internet conglomerate LibertyOne, that areneither attractive acquisition targets or strong enough tosurvive 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 thatpeople work very, very hard. The reason is that there areusually a small number of very large prizes to be won, such asbecoming the world’s primary online auction house (eBay), thedominant 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 withone or two winners taking all and everyone else collapsing in

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piles of debt. Take, for example, the rise of Cisco, which nowsupplies 80 per cent of the hardware that makes up the Internet,at the expense of companies like Cabletron Systems, a companythat led the computer networking industry in the 1980s andearly 1990s.

A key buzz phrase aired far too often during the dot-comboom was ‘first mover advantage’. I say too often because thereis sometimes a nasty tendency for the first mover to take all therisks to establish a new market only to be beaten by a followerthat learns from its mistakes. For instance, Palm entered themarket after behemoths like Apple, Compaq and Microsoft hadintroduced, and in some cases even abandoned, handheldcomputers. Another factor is that the very increase in economicspeed and innovation enabled by the Internet is underminingthe value of such early victories. In other words, becausebusiness cycles are now so fast, it’s hard for even first moversto maintain their lead for long.

‘Where once the first mover could milk the advantage foryears, if not decades—it took General Motors 20 years tooverhaul Ford’s first mover advantage in automated car pro-duction—now first movers have less time,’ says Gerard Minack,an analyst at ABN-AMRO.8

John Greaves says that when he was chief financial officerat Optus during its startup year under Bob Mansfield there wasa running joke that Fridays were great because it meant therewere two more working days before Monday.9 Greaves is luckyhe’s not at Telstra where Mansfield is now chairman. During aninterview for this book, Mansfield said that business time-lines were shrinking dramatically thanks to the mobile phone,Internet and other communications technologies. ‘Six monthsain’t good enough anymore,’ he says. ‘It should probably be sixweeks. If it was six weeks previously it probably should be six days.’10


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Removed from weekends and fun, entrepreneurs in high-growth environments tend to be very effective (before theyburn out). The Tudehope brothers win a guernsey in thiscategory as well, though I don’t think they’re about to burn out.In the absence of venture finance, they raised Macquarie off theground through sheer elbow grease. Even today they worktwelve-hour days, at least six days a week. From the way DavidTudehope tends to arrange appointments with people like mefor about 5 p.m. or 6 p.m., his strategy appears to be to seecustomers throughout the day then work in the office duringthe 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 towork at least twelve hours a day establishing OzEmail. Today,as a professional investor, he says he finds it hard to locatesmart people that are prepared to put in the effort and dedica-tion 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

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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’thelp 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 forbusiness people to maintain a balance between their work andpersonal lives. Without this they’re likely to experience abreakdown in one or the other. Mansfield has five kids who in2000 ranged from 8 to 23 years. He says that his personalstrategy is to start each year by blocking out key dates such asbirthdays, Christmas and school holidays. He then writes in any events that he can’t miss or move, such as Telstra boardmeetings. Anything else that arises during the year must thenfall within these parameters, but even then he tries to leaveempty spaces in his schedule for opportunities and emergencies.

Rule #4—Cherish intellectual property

In industries driven by innovation there is nothing morevaluable than technological know-how, or unique intellectual


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property (IP). Australian researchers and business people arerelatively weak when it comes to IP protection. This has beenparticularly prevalent in the Internet industry where we got ahead start on much of the world but failed to capitalise onmany opportunities. One illustrative story here involves shop-ping and a computer scientist named Ernst Van Oeveren.

Way back in 1994—the very dawn of the web—Van Oeverenwas working for the National Rural Health Research Instituteand came up with a then very novel idea: the Internet shoppingbasket. The idea was to make it easy for people to gather agroup of items for purchase on a website. Later that year, whileworking at the web development firm AUSNet, he extended themetaphor to create one of the world’s first online ‘shoppingtrolleys’ for a website, www.science.com.au.

Around the same time, US company Open Market was developing a similar system. Van Oeveren believes his trolleywas probably completed first but it was the American groupthat spent the tens of thousands of dollars required to patentit. ‘Our technology pre-dated their application for a patent,’ heonce told me. ‘But we didn’t patent it because we were too busytrying to make money.’12

Other US Internet leaders that patented key technologiesinclude Amazon.com (which has secured the rights to its ‘1-Click’ shopping system, recording shoppers’ credit carddetails so that they don’t have to re-enter them during thenext visit) and Priceline.com. In a decision that made peoplequestion the thought processes at the US patents’ office, Price-line managed to patent the idea of the reverse auction—peopleposting the price they were willing to pay for something on awebsite and vendors of goods and services, like hotel roomsand air tickets, ‘bidding’ to match the offers.

At the time of writing, Open Market had gone on to list onNASDAQ and become a global giant in the online commerce

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and customer relationship management arenas. It had morethan 250 customers in 30 countries, including AOL.com andLycos.com, nine offices around the world including Australiaand had been valued at around US$3 billion at the height ofthe dot-com boom. Van Oeveren, on the other hand, was stillslogging away in Sydney trying to float the online travelsoftware group World.net to raise about $5 million. Ernst is a nice guy and a gifted computer programmer, but his storyemphasises Australia’s lack of international commercial savvy.Open Market hasn’t built its market cap on shopping trolleysalone but the aggressive mindset that saw it slap that patentdown 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 knowwhat’s valuable and what isn’t. For participants this meanstrying to take advantage of opportunities without over-committing to any one path. Financial market types might callthis hedging and lovers would see it as infidelity. Internetentrepreneurs call it forming ‘alliances’.

Alliances are typically vague agreements for two companiesto work together. The good thing about them in uncertainenvironments is that even if the participants don’t know whatthey’re getting, at least they know who is on their side. I spentyears 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 morecustomers? Derive any clear benefits?

The response was almost always the verbal equivalent ofjunket. One academic that is sceptical about the tendency of unproven companies forming alliances with each other is AviShama, an academic in Texas. The result of alliances between


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many dot-coms, he argues, has been a self-perpetuating cycleof hot air where theoretical business A teams up with theor-etical business B to create hypothetical value C. Worse still, hesays all this activity has distracted the management of suchcompanies 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 havedelivered. LookSmart, for instance, has proved very adept atsigning up companies around the world to use its directory ontheir websites. These tended to be alliances as much as dealsbecause LookSmart would often exchange the value of itsdatabase of Internet addresses for a prominent position on amajor website such as those operated by British Telecom.George Foster at Stanford identifies Evan Thornley’s ability tonegotiate such alliances as key to that company’s success.

