The Tycoon Report

We Saw The Life

I'm going to have to go against the grain here and not give the exact answer you're looking for. I'm going to talk NOT about the WORST private placement a friend asked me to invest in.

Instead, today I'm going to talk about a great idea at the wrong time. That's one of the biggest killers of a private start up and it's a tricky one too.

How does one know when "the rest of the world" is ready? I mean, a really good idea is one that people are just beginning to understand how to take advantage of. The earlier you are to the party, the more you reduce the risk of someone beating you to the punch right? I mean, try starting an online auction site today and see how much luck you have going up against e-Bay or even Amazon. (Think the private investors in those companies are happy today?)

But what if you're TOO FAR ahead of the curve?

Maybe it makes more sense to wait until the trend has JUST RECENTLY started. Maybe YOU, THE INVESTOR, just happen to really "GET IT" way before everyone. Does that make you a genius? It didn't in my case. Here we go...

I was a stockbroker in 1998. A friend of mine who was a very successful broker (who also owned a brokerage firm) making over $100,000.00 / month (not a typo) decided to QUIT THE BUSINESS and start an internet company with another long time friend who was a broker in the same firm. Friend #2 was more tech savvy and had been studying internet trends and companies like "Geo Cities" who were among the first to allow ordinary people to build their own website. Friend #1 had more skill and experience in all aspects of business building so I will mostly refer to Friend #1 since he was the CEO of the internet start up.

This is a person who I had tremendous respect for, who obviously knew how to build and run a successful business, who obviously saw something that he felt so confident in that we was willing to walk away from a million dollar per year job. And oh yeah, he was a FRIEND. And did I mention that both friends were in their mid 20s? The age didn't bother me. Mid 20s web start up guys were practically considered to be dinosaurs. The non-tech background didn't bother me either as that was sort of "run of the mill" too.

In fact, the only thing that I didn't feel comfortable about (at the time) was that this guy WAS walking away from all of the Wall Street money. (Had he lost his mind? I mean, one could argue that most geniuses are a couple French fries short of a happy meal. And anyone who has the guts to start a start up in a brand new industry has to be a little nuts right? In fact, I personally look at that as a quality and not really a concern. People have said that I'M crazy, and I can't help but to take it as a compliment depending on the context (and the source). At times, people even use the term crazy because they never grasped the concept the word "innovative".)

THE IDEA

There are so many variables to consider when investing in a private placement. The scary part is that during the decade that I managed money, I noticed the most common variable that was overlooked was VALUATION. Granted, it's hard to value an idea on a piece of paper with no operations. But everyone seems to ask about the idea, and how cool it was, and how the money would be made and competition, however they seldom question the valuation.

This idea in particular was to start an online community. The idea was to make using the internet really FUN. (Remember in 1998-1999 it was mostly used for commerce or information. The most fun the average person could have was in a chat room - when the girls really actually were girls, but that's another story.)

Well instead of just signing on to the web and surfing around numerous destinations (e-mail, chat rooms, Geo Cities) the idea was to create a community. A community where I could sign in, see my profile, see my friends and their profiles, their interests etc. It would be the first place people would go when they get on the web. The community members were to grow addicted to it. The goal was to have the the community members feel like the community WAS THE WEB. If they left, it would feel like they were going outside.

Sound familiar? Ever hear of MySpace.com? The company that was bought by Rupert Murdock's company News Corp for half a billion? Talk about the right place at the right time with the right idea. I mean for those who don't know, News Corp is the media king. They own FOX, which launched "Fox Business Network" in October, they recently bought Dow Jones who owns The Wall Street Journal, 50% of Barrons and more.

Oh yeah, let me snap out of it for a second here. I was envisioning being the guy who invested in MySpace.

And I did invest in MySpace, but just the wrong MySpace. It was a great idea, but the world wasn't ready for it. The world wasn't quite ready to "see the life" on the web. A whole new world was created with the internet. It's like a galaxy within. For guys like me who spend most of their life on the web, virtual communities are the easiest way to travel. I mean, if I want to find a friend that I went to junior high school with, the first place I would go is MySpace and enter the friends name. In fact I've done it successfully many times.

It was actually the only private placement I invested in that didn't work. I had my clients invest close to $1 million into this thing. It wasn't hard to do as anything with a ".com" at the end of the name saw the stock trade from $5 to $50.00.

And this was a real effort, with real business people (not 2 drama students in a garage) with real capitalization. There was no fraud. The managers really understood business. But at the time, business just didn't understand THEM. The business lasted longer than many web startups. But ultimately there were pennies on the dollar that were returned to the start ups shareholders. (No, the managers didn't take the last crumbs and go on a 3 week vacation as if the world owed them something.)

Instead they threw a "going out of business" party. It was disguised as a Christmas party however, and it was thrown one night in their office. They broke the news to me (the guy who raised the majority of their capital from investors) at the get together. I should have known something was up when the invitation was a drawing on computer (printer) paper that said it was a bring your own food and drink sort of thing.

After the CEO and long time friend explained to me what some of the party attendees had already realized, I looked up at him and said: "So Dylan, what do you think happened here?" He replied "The world just isn't ready for it yet."

The moral of the story is that it can be very difficult to build one of the greatest success stories in history when you're "too early". But at the same time, the whole idea is to be in early. This, in my opinion, is one of the most difficult aspects of starting up a great company and staking your claim before the rest of the world figures it out.