The New New Thing: A Silicon Valley Story

by Michael Lewis

  Informally known as the Chart of Many Bubbles, eleven to be exact, it still showed Healtheon in the center. But now the little company, which still had fewer than two hundred employees, sat in the middle of many obviously complicated things. The Chart of Many Bubbles proved that Mike Long, before he took over the health care industry, had at least bothered to learn the names of its component parts. The Morgan Stanley people took only a polite interest in the Chart of Many Bubbles, however. The opening of the meeting was pure ritual, a sprinkling of holy water over the sheep before it was slaughtered. You could tell how serious they were about it from their attitude toward the black box on the conference table. One of their colleagues, a woman who had stayed home sick, listened by speaker phone. From time to time a squeak or a gurgle emanated from the box at the center of the conference table. A baby! The woman from Morgan Stanley was holding a baby, and the baby was refusing to keep quiet. Each time it mewled, the room used it as an excuse to depart from the Chart of Many Bubbles and share a hearty laugh.

  “If you’re going to play the health care game,” Mike Long said, “you’ve got to have a large percentage of your staff that can talk the talk.”

  “Gibagibagibagiba” went the baby.

  “Ho, ho, ho,” went all the people in the room.

  But the Chart of Many Bubbles suggested one obvious question, and the investment bankers raised it: How would all the companies in the little bubbles feel about a Silicon Valley upstart organizing them into a Chart of Many Bubbles and moving into the middle? Long had a long and happy answer: Healtheon could slide in and eliminate $250 billion in waste without causing the people who made their living wastefully to raise hell, and it would do this by forming partnerships with the stronger companies. The stronger companies in each sector would use Healtheon services to kill the weaker ones. By the time the stronger companies figured out that Healtheon didn’t need them either, it would be too late. The way Long said all this was perfectly soothing. He was not describing a ferocious upheaval in which hundreds of billions of capital would be redirected and hundreds of thousands of people would need to find new jobs. He was describing a friendly bake-off.

  This was the Easy Listening version of Clark’s original intention. Clark had seen the health care system as he saw much of the world, in black and white. To his way of thinking there were health care professionals who clearly served a purpose. They were called doctors. And there were people who clearly needed health care. They were called patients. Everyone else in between—the hundreds of billions in paperwork and bullshit—could go. All Mike Long’s soothing talk about “partnering” and “win-win relationships with other health care firms” was a smoke screen for what Clark was up to when he created Healtheon. “We want to empower the doctors and the patients and get all the other assholes out of the way,” Clark had once told me, then laughed. “Except for us. One asshole in the middle.”

  Long didn’t mention the part about the one asshole in the middle. Instead, he handed the Chart of Many Bubbles to the doctors and other health care authorities in the room, mercenaries in a new civil war. Each man in turn explained how he planned to worm his way into his particular bubble and make it his own. First the drug companies (the drug company SmithKline had a seat on the Healtheon board), then the insurers (the insurance company United Heath Care also had a board seat), PPOs, HMOs, hospitals, doctors, patients, and so on. Each bubble represented a gargantuan market all its own. Over the past nine months Mike Long had talked one large entity in each bubble into becoming a guinea pig for Healtheon’s software. In essence, the Healtheon employees were explaining to the Wall Street bankers how they planned to build, simultaneously, eleven separate multibillion-dollar businesses.

  “So what have you been doing for the last year?” asked one of the bankers, when they’d finished. Everyone laughed. The baby cried. Everyone laughed some more.

  “Pavan Nigam will now explain why all of this is going to work,” said Mike Long.

  Pavan had been sitting quietly to one side pretending to be interested. Now he rose and stood in front of a giant screen, and I wondered if this is what he imagined when he put down the copy of USA Today in the Delhi hotel and decided to become an Internet entrepreneur. “Three years ago this would have been impossible to pull off,” he began and then launched into a perfectly baffling presentation on the inner workings of Healtheon’s software. Abstraction followed abstraction in the manner of contemporary art criticism. The Morgan Stanley people did not have much to say to this. How could they? They didn’t understand it any better than you or I could. If they could write software, they wouldn’t be schlepping companies for a living. But at the end of it one of them, perhaps hoping to dispel the impression that the reason investment bankers are investment bankers is that they don’t have the brains to be software engineers, asked, “Is there any major piece of the platform that has not been built?” Platform.

  “Not really,” said Pavan.

