Take Five with Stephan Paternot: Lessons of a ‘dotcom whiz kid’
Stephan Paternot has been described as a social media pioneer, but his tale of instant riches and rushing to take his company public is a cautionary one.
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Stephan Paternot blanched at being called the Mark Zuckerberg of the 1990s, but long before anyone ever heard of Facebook, Paternot and his colleagues at theglobe.com were demonstrating the value of online communities. Unfortunately for Paternot, the glory was fleeting, and he explains why in a reissued edition of A Very Public Offering: The Story of theglobe.com and the First Internet Revolution.
The book, which was originally published in 2001, chronicles the rise and fall of theglobe.com, which shattered records with a billion-dollar IPO in 1998 only to see its founders, Paternot and Todd Krizelman, forced to leave less than two years later — in part because their own investment bank, the now defunct Bear Sterns, was sandbagging its stock price as part of an unethical scheme. IB recently spoke to Paternot upon the second release of A Very Public Offering and found that its many business lessons still apply. Here are excerpts from our talk.
IB: With regard to what needs to happen for the next tech revolution, how much hope do you have that emerging technologies like blockchain and a decentralized “Web 3.0” can fix what’s wrong with the internet?
Paternot: Well, I have a lot of hope, and quite frankly, it’s probably the single biggest sea change that has a shot at changing the internet and helping society with a lot of the problems we are currently experiencing. I know that’s a big, grand statement, but it’s because I can see what the blockchain movement is — a fundamental rethinking of how the internet could work, and how we would treat identity information. It would allow us to codify rules, laws, and contracts. It would actually help remove the susceptibility to corruption and the gray area that humans are in when it comes to remembering facts and following rules. It will do a tremendous service to those who believe in facts and science and who right now think we’re living in a twilight zone.
So, I think it truly will make a difference, but it’s not going to be quick. It’s not going to be any quicker than it was for the internet to go from being this crazy concept of living online — that most people couldn’t get their heads around in 1994 — to where we are now. It took 25 years for us to now accept that the internet is truly part of our lives, and we now understand exactly how it helps us do what we want to do — from shopping to banking, and from our jobs to communication. Now, it’s obvious, but for a good 10 years it wasn’t obvious, and honestly, when the [dotcom] bubble burst in 2001, a lot of people thought that was it. It was a fad. It wasn’t meant to work, and it was a gigantic waste of time.
That’s sort of how people think of the blockchain right now. We don’t quite understand it. What is it? What is it good for? There clearly are not enough examples out there right now about how it’s useful. So, how can anyone envision what it could do for us? It’s going to take, in my opinion, at least 10 to 20 years to come to full fruition.
IB: Based on your own frustrating experience, why should taking your company public be considered a last resort? I would imagine it has to do with the short-term focus on quarterly earnings at the expense of innovation.
Paternot: Yeah, obviously, we got burned with our IPO because of forces that seemed largely out of our control. Now, we were also young and inexperienced, so we weren’t as equipped as necessary to keep the boat afloat and going in the right direction, but I’ve seen what happens to all companies when they go public. You go from your number one customer being your users who engage with your product and help you grow and become successful, to then your next most important customer perhaps becoming your advertisers, and it starts to come at your users’ expense, as we’ve all seen. Then, ultimately as you become public, your number one customer becomes your shareholders, and everything becomes about appeasing the shareholders.
The joke is that the public markets have become gamified by rules and regulations of FINRA [Financial Industry Regulatory Authority] and the SEC [Securities and Exchange Commission]. The rules that were set up to help protect the least experienced, smallest investors who don’t understand what’s going on and basically want to gamble and make as big a return as fast as possible, and don’t even necessarily know what they are buying. When you cater to that group, and that group gets loud, and that group swings your stock up and down based on any which way the wind is blowing, it ends up being the tail that wags the dog.
The CEO ends up being just as distracted because you have to constantly buffer your employees from that noise and also buffer yourself because everyone is calling you. It’s you on the phone for the quarterly reports. Everyone just wants to know how much more money you are going to make them. That ultimately is to the detriment of your true customer, the original customer — the users.
Facebook is what I’m going to use in this example, but almost every major public company is guilty of this, and we’ve seen Elon Musk flailing in the public eye because of things he’s done to try to keep his stock price up. What ends up happening ultimately is that you stop taking risks, big risks, and it’s all about small, incremental, quarterly optimization. That means you stop doing innovation. You start thinking, ‘Well, I’ll just buy other companies that are innovating more,’ and you end up getting bloated with different businesses that are private and still focused and still innovating, and you let your core company, your core culture, your core mission become more diluted until you go from being a market leader like Yahoo was in the 1990s to what Yahoo became 20 years later. It was broken into pieces and it died under its own weight.
Facebook isn’t really innovating anymore. Mark Zuckerberg has become very distracted and unfocused. He’s trying to maintain his quarterly numbers to make sure he’s eking out more profit. He’s finding more and more really nefarious ways of squeezing extra pennies out of his users by taking their information and finding clever ways to monetize it to advertisers or international dark money political groups, and now he’s paying the consequences. We don’t trust the product anymore.
IB: So, your point about going public is not so much that it should be considered a last resort, as that you wouldn’t recommend it at all because it interfered with your focus on relentless innovation.
Paternot: Yeah, and I would add a few things. There are a couple of key reasons that people go public. There is the fact that you become so big that the SEC and FINRA require you to start disclosing your financials, so there is an obligation at some point, if you become huge, to go public.
Then there is another reason. If you are a company that is backed by venture capital firms, the venture capital firms want to exit. So, you have an obligation to your private shareholders to find a way for them to be liquid, and it either means you have to sell your company to a buyer to get liquidity or you have to take it public.
The third reason people go public is for the wrong reason. This perceived glory that going public is like winning an Oscar. It’s a rite of passage. Everyone wants to get there. You’ve got your stock ticker symbol going. For a hot minute, it does feel euphoric and amazing to be among the few that ever make it public, but that glory reason is the first things to die. Thereafter, you’re stuck no longer being able to afford crazy innovation. Your shareholders will bail on you because they have not turned a profit and can get out. A lot of your employees will then bail because they want to take a profit on their stock, as well. Your smartest, most clever PhD employees will see that you’re gradually trading forward-thinking innovation for short-term gain. So, typically after going public, you lose 70 percent of your smartest talent.