The New New Thing: A Silicon Valley Story (20 page)

The Internet formula for success turned traditional capitalism on its head. Traditionally a company persuaded people to invest in it by making profits. Now it persuaded people to invest in it first, and hoped the profits would follow.

Clark had understood the ass-backward nature of the enterprise from the start. The ass-backward nature of the enterprise is what gave him his tactical advantage. The trick was for Healtheon to get itself designated by the financial markets the Official Health Care Sponsor of the Miracle Economy. That in turn depended on Healtheon’s being viewed not as a health care company but as an Internet company. And that, in turn, depended on shrewd public relations. And public relations was driven in part by what the bankers said about the company. But since the bankers desperately wanted the fees that came from running the deal, they would say whatever they had to say to please Jim Clark and Mike Long, within reason. They did this with clear consciences. If they succeeded in persuading the capital markets that Healtheon belonged at the heart of the Chart of Many Bubbles, Healtheon might very well wind up at the heart of the Chart of Many Bubbles. In this new world skepticism was not a sign of intelligence. It was a sin.

When you sat back and looked at it, you saw that a single assumption underpinned the entire boom: the future would be better than the past. Healtheon existed in a state of pure possibility. It was the golden boy in his senior year headed toward some undefinable great height. The stock market would be asked to imagine the most breathtaking possibilities for it. It would be asked to devalue the past, to cease its usual talk about “track records,” and to invest everything in an idea of how the future might turn out.

In other words, the stock market was being asked to adopt Jim Clark’s value system. And the amazing thing is, it did.

The meeting lasted two hours more, and in those hours the baby found its way right up into the speaker phone. It cooed, it giggled, it spoke these adorable baby words. No one flinched or even smiled. I doubt anyone even heard it this time. From the moment the conversation had turned to the dollar value that might be placed on Healtheon, the baby had been priced out of the meeting.

A
few days later Healtheon selected Morgan Stanley to lead its public offering. A few days after that the stock markets crashed. The bad news that ostensibly caused the collapse had nothing to do with the U.S. stock market. On Friday, July 22, 1998, a rumor passed along trading desks that Russia intended to default on its foreign debt. The rumor caused a panic, and the panic forced Russia to default. One large foreign country reneging on its debts caused investors to suspect that others would follow. This in turn led to the fear of all kinds of financial risk. Investors pulled their money out of corporate stocks and bonds and put it into cash or U.S. government bonds. Between July 1 and October 1 the Dow Jones industrial average fell 2000 points, or 25 percent. The riskier Nasdaq composite—the best measure of Silicon Valley’s fortunes—fell from 2900 to 1450, or 50 percent. Netscape fell from 41 to 16. Clark went from being worth $640 million to being worth $248 million, give or take $50 million.

This period tested Clark’s resolve. Some part of him feared that the game was over. The truth was,
he
thought most Internet stocks were ridiculously overpriced. He thought that Microsoft would wind up controlling the lion’s share of Internet profits, and that most of the golden children of the miracle economy were doomed. “Fucking Yahoo is not worth thirty billion dollars,” he’d say. “Once Microsoft controls the browser market, they’ll take over Yahoo’s market too.” The trouble was, he could not say publicly what he thought about Microsoft without hurting Healtheon. He thought that one day soon Microsoft would begin to take over the vertical markets on the Internet. “They’re already into travel,” he said. “They’ll get into everything else.”

Still, Clark did not sell his Netscape stock and buy U.S. Treasury bonds or, more logically, Microsoft stock. It was as if he had decided that the first in must also be the last out. I think he almost would prefer to be poor again than buy shares in Microsoft. Almost.

The stock market crash screwed up Clark’s immediate plans for Healtheon. It caused Morgan Stanley—and every other Wall Street banker—to become cautious. Wall Street had taken 370 companies public in the year up to August; between August and October they had taken only one public. The IPOs of five new Internet companies (Earthweb, Theglobe.com, Interworld, Multex, Netgrocer) were postponed until further notice. Morgan Stanley canceled all but two of its IPOs scheduled for the fall. One of the two it did not cancel was Healtheon.