Another aspect of keeping an open mind is being veryflexible. In industries where entire ‘paradigms’ can shift over-night, you have to remain hyperaware and light on your feet.A prime example here is Microsoft which in 1995 reorientedevery one of its products towards the Internet. The turningpoint was Bill Gates’ now mythical six months surfing theInternet in his study. When he came down from the mountainhe was convinced that the network would dominate personaland business computing. In an internal company email titled‘The Internet tidal wave’, he argued that the Internet was themost important change to the industry since the IBM PC wasintroduced in 1981 and proceeded to turn Microsoft ‘on adime’, 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

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their losing control of their companies or merging with otherenterprises. ‘The American entrepreneurs are very, very flexibleand very malleable in terms of being flipped down and rein-venting themselves and coming up with different cuts at it.’15

Foster adds that this is something of a function of the largeUS market where young companies have a wider number ofpotential customers and partners. This also allows them to trydifferent strategies with different parties and refine their pitchif 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 inattracting customers, partners, employees, investors and serviceproviders. This is particularly true when the person has notrack record or reputation. Huy Truong, chief executive ofWishlist.com.au, for instance, was a refugee to Australia fromVietnam. Not only have he and his sister, Jardin, built a goodbusiness, they have gained a high profile in the press. In turn,they have used it to win distribution deals with companies


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like BP and Country Road, and funding from venture capitalfirms like J.P. Morgan and Allen & Buckeridge.

Media coverage, in particular, can also add credibility toimplausible blue sky stories and will help get stock marketfloats away. I remember writing about a group of guys fromQueensland that had an excellent idea for farming fish. Theyeven had some good marine biologists and other expertsonboard. However, because the only companies that were ableto raise money in late 1999 seemed to be Internet companies,they named themselves Seafoodonline.com and came out witha crazy prospectus saying that they were going to let Chineserestaurants in Hong Kong watch fish swim around in tanks via the Internet before buying. The float was fine—Australiashould get into fish farming—but it was nonsense to dress itup as an Internet venture. Still, I wrote about it and even rana photo of the chairman, Terry Byrne, holding up a dead fish.Given the subsequent woeful performance of the company’sshares, 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 theAustralian media is highly concentrated and under-resourced.This is unfortunate for good business people waiting for a jour-nalist to accidentally discover them but a boon for people whoknow how to play the game. Because journalists are pressed fortime and must churn out several times more words, soundsand/or images than their overseas counterparts, they typicallyhave little time to develop an in-depth understanding of theirfield or conduct exhaustive research. The result is that themajority of news stories are fed to the major media organisationsthrough trusted channels such as the fax machine and publicrelations people. Particularly in finance journalism, much of thisis quickly, if begrudgingly, rewritten and published.

When you’re a stressed-out journalist you basically have to

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trust people to tell you the truth. If you ever find out they werelying to you, you then turn on them like wolves. This was partof the reason why some Internet entrepreneurs met such nastyends in the media, but I won’t name names.

There are, of course, a lot of simple, sensible and perfectlyhonest ways to do yourself a favour when it comes to gettingfavourable media coverage. These centre on explaining your-self clearly, knowing why you are seeking media attention,understanding what journalists need and working out whichjournalists might be interested in your story. Having been on the other side of the fence, I would advise people to getprofessional help when approaching the media because, as withall power tools, you can do yourself a lot of damage veryquickly, particularly if you’re within a listed company.

As a reporter, I regarded Chris O’Hanlon to be the mostadept at getting media coverage. Indeed, he even had his owncolumn about online marketing in the Australian FinancialReview when I started there in 1997. A former journalisthimself, he understood the game. Having grown up around afamous father, he knew how fame worked and actively workedon being seen as a ‘rock star CEO’ in the American tradition ofpeople like Gates and Apple chief executive Steve Jobs.

‘It’s that game,’ says O’Hanlon. ‘It’s the walk from the privateplane to the limo. You make sure that in that 100 feet, youstand a little taller . . . Do I do all that consciously? Abso-fucking-lutely.’17

However, O’Hanlon is also aware of the risks involved inputting 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’.


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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 causeproblems are if the process becomes a distraction or if it bringsyou within cooee of Australia’s infamous tall poppy syndrome.Here, you may be cut down for being seen to be too good atsomething—unless it’s sport. But even then, you should bemodest about it.

The only entrepreneur who declined a direct request for aninterview for this book was Jodee Rich. In the 1980s Richfounded and ran Imagineering Technology Ltd, a computerdistributor. The company quickly reached sales of around $300 million a year and Rich, still in his twenties and with apersonal worth of around $85 million, was hailed as one of thecountry’s hottest new entrepreneurs. He was the youngestmember ever of the BRW 200 Rich List and reported to havebeen ‘bold, brash and supremely confident’; an avid self-promoter who courted media attention and held lavishparties.19 But it all came crashing down in the early 1990swhen Imagineering collapsed under the weight of borrow-ings. Shareholders were left to lick their wounds but the worsttreatment was reserved for Rich himself who discovered justhow quick the media can turn on its favourites when it smellsblood. Overnight, he became a symbol of everything that waswrong with the debt-driven eighties.

‘Jodee feels he was treated very badly by the press and that’sthe reason he won’t talk,’ Rodney Adler has said. ‘He enduredan absolutely public humiliation after he sold out of Imagi-

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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 cavedin and he went through an awful period.’20

Just how sensitive Rich and his joint managing director atOne.Tel, Brad Keeling, remain was shown in an extraordinaryemail sent by Keeling to Sydney Morning Herald reporter KevinMorrison.21 Morrison had asked Keeling who might replacethen departing chairman John Greaves. Keeling’s response,which followed weeks of negative pieces about the companybut which I’m sure Keeling never expected to see in print, wasrevealing:

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 mightadd, debt averse). However, during my time reporting on tele-coms, he did participate in a number of interviews. The mostnotable was on 15 February 1999. Rich and joint managingdirector Brad Keeling were joined by Lachlan Murdoch andJames Packer at One.Tel’s offices in Sydney to announce thatNews Corporation and Publishing & Broadcasting Ltd wouldinvest around $700 million in the company. But even that wasa strange event. If a normal company wanted to announce that


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it had just received hundreds of millions of dollars from two ofthe most powerful families in the country, if not the world,they’d book out the Entertainment Centre. Instead, they invitedonly myself on behalf of the Australian Financial Review anda press photographer from Murdoch’s Daily Telegraph. Andeven after the interviews were done and photos taken, theywouldn’t let me touch a phone or leave their office until theirlawyers rang to say that the deal was done. I was later told thatI was something of a pawn in a wider game but never have beenable to confirm it. In the end I was allowed back to the officein 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 softlyspoken and charming. When it came to new communicationstechnology he was also a well-informed zealot. Even so, theonly direct input from him in this book dates from interviewsconducted while at the paper. You certainly won’t find himoffering up handy hints for ‘entrepreneurs’—a word that hasbitten him once already.

Having said that, I will admit to being in two minds aboutthe tall poppy question. Anyone that knows me personally willknow that I helped found a small magazine called Strewth!. Ourmission statement read that The Strewth! Institute Inc., thebody set up to publish the magazine, was: ‘Dedicated to makingthe tall poppy syndrome world’s best practice in time for theSydney 2000 Olympics.’ We were only half joking.

