Burn Rate

by Michael Wolff

  “How could I have taken advantage of him?” I gamely tried to play the innocent.

  It seemed futile, though, to protest. Everyone knew that I had taken advantage of him.

  It was almost a commonplace now that all cyber transactions were a case of someone taking advantage of someone else. Clearly, if you buy something sight unseen, untried, untested, unknown, the chances are good that you’ll get screwed. Many people were even ready to admit this was part of the game—no hard feelings, sucker. Still, I would not want to explain such a thing to my parents if they owned the company.

  “Michael Leeds doesn’t believe there is any business to do on the Internet,” Cron said wearily. “He sees having to be on the Net as a necessary evil.” Cron shrugged.

  “What about Israel?” I said. “The ’67 war? The first strike?”

  Neither Cron nor Lundell were in the mood, though, to recall past enthusiasms.

  The first dozen or two times when you get turned down, even when you’re ready to beg for the money, it’s a crushing blow. After that, you start to realize that somewhere out there is a bunch of money that wants what you want but doesn’t know as much as you. Finding it is the job. Michael Leeds, unfortunately, in his short education in cyberspace had learned some bitter lessons.

  On my way back into the city, I returned the factotum’s call.

  “How did your meeting go?” he asked.

  “I think we have something. It was very positive.”

  “Everybody is waiting to hear. What should I tell Jon and Bob?”

  “Well, I’m going to want to work this through a little longer. But I definitely think CMP is interested.”

  Chapter Seven

  A Working Relationship

  It works this way: Money comes into an entrepreneurial company in what’s called a preferred position. The entrepreneur and employees and other founders receive common stock. The money—the professional money, the venture capital—receives preferred shares. These preferred shares have a lot going for them. They get their money back first, plus a rate of return (100 percent is not out of line), before anyone else sees a dime. Take an investment of $3 million. Sell the company twelve months later for $6 million. Preferred shareholders take all. In addition, the preferred shareholders often have a veto over raising new money. In other words, if you need more they can give it to you—on their terms.

  So the cardinal rule for an entrepreneur with preferred shareholders is never to raise money when you need to raise money; instead, raise it when you can be choosy, blasé, nose in the air.

  We knew that we would run out of cash early in the fall of 1996. Our plan, after all, was to spend as fast as we could. To buy into the market. To purchase “mind share.” We’re coming! Nothing can stop us! Believe it!

  What we didn’t know was that the Wired IPO would fail and that the market for Internet stocks would turn down. And that our principal new Web product would fall behind schedule. Of course, we should’ve known, should’ve assumed, should’ve, should’ve, should’ve. But you want to wait to see what the market is going to do before you make your plans, and you want to wait for the product prototype to be done before you’re out with the round. And, of course, bankers go on vacation (or on rafting trips), so you have to wait another week or two or three before the revisions on the private placement documents get turned around. The industry moves at Internet time, but the world moves at normal, maddening, sclerotic real time.

  Two days before the end of the month, we received from Jon Rubin’s attorney (indeed, Jon Rubin’s father’s attorney, Jesse Meer) the paperwork that would provide us with the funding we needed to meet the next payroll.

  Instead of an additional $500,000 to be supplied on relatively the same terms as the initial investment, as I could have sworn we had agreed, it was in fact $150,000, supplied in such a way as to give Jon Rubin and his family control of our company.

  There is that watershed moment, part illumination and part sinking sensation, when you suddenly realize what game you have been playing.

  In a controlled monotone, Alison recited the various draconian provisions of the agreement:

  We would lose our seats on the board.

  We would have no say in any sale or disposition of the company.

  Jon Rubin would step into the company as chairman.

  His technology advisor (the nature of whose influence over Rubin was endlessly debated), who had sat in our office, sphinxlike, all these many months, would join the board and effectively exercise day-to-day operational authority.

  As Alison and I considered the end of the world, new desks were being brought into the office for the new employees who continued to arrive on an almost daily basis.

  “There’s so much anger here,” Alison said, holding her hands to her face in a Munch-scream pose and applying something less than a legal analysis. “I think it’s Jesse. Really, he’s in control.”

  Rubin seemed as connected to his lawyer as I was to mine. You could not be sure to whom you were talking, whose ideas were really being proposed, and who really, in the end, had the final say-so.

  Certainly, at first glance, Jesse Meer was an odd soul mate for his fashionable, technology-minded client. Early on, in an interesting bit of byplay, Rubin had said he was going to be represented by Wilson Sonsini, the hottest Silicon Valley law firm. Instead, Jesse showed up. He made it clear that he represented not just Jon but Jon’s father, too, and that neither he nor Jon’s father was at all enamored with my deal.

  Jesse was from Brooklyn. He had a trodden face and wore artless suits. He reminded me of some of my uncles (and not the more successful members of the family). My impulse was to reach out, to bond with Jesse rather than his slicker client. But the least challenge to his authority just got you this inexplicable, sudden, and, it appeared, uncontrollable rage. Jesse’s face came barreling into yours, you glimpsed teeth frothy with spit, and you caught the full force of some really scary threats—what he would do to you if such and such happened, what the consequences would be if you even thought in such and such a fashion—and always a little reminder of whom you were dealing with in case you had forgotten (“You better find out who you’re dealing with”).

