After the fall

Executives at, VA Linux, Productopia and others forge a path into post-market correction Silicon Valley.

By Andrew Leonard - Janelle Brown - Damien Cave
Published April 28, 2000 4:00PM (EDT)

If you've been reading the headlines you might think that the entirety of Silicon Valley
is in a panic, as the stock market teeters precariously to and fro. Not so, or at least not

On April 14, following two weeks of steady decline, the stock market plummeted, sending the
NASDAQ composite index down 27 percent in one week and the Dow down a precipitous
617.78 points in one day. It was the single worst stock market drop in recent history --
worse, even, than the 1987 Black Friday crash that led the United States into a
recession -- and it was blamed entirely on the Internet. That weekend, the headlines
in the newspapers heralded the crash as the final insult for a falling technology stock
sector. "The Internet bubble has finally popped!" crowed a self-satisfied array of
pundits, economists and experts who had long been waiting for this day.

But the following Monday, the stock market rallied, sending the Dow up 276.74 points
and the NASDAQ up 217.68. A week later, it plummeted and then creeped back up yet
again. The last few weeks have been dizzying -- you could get vertigo just watching
your stock tickers splay across the screen.

Despite the market's ongoing uncertainty, however, it's clear that the Internet sector
has been badly battered. Tech stocks that once strived for the $100 level are now
barely grazing the teens; companies that were once the toast of the market, like and CDNow, are reportedly on the verge of shutting down. Some
companies, such as AltaVista and iSKY, have pulled their IPOs; many start-ups that
were in the process of securing funding when the market turned south may still get
their venture capital, but with a lesser valuation.

But what impact is this really having on the companies toiling in Silicon Valley? As their
stock plummets and sentiment turns against them, are the CEOs and entrepreneurs
concerned about the longevity of their own projects? Or is it business as usual?
Executives sound upbeat about the future of their companies. Are they in denial -- or
are they simply trying to maintain a rosy image despite a decaying stem? Could the
long-term outlook be just as lucrative as it was just a few weeks ago? The answers to
these questions are as difficult to predict as where the stock market will be next week
-- but interviews with entrepreneurs across the Internet sector give some clues as to
what the valley's inhabitants are really thinking.

During the last few months Marleen McDaniel, CEO of the women's network, has been sitting down
with her employees in small groups and talking to them about the stock market. Her
company's stock, listed on the NASDAQ at WOMN, has spent much of this year in
descent. It's currently trailing along at $5 a share, down from a peak of more than
$23, and her employees (all 350 of them) needed a pep talk.

"I gave them my rah-rah," she says. "I had this little speech and reminded them it's a
great company and this is what it's like to be a public company. This isn't about
overnight millionaires -- that's a myth."

Two weeks ago, on the day that the Dow dropped 617.78 points,
McDaniel was calling on investors. "They ranged from totally calm people, to people
who looked like they got run over by a truck," she laughs. Today, she's sitting in her
corner office in an office park in San Mateo, Calif., which has been transformed by a
babbling Japanese fountain into a tiny oasis of calm in a sea of sweltering concrete. has not fared well on the stock market recently; then again, neither have
its competitors -- iVillage, which once sold for a breathtaking $99 a share, is now
languishing at $10.50. Still, a recent story in the San Francisco Chronicle listed 41 local
companies with stock performing below the initial IPO price. was listed at
number 18; its stock has fallen 38.7 percent below its IPO price of $10.

McDaniel is not blasi about the fact that her stock is "in the toilet," as she puts it; but
she's not ready to throw in the towel either. "I'm extremely resilient -- it has some
realities, like it's harder to acquire companies," she explains. "But it's not hard to find
employees, because [the stock] has a chance to go up. And basically business doesn't
change at all."

She does point out that the low stock price could affect the company's capital-raising
efforts. "We might have planned a follow-on offering. The trading volume is low --
people won't sell at these prices; you want a more free flow, it slows everything down
... If your stock is way, way down, it's very expensive to raise money."

McDaniel has observed the IPO frenzy firsthand: Since 1995 she has seen the number
of tech companies going public explode from a handful to about 90 last year and 100
this spring alone. (Hoovers calculates that a total of 548 companies went public last year; IPO
filings doubled in the first quarter of this year.) A market shake-up, she says, is a
good thing -- there were, for example, too many pet portals, and the bubble needed to be
deflated a bit.

More than anything, she hopes the venture capitalists who have been driving the
money craze in Silicon Valley have learned their lesson. "It's a slap in the face for the
VCs. They created this problem. They are really con artists, they have participated in a
scheme -- the new, new thing."

But although her stock is bottoming out, and her employees sometimes need an
enthusiasm boost, McDaniel is still optimistic about the future of her company. She has
a partner in Hearst Corp., which is a major shareholder and has
promised to invest more money in the company; in the short term, she is refocusing on
reducing customer acquisition costs and reaching profitability -- something she says she
could do "tomorrow, but if I cut back too far that's damaging too."