On the one hand, it is unfortunate that the Australianbusiness environment is unforgiving. That people who make itclear they want to become richer or smarter or faster than theirpeers are often brought back into line through ridicule.However, my reading is that truly competent and honest peopleare not unduly criticised in Australia and most people who cry ‘tall poppy’ end up being found to have deserved rough

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treatment. The stellar example from the dot-com boom is ChrisTyler, chief executive of Solution 6. Tyler, for instance, did agreat job for a few years at the accounting software companythen lost his head during the dot-com boom. He started makingvery loose comments (which he later denied) about the outlookfor the company’s share price and attempted to enter intonumerous large and complex deals around the world. Before theineffectiveness of his acquisition and joint venture activitiesbecame apparent, Business Review Weekly magazine publishedan explosive article saying that he’d been arrested in the USfifteen years earlier for handling a large quantity of drugs andbeen central to the dramatic failure of a listed Canadiancompany called Lessonware. He soon left the country, sayingall sorts of awful things about the Australian media.

Solution 6 got a new CEO in August 2000, Neil Gamble, whopromptly announced a wide-reaching cleanup of the companyand its strategy. Revenues were above $300 million but Tyler’sspending spree, which had involved the purchase of elevencompanies, had landed it with an operating loss of $79.5 millionfor the year to June 2000. Solution 6 shares, which had oncereached $17, slumped to below a dollar.

On the other hand, no one has ever successfully cut downKerry Packer for instance. Or Frank Cicutto, Lindsay Fox, GerryHarvey, Janet Holmes à Court, Frank Lowy, Rupert Murdoch,John Singleton or even Bob Mansfield, for that matter. Theupshot is that you can succeed in Australia, you just have to beAustralian about it.

And I don’t think things are really all that different in SiliconValley. Fuckedcompany.com is, after all, an American website.Then there’s the following quote from Californian investorRandy Komisar:

Silicon Valley does not punish business failure. It punishes

stupidity, laziness, and dishonesty. Failure is inevitable if you


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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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elevenWHERE’S THE LOOT?

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

Watching 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 thecourt was an ad for OzEmail, the company that had barelyexisted five years earlier, now just another mass consumerbrand. People no longer thought twice about sending emailmessages or looking on the Internet for phone numbers, soccerresults, books or love. I opened the paper the same day and itsaid Sean Howard had bought a resort called Double Island,near Cairns, for $4.5 million and everything seemed to haveturned full circle. A new technology had made the world anewand spawned a new elite. As with his house in Sydney, Howardhad bought the island from a member of the previous rulingclass, 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 AidanTudehope at Macquarie Corporate Telecommunications, who

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built solid, profitable companies the old-fashioned way butwere lucky enough to realise some gains when the capitalmarkets went berserk—in this case, $50 million in cash andanother $240 million or so on paper. A couple of others from thetelecommunications industry were Barry Roberts-Thompson,founder of Hutchison Telecoms (now called Orange) in Aus-tralia, and Phil Cornish, who got 4.5 per cent of Vodafone’sAustralian operation before anyone had even heard of thecompany. They have emerged with fortunes worth in the hun-dreds of millions. Hopefully the one-time billionaires like JodeeRich at One.Tel and Tracey Ellery and Evan Thornley atLookSmart will eventually be seen as belonging to this group.At the time of writing, they were yet to show the ability to makea profit and storm clouds were gathering over their businesses.

The second group are the guys like Sean Howard, who got inearly and chose just the right moment to get out. In his case itwas 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 makerwho founded Sausage Software in 1995 at age 23 and walkedaway from the company with more than $66 million a turbulentfive years later. There were lots of less high-profile win-ners too like David Archer, the well-groomed founder of a small telecommunications company called Spectrum NetworkSystems. The company was in the business of reselling longdistance telecommunications services, which was good for awhile until competition undermined profit margins. Archersaw the writing on the wall and instead of investing in theinfrastructure required to enter the next stage of the telecomsgame, he sold his customer base to newcomer PowerTel for apersonal profit of $12 million. The last I heard of him was thathe’d made another $1.6 million from a company called ECATDevelopment Capital and Gretel Packer was buying his Sydney

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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 boomwere the ones that hung off the coat-tails of the major entre-preneurs (and in some cases, such as with Steve Outtrim and his corporate saviour Wayne Bos, made them). These includedthe venture capitalists, minority investors, merchant bankers,second-tier executives, consultants and even lawyers andaccountants. Bill Ferris, executive chairman of LookSmart’s Australian venture capital financier Australian MezzanineInvestments, for instance, would have millions even afterdistributing most of the spoils of its $200-million plus gain onLookSmart. Though the fund has also lost money on dudprojects like youth website K*Grind.

Many executives also make bucket loads by getting sharesand stock options in sexy companies. Chris Tyler may have hada rocky time at Solution 6 but he limped away with more thana few million dollars in salary and share options. Some, like DonHagans, even made big money in resigning. Hagans joinedLibertyOne as chief executive in late 1998 then left abruptly inearly 1999, clutching a payout of $2.2 million. Others, likeLarry Williams, CEO of AAPT, simply found themselves wellpaid 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, consultantsand other folks in suits that sucked up hundreds of thousandsof dollars from the companies that floated on the AustralianStock Exchange—and the even greater number that tried butnever made it. The other group that made a packet were theadministrators and liquidators that came in to clean up themess after so many crashed. This group can also be seen kickingaround town in sporty little Mercedes. So too can plenty ofmerchant bankers and stock brokers from companies likeDeutsche Bank, Hartley Poynton, Ord Minnett and Salomon

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Smith Barney that soaked up millions in underwriting andother fees from the float festivities.

A few pundits even built businesses around the growth ofthe Internet and, in turn, the speculative frenzy that followed.The most notable was Ramin Marzbani, founder of Internetresearch firm www.consult. Marzbani built his companythroughout the boom then in late 2000 sold it to ACNielsen fora rumoured $5 million.

Not all the money raised during the boom went to linepeople’s pockets. Much of it was appropriately invested inbuilding new businesses or expanding existing operations. Atthe same time, though, some of it was simply stolen. GivenAustralia’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.

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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 acloud after a past drug conviction and corporate failurebecame public. In March 2001 he found himself in a UScourt, struggling to remember the details of a $2.8 million-plus acquisition that left his old university pal Tom Montgomery not only rich, but also free to compete withSolution 6.


The Australian once published an article suggesting thatexecutives involved in Internet-based businesses were fourtimes more likely to have dubious or criminal pasts than thebusiness community at large.4 This sort of makes sense. Wherethere 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 wavesbut they also flush out lots of sewerage.

