The New New Thing: A Silicon Valley Story

by Michael Lewis

  This being Jim Clark’s trip, it could not follow its expected course and arrive at its intended destination. When we set sail from the Canaries, we were headed to St. Bart’s. Five days into the ten-day crossing, Clark decided that St. Martin’s made for a better landing. On the ninth day he changed his mind again and told Allan to take the boat to Antigua. Antigua was closer. Antigua was also new. New was good. Clark was far happier doing something that he had just decided to do than something he had decided long ago. No decision was worth sticking to unless it had replaced several other decisions.

  We groped our way toward Antigua. A couple of hundred miles offshore a spotted hawk flew overhead. It was a poignant moment; it often is when the first bird appears in the sky. The first bird, like a man ahead of his time, is a tragic figure. Typically, the first bird has flown too far from shore, and is flapping its way to its death. The good news that land is near is quickly followed by the realization that land is not near enough for the bird. The crew gathers on deck and hopes that the bird will roost in the mast, and sail back to shore. It almost never happens.

  The bird flapped on toward oblivion. A few hours later Clark’s jet plunged down out of the clouds and buzzed the boat. Everyone, Clark included, clambered up top and cheered.

  17

  The Turning Point

  The Gulf Stream rose and banked over the untroubled sea and the bright white sand. As it leveled off, Cliff’s voice came over the intercom. Cliff was one of the two pilots employed by Clark to fly his jet.

  “Okay, all you billionaires back there,” Cliff said. “They opened at one hundred and seventy-four and a half and seventy-four.”

  There was no need to specify who or what “they” were. Obviously, “they” were the share prices for AOL and Netscape, which six weeks earlier AOL had agreed to purchase. You could hear the smile on Cliff’s face. Cliff was a member of ClarkWorld and, therefore, an owner of stock options in both Netscape and Healtheon. Clark reached a bit too casually behind his seat and found a pocket calculator. Cliff’s news was the cherry on top of the ice cream sundae of his relief that the crossing was finally over. AOL had agreed to swap .45 of its own shares for each outstanding share of Netscape. Clark owned 14.2 million shares of Netscape. He punched .45 times 14.2 million into the calculator. Six point three million—the number of AOL shares he effectively owned, making his the biggest single chunk of AOL stock, larger even than that of Steve Case, who created and ran the company. He multiplied 6.3 million by 174.5. One point one billion dollars. In our ten days at sea the value of his Netscape holdings had nearly tripled, from $25 a share to $74.

  It was late January 1999 and the stock market was rising even faster than it had fallen in the fall of 1998: Healtheon was soon to make its second bid to go public. And once Healtheon went public, Clark would be even richer. More to the point, he’d be free to move again. That was the unofficial sequence: start it, sell it to the public, then announce the new new thing. The stock market collapse had forced him to put off the public side of his quest for the new new thing, though, of course, he had continued feverishly with his private search. Now the two were about to converge.

  “This is fantasy land,” he said, putting his calculator away.

  All the way back to the United States he marveled at the miracle of the stock market. Before we landed he said, “When Healtheon goes public, I’m going to get a lot of attention very quickly. I have to figure out what to do with it.”

  In mid-February, Healtheon finally went public. There was no transition between the failed IPO five months earlier and this one. No one asked how a company that the stock market deemed unworthy was now, suddenly, desirable. It just happened. The company now employed nearly six hundred people. Three hundred of them were housed in the main office in an industrial park just north of San Jose. By five in the morning on the day of the public share offering, they were all at work.

  There was almost nothing good to say about Healtheon’s offices, except that they were no worse than most offices in Silicon Valley. Outside, it was a low white stucco warehouse plopped down in a sea of asphalt and dressed up with a corporate logo to pass for an office building. Inside, you could count on one hand the attempts to enrich the employee’s state of mind: the cheap fountain across from the reception desk, the etiolated plants, the Universal weight-lifting machine tucked away in the corner of the otherwise vacant rec room, the cappuccino maker Clark had bought and installed the day he founded the company. Otherwise, it was a sea of gray fuzz cubes. Some of the cubes were slightly larger than others. Some had a view of the parking lot. Other than that, the place was as drably uniform as a commune. No number of balloons in the lobby or streamers in the rec room would turn it into a space anyone would regret leaving behind. The companies were built to change. No one was encouraged to grow attached to his personal space.