  His firm, on West Forty-fifth Street, handled garment industry clients, like Rubin’s father. This was a tough-guy firm. It specialized in intractable situations: “get what you can,” end-of-the-day meltdown situations.

  “They’re a classic fuck-you firm,” Alison had said when we first contemplated a deal with Rubin in early 1996. “They make me shiver. I’m reluctant to get involved with them. In an ideal world, I’d walk away from this deal because they’re here.”

  At the time, I barely registered her concern. I wanted the money. It was not an ideal world.

  “He has aggressive lawyers,” I had said. “But Jon seems all right, really. They’re the lawyers. What can you do?”

  Lawyers seemed like in-laws. While you might not be able to avoid them, you didn’t have to sleep with them.

  “There are four possibilities,” Alison said now, deliberately, handling the papers as though she were a pathologist holding tissue samples. “This is a spasm of anger on Jesse’s part, and Jon hasn’t even seen these documents yet.”

  “Is that the most optimistic?”

  “Or this is part of a strategy to force the common shareholders out, and realize some plan beneficial to the preferred holders.”

  “That sounds like the worst case.”

  “Or this is the first shot in a negotiation, a garment-business style negotiation.”

  “All right.”

  “Or Jon’s father is calling the shots. And he’s saying as much fuck-you to Jon as he is to us.”

  Just then, Ann—our children’s English nanny, whom we had turned into our office receptionist and who would not be paid in two days’ time if we didn’t solve our present problems—put her head in to say, “Mr. Machinist’s office.”

  “Mr. Volff,” Machinist said on th
e speaker phone with strident jocularity in his hale and hearty alumni voice. “Ve’ve stubbed our toe.” He liked to pretend he was some sort of German-Jewish eminence.

  “You have these papers then?”

  “No one ever said it was easy being an entrepreneur,” he trilled.

  Alison pushed the mute button on our end of the speaker phone. “He’s going to throw you over.”

  “How are we going to respond?” I asked Machinist.

  “How are you going to respond? You have counsel present?”

  “Yes, I’m here, Bob.” Alison leaned into the speaker.

  “Listen, Bob,” I said, reasonably, even affably, chalking this all up to a procedural snafu, just a bit of a misunderstanding or maybe a little jockeying for position. “What I would like you to do is to try to convey to Jon that he’s overreached in a serious way. I think you should tell him that Patricof will pull out of the deal if he persists in this grab.”

  Alison frowned; my naïveté was unbecoming.

  “I don’t think we’re in a position financially or ethically to do that,” Machinist said with some formality.

  Alison reached over and muted the phone again. “You got it, right? They’ve just given notice that they’re not on our side anymore.”

  “Hey, there’s no way I’m going to sign this deal. I mean I hope you know that, guys.”

  Silence. They were muting their side.

  “Listen,” Machinist said, cutting back in, “we all want the same thing. We all want to protect our investments.”

  “Bob, we’re looking at losing all of our protections, every last one!”

  Alison gave me a signal to get a grip; now, she indicated, was not the time to let it blow.

  “Well, I would say that you have to look at the realities of securing the cash resources to allow you to arrange the further financing of this company.”

  “Bob,” I said evenly (I hoped), “under these terms I’ll resign.”

  “I wouldn’t say that,” he said with a kind of forced and practiced calm, as though I were out on a ledge. “If I were you, I would not threaten to resign. No doubt, the options become significantly different if we determine that this company has a loose cannon for a CEO.”

  “I’m a pissed-off CEO.”

  “If you’re going to act against your economic interests, I think it’s reasonable to consider you a loose cannon. I want you to consider your options very carefully. I want you to consult your counsel and decide what you think is important, what you want to go to the mat for. Then we will come up with a reasonable response. I don’t think anybody disagrees that this is an aggressive document.”

  “Jon Rubin for you,” said Ann, just as Machinist was hanging up.

  “Take it,” Alison said. “But don’t tell him I’m listening. Can you do it? Are you okay?”

  I wasn’t bleeding. “I think so.”

  “Tell him you haven’t read the papers through yet.”

  I pushed the speaker. “Hello?”

  “Michael? Jon.”

  “How are you? Where are you?”

  “I’m on my way to the airport.”

  “Are you heading to L.A. or coming to New York?” I pursued, envying and trying to imagine the freedom of his mobility.

  “I’m coming to New York.”

  “Are you heading to the office or to your apartment?” I asked, as if I could solve all of our problems with unending itinerary talk. He had recently bought what sounded like a baronial apartment on Gramercy Park (he had described to me the wood wainscotting throughout the apartment in loving and monotonous detail).

  “I’ll be home. Michael, you’re going to get papers from Jesse regarding the loan you need—”

  “Yes, I’ve gotten them,” I said as though without any concern at all. “I’m just starting to look at them. Thanks for getting them up. I’ll try to look at them tonight.”