"I can't say I'm not emotionally involved [in the market], but my mood doesn't change
or anything," she asserts, sitting up straight. "I'm focused on the business."


Productopia takes up the second floor of a refurbished brick building in downtown San
Francisco; the online greeting card company Egreetings (No. 7 on the list of 41 local
companies with underwater IPOs) is on the top two floors. With 80 employees,
Productopia has outgrown its space; it's about to move to a bigger, fancier office a few
blocks away.

Productopia could be called a content company or perhaps e-commerce; its Web site offers consumer
reviews and suggestions for products, and it makes its money off advertising and the
commissions it collects when its visitors buy the products it reviews. The company's
game plan has long been to go public; although CEO Roger Neal won't confess when,
exactly, his company was planning to file its S-1, he will admit that it was always seen
as a given.

Unfortunately, online content companies never really captured investor interest, and
e-commerce companies are currently taking a beating in the stock market. Companies
that peddled their wares online may have been all the rage last fall, but after the
Christmas online-retail hype fell flat, the
market darlings have fallen from grace. The stock for, the pet portal, is
hovering around $3; online health store recently closed the commerce piece and reduced its headcount substantially; and
CDNow is, according to Barrons, just a few months (and millions) short of having to
shut down for good.

This, coupled with the stock market yo-yo of the last few weeks, means that
Productopia won't be going public in the near future. The company has pushed back its
offering until a yet-to-be-determined date.

"We've always looked at the IPO as a floating target -- like a space launch; you get
ready, but if it's cloudy you postpone," says Neal. "The sense I get from bankers is
that no one is going out anytime soon -- they've shut down."

Does this mean that Productopia is rethinking its business model and considering a
different route toward revenue? Not at all, says Neal. "Productopia has all the makings
of a company that should be public. If you're trying to be an independent source of
information about products, it benefits you to be independent." And that, of course,
means going IPO.

With $22 million in the bank, Productopia can stand to float for a while on its bank
account; and Neal asserts that the company's investors aren't pressuring it to go public
right away. In fact, he hopes that the e-commerce market pop will give
Productopia an edge in upcoming months. "It buys us a little time to mature as a
company and slow down the threat of competitors getting out before us." And if a few
e-commerce companies go out of business, so what? That means more employees to

He is, however, a bit circumspect about the way the dot-com stock market is rapidly
dividing into cheap, poorly performing stocks and powerhouses like eBay and Yahoo.
"What you're seeing in the general marketplace is that the Internet space has divided,
and turned into blue chips and penny stocks," he says. "It gives the established -- like
AOL and Yahoo -- more power. It makes it even harder for other players to establish
themselves -- it's more challenging to break in." If Yahoo decided tomorrow to write its
own product guides, Productopia might be in a tougher position.

But, like most dot-com execs, he is still insistent that his company's future is solid.
Neal's theory: "What's happening is thesis, antithesis, synthesis. We're in the
antithesis part, where everything is refuted." The synthesis of old economy with a
revalued new economy, he hopes, will come soon.

Michele Foyer

It's an unusually sunny day in San Francisco's South Park neighborhood, and because
Michele Foyer is self-employed, she's lucky enough to be able to take advantage of it.
As a marketing consultant for technology companies like PowerSpring
and publishing firm Miller Freeman, she spends much of her week jaunting about Silicon
Valley and hanging out at her office.

Foyer's been working in South Park for four years now, and has seen the area explode
-- the hip little hamlet has turned into an overcrowded, overdeveloped and expensive
mecca for the wealthy dot-com crowds, with lofts going up on every corner. Maybe a
major stock market crash wouldn't be so bad for this area; if everyone were broke, at
least you wouldn't have to wait half an hour for a salad anymore.

But other than its effect on lunch lines, Foyer says she isn't too concerned about the
stock market and the constant predictions that the bubble will pop. "I'm not worried
about the market," smiles Foyer, as she soaks in the sun. "That may be because [my
business] is centered around my talents rather than having a huge stucture. I have
people who make reservations to work with me three months out."

Because she doesn't work for any one particular dot-com company, she's hedged her
bets -- the failure of one company wouldn't affect her entire business. And she doesn't
take equity in the companies she works with ("but I'd be open to doing it"), so the
stock swings don't affect her bottom line -- except, of course, for her personal
investments in the stock market.

What were her thoughts the day the market crashed, two weeks ago? "I thought
everything would stop, and people would say 'What are we doing?' But no." She laughs,
"I was so busy working that I didn't have much time to dwell. But it makes you stop
and think. I thought, Has the line been drawn? But I wasn't worried. I had people
calling me even on that day.

"Everyone I know now that's a free agent is so busy that even though you wonder if it
will continue at this pace, you don't think it will dry up. But we know this is a golden

Overall, she shrugs, she thinks that it's probably a good thing that the market seems
to be descending. "It's hard to believe it could continue at this pace, but I don't
believe the industry will disappear. There will be business models that are
well-conceived, lots of them." The only fallout she envisions is less well-conceived companies
finding it harder to get funding -- separating the wheat
from the chaff.

