NS Internet column

Written 05 October 1999 for the New Statesman

Money is good for people. Ridiculous quantities of the stuff make them nicer, more benevolent and funny; at least this is what I believe after trying to interview Tim Jackson. He is worth £137m one week or only £35m the next, depending on which paper you  read and four years ago he used to sit opposite me at the Independent's offices and fetch his own coffee. It was Lavazzo expresso coffee, which seemed insufferably pretentious and he gave the impression then that most people around him and all his superiors combined stupidity, ignorance and incompetence in unappetising proportions. No wonder that one colleague muttered as he came back to his desk "Ah, Lavazzo: the Italian for wanker."

After three months of this we were both working on Christmas Eve but he looked unseasonably cheerful; when I asked him why he said he had just resigned. He was going to write books and freelance. Clearly this cannot have been satisfying, for the next think you know, he is worth however any zillions you care to believe from founding QXL, the auction company. He is a great deal sweeter, more funny, and charming as a result. There is, however, one small question: whether all this is not the result of a placebo effect.

If he thinks he's going to be a millionaire and everyone around him thinks the same,  does it really matter whether he is or not? The question goes to the heart of all the Internet millionaire hoopla. Out of the fifty people features in the Guardian last week as having made their fortunes on the net, very few had actually sold up and got the money they are meant to be worth. Almost all these internet fortunes are in share options. To get at them, they must sell the shares. This can't normally be done at all for a year after the company has gone public (in the USA 90 days) and by that time the share price will most likely have gone sharply downwards. Nine out of ten IPOs fail. They don't even have to be web sites for this to be true. As a founder journalist, I once had options in the Independent  myself. They were going to be worth a year's salary after three years; in the event, they were worth a month's after five.

Salon.com, which went public at a little over $10 this summer, went up to $12 and is now wallowing at half the price. Some of the founders may still have made money if their options were priced cheaply enough, but if they had instead the option to buy at the IPO price, they are in a very deep hole. Something like this is going to be the fate of most of the Internet "millionaires" spotted by the Guardian unless the law of averages has been miraculously suspended.

The underlying problem is that very few people have discovered how to make money off the web except by share prices. QXL itself posted a loss of £2.1m on a turnover of £2.5m last year; the only justification for valuing it at £280m, a hundred times its turnover, or minus 120 times its loss, is that it is losing all this money in an exciting new way that only two or three other firms have tried before. So what keeps the whole bubble going? Ignorance and greed are important factors, of course. But it is also rational for people who can afford to gamble to do so, because the winning bets do pay off so hugely and they are not really very big.

None the less, professional gamblers — sorry, I mean real stock analysts — are well aware of the fragility of the business. At the moment one of the more interesting reads on the web is a speech given in London last month by Jim Cramer, the founder and one of the columnists on thestreet.com, a financial information site. His simple advice is that nobody will make money from a web site who has only one way to do it. No one will make money from advertising alone. No one will make money from buying market share. "It is harder to do business on the Net than off it, and anybody who tells you otherwise is a dreamer or a fraud. Running a Web business requires a level of attention to detail that others off the Web would choke on and die from."

All this is transparently true, as anyone who has tried to maintain even the simplest web site will understand. But the trouble is that most of the people gambling on the market have no idea what the companies they invest in are actually doing and what the business entails. Eventually the supply of these buyers must run out: this seems to me the only certain proposition on the Internet. Unfortunately, I can't work out how to make money from this knowledge, so instead I shall trundle off to www.la-cle-de-la-cave.com which is a business anyone can understand.