  The investment bankers just nodded knowingly. No one dared dig further. The baby squalled. Everyone laughed.

  Through it all Clark had remained silent. At one point, when the bankers were asking about Healtheon’s possibilities, he said, “This could be as big as Microsoft, and quicker too.” Otherwise he sat back and watched the proceedings with the detachment of a small boy who has rolled a rock down a hill and watched it become an avalanche. His chief contribution to the meeting was to be there. He was attached to the business in the same way that Jack Nicholson was attached to a film script—thus increasing the likelihood that the script will become a movie. Simply by floating around and taking an interest, he makes all involved feel as if they are engaged in something very special.

  “What about competitors?” asked one of the bankers. “IBM has something called Health Data Networks.”

  Clark came alive, briefly. “They’ve got nothing on us,” he said. “As soon as we hire a PR person, we’re going to flatten them.”

  All talk of competition ended right there. The conversation turned to finances. The bankers asked several perfunctory questions: How much money did Mike Long think the company required? ($40 million) How fast could it grow? (How fast did they want it to grow?) How much was at stake? (The future of the single biggest market.) “The benefits of first-mover advantage in this space are so huge,” said Long. “That’s why we have this land-grab strategy.” The bankers agreed mightily with this statement. One of them said, “That’s true in every Internet space. Amazon.com is doing $87 million a quarter. Barnes and Noble is only doing $9 million. And Barnes and Noble has been as good as it gets in responding to the Internet threat.”

  “That’s why we are in a mad panic to go out and get lives on the system,” said Long, calmly. “Lives” was what health care business people called their customers. Mike Long was the sort of man who could claim to be in “a mad panic,” while giving the impression of being in such complete control that there was no point in further discussion.

  “The investor base is becoming a lot more creative in evaluating these deals,” said the woman in the box on the table. The investment bankers had all these wonderfully soothing phrases that implied the world outside the room was climate controlled. The investor base! What she was referring to was a teeming peristaltic mass of junkies high on the giddiest boom the U.S. stock market had ever seen.

  “No traditional Graham and Dodd investor invested in AOL,” said a banker at the table. “They shorted it. And got fucked. They’re learning the new model.”

  Mike Long said, “The main point is that nobody has driven a growth strategy in health care.”

  “That’s why this is such an exciting opportunity,” said one of the bankers. “It’s like AOL in the beginning. Or Yahoo.”

  The baby in the box made the most perfectly delightful noises. This time no one paid it any mind.

  They’d arrived at the true purpose of their meeting. The true purpose of the meeting was not to determine whether Healtheon was worthy of Wall Street’
s attention. It was to determine just how enthusiastic the bankers were prepared to sound about Healtheon. Their money was cheap: there was so much money pouring into the Valley that Mike Long had about twelve different ways he could get his hands on what he needed. The Valley was a little experiment of capitalism with too much capital. For a brief but shining moment capital lost its purchase on its own process. The process took on a momentum all its own, and the old-fashioned capitalist just came along for the ride. All he could offer was his ability to influence the minds of investors who had not figured out what had happened. The investment bankers were no longer selling money; they were selling talk.

  The people from Wall Street now fell over each other praising the future of Healtheon. One said, “The opportunity really is huge.” Another said, “The only problem is finding a way to explain it.” A third said, “It’s like AOL all over again.” For the first time Clark became truly interested. “The market opportunity here is bigger then all of those guys put together—bigger than Netscape, than Amazon, than AOL, than Yahoo, than all of them,” he said. “That’s why when I look at your revenue projections they seem laughably small.”

  What was Healtheon worth? How did a sane person value a company that had never made a profit? The old formulas of old Graham and Dodd investors like Warren Buffett no longer applied. By those formulas Healtheon was worth zero. The company’s balance sheet was filled with negative numbers. It showed losses running out as far as the eye could see. Like other Internet companies, it said to the stock market: our future will look nothing like our present; ergo, you cannot determine our value by looking at the present. You must close your eyes and imagine a new world. Look to the future! The future is bright! The belief was partly self-fulfilling: belief often is. Once the stock price took off, the company was halfway home. The competition would fall away or, more likely, offer itself for sale to Healtheon. Mike Long spoke of “an M&A strategy for growth.” What he meant by that was that as soon as he was able to buy potential competitors with Healtheon stock he would do so.

  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.

  13

  Cheese Sandwiches for Breakfast

  New 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.