Still, she points out, those aren't the companies she was working with anyway. So in
her eyes, there is nothing to fear at all.


Richard Hebert saw it coming -- or rather, heard it. In late March, the president and
CEO of iSKY, which handles
customer service for clients like BMW, American Express and several dot-coms, met
with institutional investors in San Diego. It was typical roadshow behavior: The
company's initial public offering was scheduled for April 13; the trip was designed to
drum up support. But instead of the enthusiasm Hebert expected, the investors
politely blew him off.

"When you walk into an investment bank and they begin the conversation by saying,
'We're not investing in IPO's right now, but we'll listen to your story anyway,' then you
know you have a problem," says Hebert, chatting from the company's Maryland offices.
"We started to feel that the IPO window had closed."

In the short term, the window didn't just close, it shattered, and iSKY wasn't the only
one who felt the effects. As the market plunged in early April, at least three other
technology companies postponed their offerings: the AltaVista search engine, the online coupon
service CoolSavings and
the Spanish-language portal Yupi

But iSKY went further than postponing; it pulled its registration, canceling its IPO, at
least in the short term. Hebert says he did so because he figured the market wouldn't
stabilize quickly enough to justify an extension of the pre-IPO "quiet period." "We
have a great business that's growing, and we wanted to keep marketing," he says.
"This was the only way to do it."

So far, that decision has paid off. The market remains seasick and iSKY's business is
apparently booming. In March, the 1,300-employee company received 10 requests for
proposals each week; now they handle close to 30, Hebert says.

"The shakeout is creating more outsourcing opportunities," says Hebert, who has been
iSKY's CEO since 1995. "This is actually good for us; it's akin to the guy selling shovels
in the gold rush," he says, borrowing a clichi often cited in the Internet boom. "We're
not concerned with who wins or loses because we can serve them all."

But wouldn't it have been nice to have it the "old" way? To watch the company's stock
skyrocket, minting millionaires along the way? Hebert doesn't think so; or at least he
won't admit it. He's just happy to be out of the fray.

"All I can say is that for our company, and personally, I'm very relieved that we didn't
go forward as planned. It would have been a blood bath."

Red Hat and VA Linux

Few companies fit the role of poster boys for the stock market roller coaster of the last
six months better than Linux start-ups Red Hat and VA Linux. Acclaimed as Wall
Street's darlings after their stunning 1999 public offerings, both companies have of
late been plagued with an unremitting stream of bad press as their share prices have
declined. VA Linux is currently trading at $39, down from a high of $320. Red Hat is at
$26 -- call it $52 to account for a split, but that's still down significantly from a pre-split
high of $151.

Both companies also lumber under the additional burden of being treated as canaries
in the Linux gold mine. Red Hat's IPO was widely considered a validation of the
commercial potential of Linux. But its stock price slide is now hailed as proof that there
is no money to be made in the entire Linux sector.

One might expect the load of responsibility to get a bit tiresome. The day VA Linux
went public was a day of great celebration at its Mountain View, Calif., headquarters.
But it can't be a whole lot of fun these days to check into Slashdot -- the "news for
nerds" Web site that VA Linux owns -- and read another couple of hundred slams
against the company every time the share price drops another notch.

Not surprisingly, executives at both companies are keeping a stiff upper lip, although
Brian Biles, vice president of marketing at VA Linux, sounds as if he would rather be
doing just about anything else than answering yet another reporter's questions about
VA's stock travails.

Biles acknowledges that the combination of the company's record-setting IPO with the
long, inexorable share price decline has made VA Linux a favored target of the press.
But he still wouldn't trade the glory that came with going public for anything.

"Part of my job is to make sure that people have heard about us," says Biles, "and
that day people heard about us. A lot of companies treat you with more respect when
they know that you are a public, scrutinized company. Since we went public, we have
been able to talk to a lot more companies."

Red Hat chairman Bob Young gave the virtual equivalent of a shrug via e-mail. "The
daily fluctuations between those [share price] numbers are a result of the growth in
day trading and we can't comment on that mysterious phenomenon."

Young did not respond to a question about company morale by the time this article
was published, but Biles says there have been no problems at VA Linux.

"Nobody's panicky," says Biles. "Everybody is excited about the future of the business."

"Demand is still great for Linux solutions," continues Biles, citing figures released for
the company's last fiscal quarter. "When you talk to your customers and they tell you
that they like what you are doing, the rest of it just seems like noise."

It's easy to be skeptical when company executives paint a rosy picture of their
operations -- certainly, one wouldn't consider them very good at their job if they acted
glum and filled with despair. But it's also worth taking some of their statements at face
value. In a market as volatile as the current surges and drops demonstrate -- in April
alone, NASDAQ has experienced three of its biggest one-day rises and four of its
biggest declines ever -- one would do well to question just how reliable that
market is as an indicator of anything besides ongoing investor psychosis.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Janelle Brown

Janelle Brown is a contributing writer for Salon.

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Damien Cave

Damien Cave is an associate editor at Rolling Stone and a contributing writer at Salon.

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