In retrospect it’s odd that they went ahead. On the first of October 1998, in what was widely viewed as the worst market for IPOs since the early 1970s, they set out to sell a company, and restore the vigor to Jim Clark’s bank account. At four in the morning, in an airport in rural New Jersey, five men piled onto Clark’s plane: Clark, Mike Long, Healtheon’s CFO Jay Westerman, an investment banker, and I.

N
ew companies are sold to the public in much the same spirit as new books, new music, and new politicians. The sellers leap onto airplanes and fly to many cities, where they put on a show for the perfect strangers who they hope will buy their product. In the case of a new company, the strangers are money managers and the show is called “the road show.”

The Healtheon road show had the same two stages as most road shows for Silicon Valley companies. The first stage was in Europe. Europe was a useful place to open not because it had a lot of money managers dying to invest in new technology companies but because it didn’t. Europeans were famously clueless about new things, not to mention new new things. When the Netscape road show had passed through London, and after Jim Barksdale had spent an hour explaining to a group of Englishmen what, exactly, the Netscape browser did, one of the investors raised his hands and asked, “Do you need a
modem
to use your product?” The way he said it you could tell he was pleased he’d heard of a modem.

Europe was the place to polish the act before taking it onto the stage that really mattered, the United States. You could flop in Europe, and Europeans would never know. “What we’ll tell Americans when we come back is far more complicated,” said the Morgan Stanley man simply, as Clark’s plane leveled off at 37,000 feet.

Once over the Atlantic, Mike Long and his CFO, Jay Westerman, reviewed their slide show. The road show was, in fact, a traveling slide show. The slide show was the preferred technique for rendering essentially abstract concepts—“the future,” “software,” “the U.S. health care industry”—concrete. Unless they have seen a slide show, investors do not truly believe they have been shown a business, especially when the business is an abstract promise to make a lot of money rather than a concrete, profit-making enterprise. And so, together with the man from Morgan Stanley, the Healtheon executives sat in the big swivel chairs in the back of Clark’s jet and examined the first slide in the show. It was the Chart of Many Bubbles.

I should say that from the start it was clear this was not Clark’s show but Mike Long’s. Clark was along only because Long had asked him to come, on the theory that Clark’s reputation for inventing the future couldn’t hurt and might help. After all, Jim Clark had made a lot of money for investors over the years. Clark for his part would have preferred to be working on his boat. He listened politely to Long’s presentation. Occasionally he walked to the back of the plane and sat himself in front of the blue Silicon Graphics work station he carried with him wherever he went. There were still many kinks in his own software, and the boat was due to cross the Atlantic a few weeks hence. He was determined that, if something went wrong, it was not going to be
his
code that caused the problem.

Clark’s priorities were not lost on Long. Before he set the dates for the Healtheon road show, he made sure it didn’t interfere with the launching of the boat.

The trouble with Mike Long’s slide show was that he couldn’t just tell investors what he really thought: that he intended to build the world’s biggest company. They wouldn’t believe him; they’d laugh him off the stage. To translate Jim Clark’s ambition into the language of the global investor, Long had to tease them with charts and numbers and hope they arrived at their own rosy conclusions. But here, outside of Silicon Valley, the Chart of Many Bubbles looked perfectly baffling. No ignorant person could conclude anything from it. Long seemed to realize that he could never truly explain Healtheon’s software, or the U.S. health care industry, to foreigners. He groped for a simpler way to show Europeans exactly how Healtheon intended to seize the world’s largest market.

“I sort of like the physician metric,” he said. He sounded hopeful but looked weary. He hadn’t slept properly in several days.

The physician metric was a complicated-sounding phrase for a simple idea: the number of doctors who used Healtheon’s service. Investors needed some way to evaluate how well Healtheon was doing. Investors liked to be able to count progress in dollars. Long wanted them to count progress in doctors.

“I like the physician metric too,” said the Morgan Stanley man.

“You think there are too many things on that slide?” Long asked, holding up one of the charts that followed the Chart of Many Bubbles. The slide was a war zone of arrows and swooshes.