  By five-thirty the employees had assembled in the big rec room, in front of the television set. Pavan, Kittu, Stuart, the Band of Indians—they were all crammed into this one room. It smelled, faintly, of curry. The only sounds came from the television, tuned to CNBC. The ticker tape ran across the bottom of the screen. The Nasdaq opened up 64 points, or better than 2 percent. Yahoo and @Home were both up almost 10 points. No one could say what Healtheon had done, since trading in the stock was suspended before it began, because of an imbalance of orders. Healtheon had offered five million shares in itself, or about 8 percent of the company. The initial demand, mainly from the big institutions, was more than five million shares. How much more no one could be sure. Morgan Stanley and Goldman Sachs had ginned up a lot of interest. The deal was hot, or appeared to be, which amounted to the same thing. Healtheon’s shares had been offered at seven dollars apiece, but that was just what people paid who were lucky enough to receive what they signed up for. The important question was: At what price would the first trade occur? How much would people pay for shares in Healtheon who didn’t get as many as they wanted? At what price would the investors who paid seven dollars willingly part with their shares? Healtheon’s CFO, Jay Westerman, stood beside the trader at Morgan Stanley in midtown Manhattan who was making the book in Healtheon’s shares. He’d tell Pavan the price. Pavan would announce it to the room.

  Once the employees were informed trading had been suspended, attention shifted back and forth between the television and Pavan. Pavan would get the news about the stock price before CNBC. CNBC would get Jim Clark. The cable reporter was scheduled to interview Clark, though it was unclear exactly where Clark was at that moment. Mike Long sat on the Morgan Stanley trading desk in New York City; Clark was nowhere to be found. For the next thirty minutes Pavan stood stoically in the front of the room with a cell phone to his ear, while the employees around him tittered. Among them they controlled about 15 million shares out of the 69 million shares outstanding. Pavan alone owned a million. Kittu, who stood beside Pavan, had 350,000. Stuart, who stood a bit off to one side, owned perhaps 100,000—though Stuart was coy about this. All together the employees owned only a bit more than Clark, who, at the time of the offering, controlled 11.5 million shares. It was a tribute to their belief in Silicon Valley’s class system that they felt they had been treated generously.

  There had been no road show this time around. Instead, Mike Long had sat down with a handful of large institutional investors that the Morgan Stanley bankers felt would lead public opinion about the company. Long had decided in his mind that he deserved some of the blame for the failure of the IPO the first time around. “The story in the fall was too complex,” he said. He had learned that, in a business climate that changed as rapidly as this one did, no one on the outside had time to “study the details” of the business. That was a polite way of saying that a lot of potential investors had no idea what Healtheon actually did. Healtheon, like a lot of Internet companies, was an ever-shifting abstraction. When asked what advice he might give to other Serious American Executives who were talked into running one of these Silicon Valley businesses, he’d
say, “It’s not about business plans. You can’t plan chaos.”

  This time Long made his presentation to investors even simpler than before. Gone was any mention of the software, which no one understood anyway. All that mattered was that Long could say, truthfully, that the software had been installed successfully in doctors’ computers, just a few days after the nasty article in the Wall Street Journal implied that the software might never see the light of day. Gone, too, was the Chart of Many Bubbles. Just as the Magic Diamond had given way to the Chart of Many Bubbles, the Chart of Many Bubbles now gave way to the Golden Triangle. The Golden Triangle distilled the high concept behind Healtheon to its essential components:

  Leaving just enough room for one asshole in the middle. The notion of one asshole in the middle was easier to put across when you summarized the entire Byzantine health care bureaucracy, most of which you intended to gut, with the phrase “health care institutions.” The math that Long asked investors to do was also even simpler than before. Healtheon now had 200,000 physicians under contract; soon enough they’d all be wired into Healtheon’s system. Each time a physician hit a button on his computer to order a lab test, or a prescription, or a patient’s medical record, Healtheon would be paid between 9 and 35 cents. Long told investors that the company had handled 5 million transactions in 1998, and expected to handle 500 million in 1999, 1.5 billion in 2000, and so on for some time until, presumably, every single health care transaction in America ran through its computers. You do the math.