  “What I want you to understand,” he said sternly, “is that these documents outline the only deal I’m in a position to offer you. This is not a proposal. This is not the beginning of a negotiation. This is not open to discussion.”

  “Jon—”

  “Michael, I want you to understand where we are,” he said deliberately. “Where you are. You’ve run out of money. You’ve fucked up.”

  “Jon—”

  “I want you to go over this with Alison, if you feel that’s necessary. And then I want this to be signed by the time I get to your office tomorrow.”

  Alison made a draw-it-out, get-more-time signal, as though directing a live talk show.

  “Jon—”

  “I just want to make sure you understand this.”

  “First of all, Jon, as I think I mentioned to you,” I said, taking a little umbrage while I wildly grasped in thin air for a delaying ploy, “Alison’s father”—I made this up on the spot—“is having open heart surgery tomorrow morning, and I, frankly, don’t know if I’m going to be able to get her to look at this.”

  “Michael, you may have to call another lawyer then. I’m very sorry about Alison’s father.”

  “I’ll be honest, Jon. I don’t know what’s in these papers, although, of course, I know the deal that we’ve been discussing, but I’m a little concerned about what seems to be an abrupt adversarial turn in our relationship.”

  “Michael. I didn’t call to discuss our relationship. Whether our relationship is good or bad is not relevant now. I’m in a business situation that I did not and do not want to be in. I am not a credit card. I am not a bank. I am not a member of your family. You should have understood that before you ran out of money.” He was giving muffled directions to his driver.

  “Let me look at the papers, Jon. I’ll let you know what I think.”

  “Michael, I need you to understand that what you think is not of any consequence to what is going to happen. You should know that, and I hope you can appreciate it.”

  I was calm and collected—feeling some new reserves of strength, in fact—but, I noticed after I hung up, bathed in sweat.

  “Nice touch, open heart surgery,” Alison said glumly.

  We were on the brink of disaster, just as we stood on the brink of success.

  We had rolled out our new and improved state-of-the-art Web “product” just a few weeks before.

  It was the culmination of nearly two years’ and more than six million dollars’ worth of shifts and turns and reversals in the industry.

  It was based on a hard-fought analysis, involving many Internet generations and business lives, of how the Internet would organize itself and grow and envelop the mass of consumers.

  I was wrong in my analysis only about half of the time.

  For a long while I had believed that connectivity—that is, where your modem dialed to get you onto the Internet—would be the central organizing principle. If you owned the server, you owned the audience. Therefore, obviously, if you wanted to be somebody in this business, you better start an ISP.

  Connectivity, I had presumed through 1994 and early 1995, would be organized at a local level because the consumer would only be willing to make a local call and because the price of entry into the connectivity business was reasonable for small operators at a local level. This would give way, I logically imagined, to a form of regionalization: if you were operating in Manhattan’s 212 area code, it was easy enough to put a POP (point of presence) in North Jersey’s 201 area code and in Long Island’s 516 area code. After a while, of course, we would see a rapid form of consolidation. Major players would begin to emerge—nationals and regionals.

  It would be, I had thought, a service game. Value added. Consumers would choose a provider of Internet service on the basis of the ease and reliability of its connection to the Net, the availability and affability of its service personnel, and on the other ways the ISP could add value—exclusive arrangements with particular content providers, friendly and compelling guides, contests no doubt, and a range of other helpful features and come-on gimmicks.


  I wasn’t really wrong about this. My screwup came in thinking that this would take ten years to unfold, whereas in actuality it took just about twelve months.

  My notion had been that we would offer connectivity in the New York area—a flagship locale if there ever was one—and develop programming (“content”) that, in what seemed like a perfectly tried-and-true television model, we would syndicate (that is to say, rent) to other ISP systems, most of which would be run by techies without the skills or interests to develop content of their own.

  Rich from our CMP deal and with remarkable optimism and innocence, we set about building an ISP in the fall of 1994. If I had once questioned why Time Warner would so blithely plunge into a technology it knew nothing about, I never once paused to ask myself, as technically disinclined as the next fellow, what I had in mind. The motivation, I now think, was that seeing the future with what appeared to be greater and greater clarity, I just had to go there; anything else seemed like rank cowardice. To be told that you don’t have the wherewithal or talent or temperament to deal with the mechanical world is not something that an ambitious American, accustomed to a lifetime of transparent technologies (after all, I can work a computer, and my wife and children can certainly program a VCR, even if I can’t), would willingly accept.

  Weird Stan said he could build me an Internet provider system. He wasn’t happy about it. Nor did he believe that the average American belonged on the Internet. But, technically, he could do it. If that’s what I wanted.

  Determined that our system would be as technically proficient and as physically stable as possible (when West Coast companies go public, they have to disclose that they sit on top of geological fault lines that could destroy their infrastructure at any moment), we established our servers, after long negotiations, in a secure communications facility run by one of the hottest fiber-optic telephone companies in the country, on top of the New York Stock Exchange overlooking Wall Street in downtown Manhattan. It had the perfect ring to me. I could hear the old radio announcers: “Coming to you from our transmitters atop the Empire State Building . . .” Now it would be “From our servers at the New York Stock Exchange . . .”