Speaking of human waste, some money was simply pissed upagainst the wall. The high point here was the decision by IsisFoundation, the charitable arm of listed Internet and mediacompany Isis Communications, to spend $5 million sponsoringa 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 toDecember 2000. Instead, it lost $29.7 million. Michael Wolff’scomment about entrepreneurs who are given too much money,too easily, thinking they’ve been born into the Medici familysuddenly 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 sharemarket investors, ranging from naive mums and dads to semi-professional ‘day traders’ who, on balance, lost money duringthe period. In the 1999–2000 financial year, for instance, 161companies floated on the ASX raising $1.54 billion.6 Arounda third of these were Internet-related and close to 60 per centfinished the year below their issue prices—the amount thatthe above entrepreneurs, merchants bankers, brokers, lawyersand others managed to flog them for when the company floated(or sank).

However, companies like One.Tel and Solution 6, let aloneTelstra and News Corporation, don’t get multi-billion dollarvaluations without support from professional investors. That

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means fund managers at major superannuation funds, whichmeans your retirement savings. Many of these guys hated the fundamentals—the financial data that shows how well acompany is performing—of many high-flying Internet andtechnology stocks. But they found themselves compelled tobuy because, whether it was rational or not, people were mak-ing money. This pumped billions, indeed trillions, of dollarsinto the global markets, creating the extraordinary bubble thatfinally 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 applyeventually.

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 willreturn. Most of the entrepreneurs that lost serious money in the boom were the ones like TheSpot that spent money theydidn’t have in the faith that investors would bail them out.They raced from funding round to funding round, but whenthe music stopped they ended up stranded. Another largegroup was people who tried to list on the ASX in early 2000.They couldn’t get their floats away after the market turnedsour but still had to pay up hundreds of thousands of dollarsto merchant bankers, lawyers, accountants, public relationsfirms 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 boomwas also a period of exciting innovation in which a lot of newcompanies were created, particularly in key areas such as com-puting and telecommunications. I would even argue thatAustralia rediscovered entrepreneurialism itself. It also spurredthe Federal Government to introduce wide-ranging tax changesand other incentives that should make Australia a healthierplace for business builders. Even better, the whole of Australian

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society is becoming a more level playing field for smart peoplewith good ideas. And all those new multi-millionaires listed arearound and reinvesting not only their money but also theirexperience. Even those people who tried to float but failednow at least know how the process works. Let’s hope that the flameouts of companies like LibertyOne don’t eclipse thelearning that Australia has been through and our newfoundpassion for innovation. We need people to build great busi-nesses that create real wealth if we want to maintain ourhistorically high standard of living. This will always be a hitand miss process but that’s the nature of innovation, as RodneyAdler 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 incash for their company when they could have? I asked David.He looked slightly apprehensive—like maybe he’d one day lookback and ask himself the same thing—but said they justcouldn’t do it. After eight years of personal sacrifice, all themoney 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 asuccessful offshore business. He was particularly critical of thefailure of Telstra, with all its billions, to establish a footholdeven in Asia. He also seems young enough, and idealisticenough, to try to do something about it. The day in early 2000that he received an international award in Washington DC

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ranking Macquarie as the world’s best provider of businesstelecommunications services is obviously among his proudest.The company also recently opened an office in Singapore, itsfirst move offshore. The way I look at it, the entrepreneurs thathave to worry about ridiculous questions like ‘Do you want tokeep working every day or can I give you millions of dollars for your company?’ are usually the ones that aren’t driven bymoney in the first place.

If you’re an entrepreneur operating in a boom, or aspiring tobe one, you have to ask yourself two broad questions. First, areyou the sort of person that could muscle into an establishedindustry and come out on top, like Gerry Harvey or RupertMurdoch? Or are you more like Sean Howard and the Tudehopebrothers, capable of spotting trends and light enough on yourfeet to surf your way to wealth?

Either way, what would you do if you made it? Are you thesort that could sell out of your company and buy an island?Would that be your objective from day one? Or would you alsoknock back the cash if it clashed with your vision? There’s nowrong or right and this country needs both kinds of people.But the answer will shape your whole approach to business. Ifyou don’t mind the thought of losing control of your companythen you might look to the world of venture capital and otherexternal finance. If you would hate to ever find yourselfanswerable to outside shareholders, then you might be best tokeep your company private. The risk, of course, is that youstarve yourself of capital and end up having no business toworry about. There are no black and white answers or even safesolutions—especially when just making a dollar each day ishard enough. Your challenge is to look beyond the day-to-dayand find a path that suits your personality, business situationand industry. And don’t be afraid to be a little reckless alongthe way. As Bob Mansfield says, ‘Profit’s a reward for risk.’7

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epilogueYOUR 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 writingbooks about it rather than doing it?’ It’s a fair question and the answer is that, with my wife Cassandra and business part-ner David Crowe, I am giving it a go. In March 2000, I quit myjob as information technology editor at the Australian FinancialReview and started full time at Editor.com Pty Ltd, our owncompany.

By the time I left the paper, I had convinced myself, perhapsmisguidedly, that leaving wasn’t brave at all. Bravery, I decided,would have been to stay and take my chances at eventuallywinning one of the two or three really big salaries available. Iwas also genuinely excited by what I thought we could dowith 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 discussedin more detail in this book, there really is a need for constanteconomic renewal and that won’t happen on its own. A relatedtheme here is the dilemma of finding what Jim Collins, authorof the now famous, acerbic essay, ‘Built to flip’,3 might refer

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to as ‘meaningful work’. He argues that in the materialistic1980s 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 didmeaningful things and added real value to humanity. The threequalities a company should aspire to, he says, are ‘excellence,contribution and meaning’. However, these high ideals werequickly corrupted by the rush to build enterprises ‘to flip’—structures built on legal documents, PowerPoint slides andrented Formica desks—created only to be sold to the nextsucker at a higher price. The best that six billion people in anage of extraordinary technological progress and informationflows could come up with, it seemed, was e-tailing.

What a soulless bummer. We had, Collins believes, gone fullcircle from working for money to working for money, albeitvastly 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 justwrote about it. Worse still, as a financial journalist at a respectedbusiness newspaper, I was central to the whole flipping thing.Indeed, I’ve cringed re-reading my old upbeat stories aboutcompanies like LibertyOne, Solution 6 and Spike in the processof writing this book. It’s yet to be seen whether doing my ownthing is any more meaningful or valuable but it seemed wortha go. Finally, we knew that if we didn’t at least try going intobusiness for ourselves we would have always wonderedwhether ‘we could’a been contendas’.

Perhaps you are reading this book because you’re also con-sidering doing your own thing. I am in no position to offeradvice, which is why I interviewed so many smarter and moresuccessful 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 toask: what will happen if I stay? One technique is to look around

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your office, identify the people that run the show and askwhether 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 youwouldn’t—it’s obviously the sort of person that succeeds inyour environment? And so on.

I also like the following quote from Mark Beesley, a NewZealand television director and filmmaker who helped to createthe 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 hemustered the courage to move to writing scripts and directing.I gather that he is now a much happier man. It’s not very upbeatbut it’s from the heart and encourages you to look in the rightplace 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 noone else knows. What’s changing? How are people behaving?What new technologies or trends are affecting the land-scape? What wave can you see coming? Is it a big one? Mightit change the world? Are you in a position to take advantage ofit? Could you be? If the answer is yes, then start paddling.