  On top of that, Long said, Healtheon could be the leading health care Internet portal. People would come to the Healtheon Web site for information; once there, they could be sold all sorts of things.

  Healtheon’s story had improved in the retelling. The story may not have been quite as important as the willingness of the stock market to hear it, but the story still mattered a lot. No one could honestly claim to know what Healtheon was worth. The company in its brief history had made nothing but losses. It would run through another several hundred million dollars before it ever earned a dime. It could offer only a rough estimate of its revenues for the next few years, which no knowledgeable person, or even intelligent ignoramus, could take seriously. Healtheon was worth whatever investors felt like paying for it, and that depended largely on public opinion. Healtheon was running for president. The IPO was election day. The polls were moving in the right direction. Just a year earlier the venture capitalists who had backed it thought its stock was worth zero; just six months ago the investment bankers who were taking it to market said they might be able to unload the stock at a price that implied a total value of a bit more than $500 million. Now there was talk in the rec room that the company might be worth a billion dollars.

  And why not? The stock market was once again cooking up miracles. It was now possible that the big Internet investors—Fidelity, Vanguard, Bowman Capital, Nicholas-Applegate, Amerindo—would be intoxicated by Mike Long’s story. If so, their excitement might well percolate all the way down to small investors like Captain Allan Prior, poised in front of the one computer screen on Hyperion he felt happy about, ready to buy something new.

  The employees waited nearly two hours. At nine-fifteen Pavan shushed the room. A big smile flitted across his face, which he quickly swallowed in the interest of preserving his air of authority. “They have demand for forty million shares!” he shouted. A cheer went up.

  They waited another fifteen minutes. At nine-thirty Pavan quieted the room again. His expression suddenly became more serious. Beyond serious. Pained. He looked like a man with a stomachache. The excitement of what he was about to say was nearly too much for him. “Twenty-one and a half!” he shouted. The four hundred people in the room went wild. The ragtag collection of engineers and engineers’ helpers suddenly were worth three hundred million dollars. Pavan waved his hand for silence. The room went quiet.

  “Twenty-four!” Pavan shouted.

  More cheers.

  Again, Pavan raised his hand; again, silence. “Twenty-eight!” Pavan shouted.

  More cheers.

  Now Pavan’s hand was raised high and straight, like a Roman orator’s. The room went completely silent. It was filled with people whose fortunes were rocketing; at the rate they were going, they’d all be billionaires by nightfall. Rather gravely Pavan announced, “One million shares just traded at thirty-three and a quarter!”

  This time a new sound greeted the news. Not cheering. Laughing! Healtheon’s employees were turning and clapping each other on the back and laughing. Thirty-three and a quarter! At that price they ceased to be the justly rewarded victors of the race that went to the swift. They became the lucky holders of a winning lottery ticket. One of the Indian engineers threw up his hands and jogged back to his cubicle and wrote a program that installed the Wall Street ticker tape on the top of his computer screen. Thirty-three and a quarter! At thirty-three the company was worth $2.2 billion. Pavan Nigam was worth $33 million. Kittu Kolluri was worth $10 million. Stuart was worth $3.5 million. Jim Clark was worth another $375 million. When you added in his stake in AOL, he was now worth $1.5 billion.