“The simpler the better,” said the Morgan Stanley man. “Think AOL. One of the great things about AOL was that they hammered into the heads of investors the idea that all that mattered was the number of subscribers.”

Clark said, “That’s exactly right.”

The Morgan Stanley man became more enthusiastic about the physician metric. He wanted to call Mary Meeker, the Morgan Stanley analyst who was fast making a name for herself as the leading authority on Internet businesses, and “bake” into her mind the idea that investors should focus only on the number of physicians hooked up to Healtheon’s service. Long leaned over to Clark and said, “Hell, we could get 150,000 more physicians with just two deals.”

“Really?” said Clark. He was interested again.

The two men danced together around the next heuristic problem: how to explain to investors how much money Healtheon intended to make, without sounding absurd. “I don’t think I have to say it,” said Long. “I think all I have to do is say that there are 700,000 physicians in the United States and that we feel we have a legitimate shot in signing up 500,000 of those. Each doctor represents $20,000 a year in revenues. I’ll just say, ‘You do the math.’”

Clark thought this was a great idea, as did the man from Morgan Stanley.
You do the math
. The Healtheon men and their banker were not just creating a presentation. They were inventing the manner in which their business would be judged, at least for the next few years, while they lost great sums of money.
You do the math
became one of Mike Long’s favorite phrases.
You do the math
gave the investors something to do with their hands while he spoke. And if they actually did the math, they arrived at the most fantastic calculations. Multiply 500,000 doctors by $20,000 a year and you wound up with $10 billion a year in revenues. Ten billion a year that did not even include foreign health care markets, which Healtheon now also had vague ambitions to conquer. Microsoft, America’s most highly valued corporation, had only $8 billion annually in revenues.

Everyone was happy with the physician metric. The man from Morgan Stanley was so happy that he presumed a familiarity with Clark. Clark had settled himself in behind his computer work station. The Morgan Stanley man leaned over to chat about the sailboat. The sailboat had people back in the Valley talking—it was yet more evidence that Clark was just a little…different. “I was wondering, Jim,” the Morgan Stanley man asked, “what happens if the computers go down? Is there a mechanical override or backup or something?”

“The computers won’t go down,” said Clark, so gruffly that the investment bankers flinched. Clearly, there’d be no questions about the boat from investment bankers on this trip. Clark let the Wall Street people sell his companies to the public and make him billions of dollars, but only because he hadn’t yet figured out a way to get rid of them. But he’d never let them into his sacred world of machines.

T
he first two days in London nothing much happened. The British were hard to sell to, but the British were always hard to sell to. In these situations they tended not to even cross that invisible mental line that separates spectators from customers. Dapper British men in expensive suits came to see Mike Long’s slide show with the air of people watching a tennis match. They asked questions that suggested, if not keen interest, at least mild curiosity. Long made his pitch in Britain seven times inside of thirty-six hours. He was moving too fast to notice that something was terribly wrong. It wasn’t until the third morning in Amsterdam when it dawned on him, as it dawned on everyone else, how unlikely he was to sell anything to anyone, much less sell the new new thing to Europeans. The vision of a technology company rising up out of the miasma of the U.S. health care industry and changing the world was suddenly, horribly implausible. Change required optimism, and optimism was suddenly scarce.

The first morning on the European continent we gathered in the conference room of a fancy Amsterdam hotel. Long had not slept in forty-eight hours. The U.S. stock market had finished 200 points lower the day before, having fallen 250 points the day before that. The German stock market had just opened down 8 percent, the equivalent of a 600-point drop in the Dow. Banks around the world were announcing massive losses from loans they’d made to Long-Term Capital, an American hedge fund gone sour. Holland’s biggest brokerage firm, ING Barings, announced that morning its new plans to cut 1,200 jobs. The Bloomberg news service had an article quoting IPO experts saying that the business of companies with huge losses and no foreseeable profits trading for many multiples of their revenues had been stopped in its tracks by the new skepticism of financial markets.