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appendix 1OPPORTUNITIES FROM TAX REFORM

The changes to Australia’s tax system introducedin 2000 by the Federal Government went well

beyond the goods and services tax and included a number ofsteps designed to make it more attractive to build companies inAustralia. These steps include those set out below.

Lower company tax rate

The government dropped the company tax rate from 36 percent to 34 per cent for the 2000–01 income year and to 30 percent thereafter. This move is designed to bring Australia intoline with other countries within our region and has taken cor-porate 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 thatindividuals make on their investments. Before this change, ifyou made $2,000 by selling some Telstra shares, for instance,you would have paid up to 48.5 per cent tax—the maximumpersonal rate—on that whole amount. This would have equalled

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

Less CGT for small businesses

The government has increased the number of small businesseseligible for a 50 per cent cut on capital gains tax by expandingthe definition of a ‘small business’ from companies with netbusiness assets of up to $2.3 million to $5 million. Larger com-panies pay CGT at the normal company tax rate of 30 per cent.The government has also simplified small business rollover andretirement exemption provisions.

Less CGT for super funds

The government has also effectively reduced the amount ofcapital gains tax that superannuation funds—the massiverepositories of people’s mandatory retirement savings—mustpay on investments from 15 per cent to 10 per cent. They havedone this by making them pay tax on only two-thirds of theircapital gains or giving them the option of using alternativetechniques to measure capital gains made. Notably, the govern-ment now allows all three groups—individuals, funds andcompanies—to offset capital losses against capital gains, furthermaximising benefits to tax payers.

Foreign super funds exempted fromCGT

Foreign super or ‘pension’ funds have traditionally avoidedAustralia because it has been one of the few countries in whichthey were asked to pay capital gains tax on their investments.

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While it might seem reasonable to make Florida retirees pay taxon investment wins down under, we have been missing out onforeign investment flows. In response, the government hasexempted US, British, Japanese, German, French and Canadianfunds from having to pay any CGT on ‘active’ investments incompanies with assets under $50 million. Here, ‘passive’ meansinvestment categories such as real estate.

Scrip for scrip rollover relief

A step that should make it easier for companies to restructureand expand through mergers and acquisitions will be CGTrelief on deals that involve the exchange of shares but not cash.Under certain conditions, companies will no longer have toimmediately pay tax on capital gains derived during such ‘scripfor scrip’ transactions until ‘ultimate disposal of the replace-ment asset’. This treatment is normal in the US, for instance, soa secondary aim is to keep companies in Australia.1

The best example of the distorting effects of this final rulewas the sale of Internet service provider OzEmail in 1999. The management of OzEmail, which included Sean Howardand republican campaigner Malcolm Turnbull, was keen tosell to Australian telecommunications carrier AAPT. How-ever, AAPT was offering shares, not cash, which would haveleft the OzEmail team with shares that they couldn’t sell for acertain period but a massive tax obligation in the vicinity of$200 million.

The alternative, which they took, was a $520 million cashbid from American giant UUNET. They had to pay tax, butthere was no risk. Unfortunately, the company was effectivelytaken offshore in the process. In retrospect, AAPT was boughtby Telecom New Zealand so either way, OzEmail would havegone offshore. That’s globalisation for you.

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appendix 2STEPS IN THE VC PROCESS

Venture capital firms maintain strict processesfor assessing potential investments. The six

steps below show the process followed by Sydney venturecapital fund Nanyang Management.

Deal flow

Like all VCs, Nanyang beats the bushes looking for worth-while companies to fund. Its specific criteria are that investeesshould be based on Australia’s east coast, have a significantdomestic 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 facingdemands or opportunities that cannot be met from existingfinancial resources and have a team in place—that is, be pastsole trader stage.

Screening

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

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four to five hours and is designed to identify the company’sstrengths, weaknesses and stage of development. It also con-ducts psychological profiling of CEOs. These tests take a totalof about three weeks but are not charged to the managementteam.

Due diligence

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

Approval

Here the fund gets down to the nitty gritty of valuations anddeal structure. It will present the potential investee with awritten proposal that has been passed by its own investmentcommittee.

Documentation

If the fund and entrepreneur/s can agree on terms, a share-holders’ 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 dotcom 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 andprosperity, Zed Books, London, 1996, p. 28.

6 Paul Budde Communications, Global Internet Market—StatisticsOverviews, 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.

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9 Reichart, Bill, speaking at Tinshed’s Kickstart for Startups confer-ence in Sydney, 29 March 2000.

10 www.consult, Australian Online Shopping Report, July–December1999.

11 Potter, Ben, ‘E-com exchanges worry small players’, AustralianFinancial 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 theauthor.

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.

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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, NewYork, 1995, p. 24.

2 Wolff, Michael, Burn Rate: How I survived the gold rush years onthe 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, Syd-

ney, 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.

NOTES

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11 Bivell, Victor, ‘Strong growth forecast for venture capital’, Aus-tralian 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 Con-sulting for Australian Services Network, ‘The New Entrepre-neurialism: Opportunities within Australia’s reach’, ASN andAcuity Consulting, Melbourne, 2000.

14 Enterprise Market statement at www.em.asx.com.au, 4 Septem-ber 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’, AustralianFinancial 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.

WHERE’S THE LOOT?

190


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 ReviewMagazine, 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 Novem-

ber 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.

NOTES

191


20 ibid., p.81. 21 myCFO company press release, dated 7 February 2001.22 ‘Know Thyself’, The Economist, 30 October 1999, p. 102.23 The built to flip idea was introduced by Jim Collins in ‘Built to

flip’, an article for Fast Company, March 2000, p. 131. Collins isalso co-author of Built to Last: Successful habits of visionarycompanies, 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); InformationCity, 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.

WHERE’S THE LOOT?

192


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, NewYork, 1995.

16 Golis, Christopher, Enterprise and Venture Capital, 3rd edn, Allen& Unwin, Sydney, 1998.

17 Allen & Buckeridge, conference proceedings, Allen & Buckeridgeinvestor seminar, Sydney, 15 August 2000.

18 O’Hanlon, Chris, email to author, 4 July 2000. All other O’Hanlonquotes are from phone or email interviews conducted with theauthor 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 Decem-

ber 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’, SydneyMorning Herald, 29 June 2000, p. 25.

28 Nicholas, Katrina, ‘Boo failure sounds a warning’, Sydney MorningHerald, 20 May 2000, p. 103.

29 Nicholas, Katrina, ‘When the dot com dream goes bung’, SydneyMorning 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.

NOTES

193


Five—Magna Data

1 Conversation with the author, December 2000.2 Ashton, Jason, interview with the author, 2 May 2000. Subse-

quent 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’reinterested 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.

WHERE’S THE LOOT?

194


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 generationgap’, 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, NewYork, 1995, p. 24.

2 Higgins, David, ‘Spike founder on sharp end of $1.2m sex harass-ment 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. Subse-

quent 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.