  All attention now shifted to the television set. One cheer went up when Healtheon’s stock price raced across the bottom, another when the talking head announced that Healtheon’s was one of the most successful IPOs of all time. They were, collectively, a success. What the four hundred people in the room wanted to see now was Jim Clark. A long time ago Clark had told several of them personally what was going to happen. “At the end of the first trading day Healtheon will be worth two billion plus,” he’d said. “And I don’t see any reason why it shouldn’t go to five billion fairly quickly. It depends on what kind of publicity we get.” To the engineers this was a mythical Clark moment; and I knew it to be a true myth because he had said that very thing to me, a year and a half earlier. How often did a man say to you, “Come with me, I’ll make you rich,” and then tell you exactly how rich he was going to make you, and then do it. It was a bit like watching Babe Ruth stride to the plate and point to the fence with his bat.

  It went without saying that Clark was making it up as he went along: no one could know even the day before what financial public opinion would make of Healtheon if and when it finally went public. But crack engineers like Pavan and Kittu and Stuart had believed him, and their faith trickled down. Not a single engineer had quit the company after the failed IPO. Each of them could have worked for any Silicon Valley start-up he wanted to work for. The decision of where to work was, at that moment, monumentally important. Work for a flop, and you miss this golden moment—perhaps the one chance you’ll have in your whole life to get rich. And all had stuck with Healtheon. And now their faith had been rewarded. That is why they sat and waited half the day for Jim Clark to appear on the screen.

  They waited for an hour and…nothing. Something was holding up Clark’s appearance. Pavan tried to discover what. The people at Morgan Stanley in New York had no idea. Finally, Pavan announced that Clark was off on his boat. Of course, Clark had designed the search for the new new thing so that it could occur wherever he happened to be. At that moment he happened to be on his boat, docked in some Caribbean harbor. A camera crew from CNBC waited on the dock, hoping to record Clark’s reaction to being the first man to create three different multibillion-dollar technology companies. They couldn’t possibly know that his mind was now fully occupied by the fourth. At any rate, Clark decided he didn’t want to go on the television. The CNBC reporter had hinted he might show a map of the Caribbean with the boat on it. Clark didn’t like the idea.

  When Pavan relayed that news, the energy went out of the event. Healtheon’s engineers trickled reluctantly from the conference room. Pavan and Kittu left together. Kittu was jolly, Pavan sober. As he walked back to his cube, his legs trembled. Kittu put his arm around him, and they shared a laugh.

  Pavan’s cube was no kind of place for a man worth thirty-three million dollars. It had a computer, a desk, and a giant white bo
ard. Pavan went to his white board, stood there for a minute, and quit. There was nothing to draw. The lines, graphs, and charts that he was forever scribbling on the board no longer expressed his meaning. He resembled a man who has swallowed an earthquake whole and was now trying to contain the aftershocks within his frame. He shook involuntarily. He had imagined this moment for nearly five years, since he first read in USA Today, while sitting in a Delhi hotel, about the Netscape IPO. He had met his destiny, and he did not know exactly what to make of it. Pavan Nigam was a rich man.

  That night I came home and found an e-mail from Stuart Liroff. Stuart had been more reticent about his good fortune than either Pavan or Kittu. When I asked him whether on balance the sacrifice had been worth it to his wife, he made a face that suggested he wasn’t sure. “History will document this as the largest financial bubble in the history of the world economy,” he said, at one point. I think deep down Stuart did not really expect to make millions of dollars: he was so happy without them. After the IPO I had asked him if he ever thought about retiring. He said that the thought never crossed his mind, nor should it. Now he wrote,

  My grandfather was a Kosher butcher and my father was in the “rag trade.” I think my reaction to the word “retire” was almost visceral….

  But you wouldn’t believe what happened to me this evening.

  As I mentioned, I went with my wife to a local charitable event…. There were no less than 500 people there…. It was mind boggling. It seemed like almost everyone came up to me and gushed about how rich I was, and about how I could retire, and wanted to know what I was “going to do now”!? I felt like I had been Bar Mitzvah’d or just had a baby! You have to understand: I never talk to anyone about my personal finances; in my family, it was always considered “bad taste” to talk about your finances publicly. And, here I was, in the middle of a public event, and it seemed like 250 people knew that I was “rich.” I felt somehow exposed in public, and you know what, it felt great!