Clark arrived at the breakfast with a stack of faxes from Healtheon’s publicist. They turned out to be Healtheon’s first reviews. There was a front-page article in the
Wall Street Journal
, a big spread in
Business Week
, a smaller spread in
U.S. News & World Report
, and a long article from
Bloomberg News
. Before his slide show Long declined to read any of them. Still, he could see from Clark’s face that the reviews were not good.
Business Week
quoted Jim Barksdale, the Mike Long of Netscape, describing Clark as “a maniac who has his mania only partly under control.” The
Wall Street Journal
’s front-page story suggested that Healtheon’s software was not finished.

Long looked around for the slide projector. It didn’t exist. Normally, the slide projector had something wrong with it but at least it existed. Normally, Clark just fixed it.

He looked out over the breakfast table. Along it sat half a dozen surprisingly young Dutchmen with their pallid Dutch skin and lank Dutch hair. They dug into droopy cheese sandwiches. Cheese sandwiches! At seven in the morning! The thought did not obviously interfere with their pleasure in the free meal. Each one of them ate for three. The gusto with which they attacked the cheese sandwiches caused Long to wonder if they had come, perhaps, for the food. Were these people really the power brokers of the northern European financial markets? Of course not! The power brokers were all back in their offices trying to figure out how to sell their Internet stocks.

Wearily, Long produced the paper version of his slide show. He held it up before him, like a second-grade teacher with an alphabet chart. The first slide was no longer the Chart of Many Bubbles. The Chart of Many Bubbles had baffled one too many Englishmen. The first slide was a list of the people who sat on Healtheon’s board of directors: Jim Clark, John Doerr, Dick Kramlich, a virtual who’s who of Silicon Valley. “Everyone at our company who is not on this chart,” Long said, “is under twenty-six years old and works twenty-four hours a day seven days a week and sleeps in his cubicle.”

No one at the conference table laughed. No one even broke a smile. From their expressions of incomprehension it was unclear whether they understood English. They looked to be about twelve years old. Their suits were the off-the-rack polyester sacks that every European male bought before his first day at the bank. Their socks drooped.

Still, Long worked his way steadily through the slide show. The phrases rolled off his tongue:
We think doctors want to pay for our services by the drink…. The Internet changes everything…. There is constant media scrutiny of this company…. A one-point-five-trillion-dollar market is ours to win or lose…. You do the math.

Their faces remained uninspired. There was not the slightest sign of comprehension in them. If there was a sound in that room, it was the sound of air being let out of a tire. The Internet and all it stood for felt woefully out of place. What could it mean to a dozen Dutchmen who were still getting their minds around the idea of electric power?

A lesser man would have caved in and walked out of the place. After all, why did Mike Long need to be going without sleep for forty-eight hours for the privilege of explaining the U.S. health care system to a handful of Dutch adolescents? He was plenty rich enough that he didn’t need to work. He was, at least on the surface, a modest man; certainly he had no further material needs. More to the point, he was not like Jim Clark, who was forever doomed to grope for the new new thing. He could have given up, then and there. Yet he didn’t. The Serious American Executive had signed on for his tour of duty in the Internet wars. Having signed on, he was going to finish.

After the Dutch paper slide show we drove in silence back to Clark’s plane. There, while detained on the runway, Long asked for and received the front-page article from the
Wall Street Journal
. He sat in one of the big swivel chairs and placed the piece on his lap, unread. He could have been a director preparing to read the reviews of his latest film, or a politician checking the papers to see how his latest policy speech went down.

But before he started, Long lowered his expectations. That was one of the little psychological tricks he played on himself. As the Serious American Executive, he was not allowed to show great emotion. He could not permit himself to be visibly upset or disappointed. Thrilled as Mike Long had been by the physician metric, he never let himself hope that he could sell Europeans on the idea. For instance, as we drove in from the airport to central London, he brought up a trip to Europe he had made recently with his father. His father had been an infantryman in World War II. Long gathered up twenty or so snapshots his father had brought back from the war, grabbed his father by the hand, and set out to revisit the sites and retake the photos. They tracked down ten of the twenty places. “And the thing was,” said Long, on his return to Europe, “they were all the same. We retook this one picture in Pisa, beside the statue of Garibaldi. In the old picture there was a shutter hanging off one of the houses by a single hinge. That had been fixed. Other than that the two photos were identical.”