NOTES

195


2 Cited in the Australian, Cutting Edge (IT section), 12 December2000, 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 ofTexas-Pan American at Edinburg, Texas.

14 Gates, William, Business @ the Speed of Thought, Viking, NewYork, 1999, p. 171.

15 Foster, Professor George, interview with the author, 21 August2000. 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 January2000.

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.

WHERE’S THE LOOT?

196


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 onthe Internet, Weidenfeld & Nicolson, London, 1998.

6 Hoyle, Simon, ‘Navigating treacherous sea of dud floats’, Aus-tralian 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 Departmentwebsite at www.treasury.gov.au.

NOTES

197


‘10 per cent club’, 4324/7 Media, 41–2, 15680/20 Software, 92

AAPT, 108, 128, 130–1, 134–5,155, 173, 184–5

Abeles, Sir Peter, 139ABN-AMRO, 157ABS see Australian Bureau of

StatisticsACCC see Australian

Competition and ConsumerCommission

accelerators see incubatorsACNielsen, 174Adamovich, Alex, 76Adler, Fred, 92Adler, Larry, 36, 37Adler, 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

alliances, 9, 140, 143–4, 150,161–3

AltaVista, 79Amazon.com, 8, 18, 153, 160America Online see AOL Time

WarnerAMP, 9, 18, 33Anderson, Howard, 83angel investment, 72–7, 117AnnounceTV, 80ANU see Australian National

UniversityANZ Bank, 9AOL Time Warner, 32, 68, 154,

161Apple, 149–50, 157, 165approval, 187Archer, David, 172Arthur Andersen, 144Ashton, Jason, ix, 26, 103–9Asian Infrastructure Fund, 25ASIC see Australian Securities

and Investment Commission

198

INDEX


199

ASN see Australian ServicesNetwork

ASX see Australian StockExchange

Atkinson, John, 142–3AuctionWeb, 55AUSNet, viii, 160Austal Ships, 99Australia Club, 44–5Australian Academic and

Research Network(AARNet), 103

Australian Bureau of Statistics(ABS), 47

Australian Business (previouslyNSW Chamber ofCommerce), 75

Australian Business Angels,75–6

Australian Competition andConsumer 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 andInvestment 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, 144Barker College, 45Beesley, Mark, 181Bell Laboratories, 78Bell Resources, xBell-Mason Diagnostic Test,

186Benchmark Capital, 98Bertini, Anthony, 62, 70Besen family, 2BHP, 9Blount, Frank, 128blue sky investments, 33,

63–9 passim, 164Bluefire, 79BMCMedia, 39, 62, 70Bond, Alan, x, 72Boo.com, 100Bootcamp for Startups

conference, 25Booz Allen & Hamilton, 58Bos, Wayne, 173Boutros-Ghali, Boutros, 5BP, 164Brady, Damien, x, xiibrain drain, 14–16 passim,

48–9Bristow, Graham, 43–4 British Telecom, 162BRW Rich List, 118, 166Buckeridge, Roger, viiiBuffett, Warren, 10

INDEX


Building on IT Strengthsscheme, 79

‘built to flip’, 68–9, 71, 179–80Bunnell, David, 56burn rate, 100–2, 112, 153–4business accelerators see

incubatorsbusiness risk, 1–2, 46–7,

176–81 passimBusiness Thinking Systems, 37Business.com, 154Buy.com.au, 8Byrne, Terry, 164

Cabletron Systems, 157Campsix, 81capital gains tax (CGT), 182–4capital markets, 16–22, 70–1,

94–7CareerPath.com, 47Carrefour, 9Carruthers, Luke, ix, 103–9CDNow, 32CGT see capital gains taxChemdex.com, 56–8, 133 Chinadotcom, 43Cicutto, Frank, 169Cisco Systems, 2, 20, 104, 154,

156–7Citibank/Citigroup, 15, 17Clark, Jim, 66–9, 149, 179–80clubs, 44–6CMGI, 59, 78–9, 81 Coca-Cola Amatil, 9Coles Myer, 2, 9

Collins, Jim, 71, 130, 179–80Columbia University, 94Com Tech Communications, 2Compaq, 157Computer Power Group, 88Consolidated Press Holdings,

114Cooper, Brad, 37Cornish, Phil, 172CorProcure, 9Country Road, 164Covey, Stephen, 24Covisint, 9Cox Communications, 113–4Cramer-Roberts, Mark, ix,

103–9Cranbrook (school), 36–7,

104Critical Path, 79CRM see customer relationship

managementcustomer relationship

management (CRM), 121–2,128

cybersqatters, 32, 154

DaimlerChrysler, 8–9Danko, William, 24Datacraft, 89Datacraft Asia Ltd, 99Davis, Paul, 73Davnet, ix, 26–7, 103–9deal flow, 73, 186Decisive Publishing, viiiDepartment of Industry, 29

WHERE’S THE LOOT?

200


deregulation, 31–2Deutsche Bank, 173Deutsche Boerse, 21Diamond Press, 106, 109Digital Media Group, 75dilution of shareholdings,

90–1Dimension Data, 2, 89disruptive technology, 31DNA Sciences, 68Doerr, John, 59domain experience, 54–5,

110DoubleClick Inc., 40–2Doust, David, 75Dowell Schlumberger, 57Downer, Alexander, 39dstore, 2, 75due diligence, 93, 187

E*Trade, 21eBay, 56–5, 154, 156ECAT Development Capital,

172ecorp, xiiEdge Group, xEditor.com, 179Eisa, x, xiielectronic communications

networks (ECNs), 21Ellery, Tracey, ix, 32, 37–8,

45–6, 110–17, 172Enterprise Market, 34entrepreneurialism, vii-xiii, 16,

27–8, 33–4, 51–3, 57–8, 139,

145, 150, 171–81 passimEordogh, Andrew, 64ePark, 79Equity Partners Asia, 76eToys.com, 81excess funding, 99–102, 176Excite, 43–4Exxon, 19, 57–9

FAI, 37, 120, 124, 143Fairlight ESP, 89fame, 163–70 passimFerris, Bill, 45, 85, 87, 99, 155,

173financial system revolution,

8–10, 16–22 passimfirst mover advantage, 157First Pacific, 118First Tuesday, 25, 97Fisher, Greg, xi, xiiflexibility, 113, 163focus, 134, 154–6Fogel, Robert, 13Foos, Richard, 101Ford Motor Company, 8–9, 79,

156–7Foster, George, 27–8, 85–6,

113–4, 162–3Foster’s, 9, 122Foundry Networks, 94Fox, Lindsay, 169free trade, 10–11FreeMarkets, 10, 94friction-free capitalism, 10, 22Friedman, Thomas, 15

INDEX

201


FTR Holdings, 35FuckedCompany, 152, 169

Gamble, Neil, 169Garage.com, 7, 25Garden.com, 153Garner MacLennan Group, 89Gates, Bill, 5, 22, 52, 83, 162,

165GE Capital, 12, 16, 19–20General Motors, 8, 156, 157Gerber, Michael, 87Global 1000, 10globalisation, 3–22 passim, 185GlobalNetXchange, 9GoFish.com, 79Golis, Christopher, 89–93, 98goods and services tax (GST),

34, 182Gore, Al, 4, 134Greatorex, David, 25Greaves, John, xi, 120, 126–7,

143, 157, 167Green, James, 40Greenwald, Bruce, 94Greiner, Nick, 2, 39Greylock, 58Gross, Bill, 80–1GST see goods and services tax

Hagans, Don, 173Handy, Charles, 47Hansen, Morten, 80–1Harbour Angels, 75Hardie, James, 18

Harrington, Alison, xii, 100–1Harris Scarfe, 2Hartley Poynton, 173Harvard Business School, 57–8,

82, 133Harvey, Gerry, 51, 169, 178Harvey Norman, 51Hawke, Bob, 26Healtheon, 67–8Hewlett Packard, 64Higgins, David, 141high growth (managing), 103–9,

126–9, 150, 156–9 passimHochma, 2Holmes à Court, Janet, 169Home nightclub, 26HomeBase Directories, 111Hooker, Janusz, 25, 75Hooker, L.J., 25Hotbank, 81Howard, John, xHoward, Sean, vii, viii, xii,

xiii, 32, 35, 39, 41, 50, 52,59–63, 107, 158–9, 171–2,178, 184

HSBC, 15, 22human resources management,

14, 115, 127-8, 137, 148–9Humphry, Richard, 18Hunter Bay Innovation, 142Hutchison Telecoms, 119, 126,

172; see also Orange

IBM, 19–20, 33, 52, 162idealab!, 78, 80–1

WHERE’S THE LOOT?

202


Imagination Entertainment, 75

Imagineering Group, 36, 118–20, 126, 166

Immutech, 58incubators, 77–83information superhighway, 4,

134initial public offers (IPOs), 24,

94–7 passim, 114, 132,142–3

Ink Development Corporation,56

Inner Circle party, 25Innovation Investment Fund

scheme, 112, 114Instinet, 21Intel, 105intellectual property (IP), 87,

159–61; see also patentsInternet Assigned Numbers

Authority, 6Internet Capital Group, 78inter-touch, 105, 107IP see intellectual propertyiReality Group, 43Isis Communications, 175ITem 3, 79iX, 21

Japan, 24–5JGL Investments, 2JNA Telecommunications,

115Jobs, Steve, 149, 165

John Fairfax Publications, 63J.P. Morgan, 164

K*Grind, 87, 173Kalori Consortium, 133Kaplan, Philip, 152Katz, Laurence, 57–8Keeling, Brad, 120, 122–9keiretsu, 80Kennedy, Trevor, 41Kepper, George, 89KFT Investments, 89Kickstart for Startups

conference, 25King, Judith, 33King, Stefanie, 141Kings (school), 103Kiyosaki, Robert, 24Kleiner Perkins Caufield &

Byers, 59Knox (school), 36Komisar, Randy, 53–4, 100, 169

Labor Party, 13Leibler, Mark, 2Lentell, Gour, 39–42, 62Lessonware, 169Lewis, Michael, 33, 66, 68Li family, 126Li, Richard, 143Liberman family, 2LibertyOne, 43–4, 156, 173,

177, 180Linux, 94Linux Care, 48

INDEX

203


Living.com, 22London Stock Exchange (LSE),

21–2LookSmart, ix, 2, 32, 37–8,

45–6, 92, 110–17, 128, 162,172–3

Love, x; see also Reynolds,Siimon

Lowy, David, 25, 124Lowy, Frank, xiii, 27, 169LSE see London Stock

ExchangeLucent Technologies, 78, 123Lycos, 79, 161

McCance, Henry, 58McDonald’s, xiii, 37, 49, 87McGuigan, John, 93, 140–4,

147, 150–1Mackerras, Paul, 48McKinsey & Co., 97, 110–1Macquarie Bank, 80, 87, 114Macquarie Corporate

Telecommunications (MCT),ix, 31, 53, 96–7, 130–8,155–6, 158, 171, 178

Macquarie Technology Fund,87

Macquarie University, 1Magna Data, viii, ix, 25–7, 74,

102, 103–9Mainprize, Timothy, 143Maltz, Lawrence, 143, 147Mandela, Nelson, 175Mansfield, Bob, xi, 4, 45–6, 50,

120–2, 157, 159, 163, 169,178

Marzbani, Ramin, 64, 174MCI, viii, 133Melbourne Club, 44Mercantile Mutual, 64, 148Merrill Lynch, 22Mesker, Michael, 64, 148Metro group, 9Micro Forte, 92Microsoft, 4–5, 17, 20, 48, 52,

56, 68, 83, 88, 113, 139,156–7, 162, 165

Microsoft Australia, 48MicroStrategy, 149Miles, Neville, 41Minack, Gerard, 157Moignard, Stephen, 108Monkeydex.com, 33Mothers (stock exchange), 25Mount, Nick, 75MTM Funds Management, 41Murdoch family, 126, 128Murdoch, Lachlan, 118, 127–8,

167Murdoch, Rupert, 51, 83, 123,

168–9, 178Murdoch University, 33Muspratt, Peter, 133myCFO, 67-8MYOB, xiii

Nanyang Management, 89, 93,186–7

Naphtali, Michael, 2

WHERE’S THE LOOT?

204


NASDAQ see NationalAssociation of SecuritiesDealers AutomatedQuotation

National Association ofSecurities DealersAutomated Quotation(NASDAQ), 19–21, 25, 33,38, 41, 43, 57, 62, 78–9, 94,96, 107, 114, 116, 160

National Office for the Infor-mation Economy (NOIE), 97

National Rural Health ResearchInstitute, 160

NetGear Ltd, 112NetJ.com, 33NetPort Hospitality Systems,

105Netscape, 4, 62, 66, 68, 113–4,

149Network Solutions, 4networking, 25–6, 50NetX, 37new economy, 149New York Stock Exchange

(NYSE), 17, 19–21News Corporation, 18, 65, 83,

122, 126, 167, 175N-Generation, 6Nike, 47ninemsn, 2Nissan, 8NOIE see National Office for

the Information Economy Norman, Greg, 44

Norman Ross, 51Normanhurst Boys’ High

School, 35NRMA, 39, 44NSW Chamber of Commerce,

75; see also AustralianBusiness

NTT, 108NYSE see New York Stock

Exchange

O’Hanlon, Chris, 63–6, 92,139–51, 165

Oeveren, Ernst Van, 160–1Omidyar, Pierre, 55–6One.Tel, ix, xi, 37, 118–29,

143, 155, 167, 172, 175, 177Open Market, 160–1Open Telecommunications, 70,

94Optus, 168, 119–21, 123–4,

127, 130–1, 133–4, 155, 157Oracle, 40Orange, 119, 172; see also

Hutchison TelecomsOrd Minnett, 173OTC, 134‘other people’s money’ (OPM),

70–102Outbiz.com, 79Outtrim, Steve, 172–3OzEmail, viii, x, 32, 35, 39–41,

59–63, 101, 107, 109, 156,158, 171–2, 184–5

OZeStock.com.au, 80

INDEX

205


Pacific Century CyberWorks(PCCW), 65, 140, 142–4, 150

Packer family, 45, 128Packer, Frank, xiiiPacker, Gretel, 172Packer, James, 25, 36, 75, 118,

120, 122–4, 128, 167Packer, Kerry, viii, 62, 114,

169Palasty, John, 171Palm, 156–7Partnership Pacific Ltd,

133–4Passlow, Wayne, 70–1, 94patents, 160–1; see also

intellectual propertyPaul Budde Communications, 6PBL Online, 48; see also

Publishing & BroadcastingLtd

PCCW see Pacific CenturyCyberWorks

PEG Technologies, 89Pepsi-Cola, 149Perkins, Michael, 98–9Perry, David, 56–9, 133Peter-Martin, Hans, 15Petre, Daniel, xii, 48Pets.com, 8Poole, Richard, 79–80Powderbox, 79–80PowerTel, 172Priceline.com, 160PriceWaterhouseCoopers,

28–9

public relations, 163–70passim; see also fame

Publishing & BroadcastingLimited (PBL), 122, 167

Punch, Justin, xii

R&D see research anddevelopment

Rachleff, Andy, 98Radiata Communications, 2Reader’s Digest Association,

111–2Rebel Sports, 2Redmond, 162Reichert, Bill, 7Renault, 8research and development

(R&D), funding, 47–8, 71Reuters, 21Reynolds, Siimon, xRhino Records, 101Rich, Jodee (John David), ix,

xii, 36, 50, 118–29, 166–8,172

Rich, Maxine, 119Rich, Stephen, 36Riley, Paul, 112Roberts-Thompson, Barry,

172rough backgrounds (growing

up poor), 35–8 passimRozell, Given, 141–2

Sabela Media, 39–43, 62, 115,156

WHERE’S THE LOOT?

206


Salomon Smith Barney, 144,173–4

Sarris, Stan, 37Satellite Group, The, xiSausage Software, 172Saylor, Michael, 149Sculley, John, 149Seafoodonline.com, 164Sears Roebuck, 9Secure Sockets Layer (SSL), 4Seek.com.au, xSemco, 127Semler, Ricardo, 127SFE see Sydney Futures

ExchangeShama, Avi, 161Shawcross, William, 51Shein, David, 2Shein, Jon, 2Shein, Stephen, 2SheSaid.com.au, 79ShopFast, 75shopping basket/trolley

(Internet), 160Shuttleworth, Mark, 4–5, 22Silicon Graphics, 66, 68Silverstream Corporate, 79Singleton, John, 25, 169Skellern, David, 1Skettos, Michael, 106Skoll, Jeff, 55Smith, Adam, 14Smorgon, Norman, 25Softbank Interactive, 40Software-markets.com, 75

Solution 6, xi, xii, 43, 169, 180,173, 175

Sony, 116South Australia Club, 39, 44Spectrum Network Systems,

172Spence, David, 41, 62Spike Networks, 32, 63–6, 92,

139–51, 180Spira, John, 106St George Bank, 89Stanford University, 27–8, 68,

85, 113, 162Stanley, Thomas, 24Starbucks Coffee Company, 143Stewart, Vivian, ix, 25, 75, 101,

103–9Strewth!, 168success, vii–ix, xiii, 1–2, 38–9,

171–8 passimSussan, 2Swinburne University, 33Switkowski, Ziggy, 122Sydney Futures Exchange

(SFE), 18–19Sydney Grammar (school), 103

tall poppy syndrome, 152, 166–8 passim

Tapscott, Don, 6tax reform, ix, 34–5, 47, 176–7,

182–5Tech Invest, 73Tech Pacific, 150, 118 Telecom, 134; see also Telstra

INDEX

207


Telecom New Zealand, 130,185

Telefonica, 128Telstra, 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, 79Tetherless Access, viiiThawte Consulting, 4–5theglobe.com, 94TheSpot, xii, 2, 100–1, 176Theys, Thomas, 17, 19Thornley, Evan, ix, 32, 38,

110–7, 162, 172Time Warner, 116Tinshed, 25–7, 74–6, 105TNT, 139Tokad, 40Tokyo Stock Exchange (TSE),

25Torson, 92Toyota, 63Toys ‘R’ Us, 81Traveland, 36Tridgell, Andrew, 48Tripp, Simon, 41Truong, Huy, 163Truong, Jardin, 163Tudehope, Aidan, ix, 130–8,

171, 177–8Tudehope, David, ix, 31, 36,

53, 96–7, 130–8, 155, 158,171, 177–8

Tufts University, 56

Turnbull, Lucy, 35Turnbull, Malcolm, 35–6, 41,

184Turner, David, 39–42, 62Twomey, Paul, 97Tyler, Chris, x, xii, 169, 173Tyson, Eric, 24

uBid, 44, 79Ugeux, Georges, 17, 19Union Club, 45University of Cape Town, 4University of New South

Wales, 106, 133 University of Sydney, 106University of Tulsa, 57UUNET, viii, 32, 156, 185

VA Linux, 94Value America, 154VECCI see Victorian Employers’

Chamber of Commerce andIndustry

Ventro Corporation, 56–7venture capital, viii, xi, 26–30,

71–3, 84–93, 97–102, 186–7Verisign, 4Victorian Employers’ Chamber

of Commerce and Industry(VECCI), 75

vision, 50–3, 59–63, 126, 145,149–51, 162

Vodafone, 123–4, 172voting control, 71–7, 83, 90–3

passim, 97–9, 139–40, 162–3

WHERE’S THE LOOT?

208


Wacker, Watts, 166Walden International, 112Wang, Johnson, x, xiWarner Music, 101wealthy backgrounds (growing

up wealthy), xii, 35–9passim, 118

Web Wide Media, 40, 62WebMD, 68Weldon, Kevin, 25West, Morris, 63Weste, Neil, 1Westfield, 124Westpac, 31, 133, 134Wharton (business school), 119Whitlam, Gough, 39Whitlam, Nick, 39, 43–4Williams, Larry, 128, 173Winepool.com.au, 79Winkler, Craig, xiiiWinn, Craig, 154

Wishlist.com.au, 163Wolff, Michael, 23, 175Wolff New Media, 23World Intellectual Property

Organisation, 32World Trade Organisation, 11,

31World.net, 161www.consult, 7–8, 174www.science.com.au, 160

Yahoo!, 111, 114–17, 154, 156YankeeTek, 83Yell, Brendan, 32Young, Patrick, 17, 19

Zivo, 44Zulumedia, 40Zulu-Tek, 40; see also

ZulumediaZurich, 64

INDEX

209


wheres the loot

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