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.
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.
IB: If you had resisted the pressure to go public, it would have saved you a lot of headaches and heartaches, but how would theglobe.com have developed if it remained a privately held company?
“Facebook isn’t really innovating anymore. Mark Zuckerberg has become very distracted and unfocused.” — Stephan Paternot
Paternot: It would have developed more slowly, but the late 1990s internet era was a land grab where it was very much an attitude of winner takes all. It was more about grabbing turf. Once you have a product that gains traction, it was grow, grow, grow because your competitors are coming for you. So, the name of the game became whoever has the most capital can acquire the most users and build the most and outlast everyone else. So, in that environment, where everyone says profits are irrelevant and it’s about growth at all costs, you don’t have a choice. In that era, we didn’t have a choice because private companies weren’t raising hundreds of millions of dollars privately. To raise that type of money, you had to go public.
Nowadays, it’s very different. It’s still a winner-take-all model, but just like you’ve seen with Uber, for instance, most of these internet companies have done A rounds, B rounds, C rounds, D rounds, and E rounds, and they have raised $10 or $15 billion in private money. They have taken it as far as they can go and raised more money than most companies do in an IPO in order to stay private and keep growing. So, the market has now changed to actually help companies get much bigger and stay private longer. It’s just better. You stay more competitive. You’re scrutinized less.
IB: You were attracting advertisers and growing revenue every quarter, yet your stock price was being tanked. You were being knifed from behind the scenes by your own investment bank.
Paternot: That’s right.
IB: It had to be just an incredibly frustrating exercise to go through.
Paternot: Absolutely. One of our board members, Bob Halperin, had been part of several major companies, including Intel and Raychem, and he gave us advice early on. He said, ‘Guys, don’t focus on your stock price. Just focus on the business. If you take care of the business, the stock price will take care of itself.’ So, Todd and I, as hard as it was when you’re public and everyone is talking about your stock … we did our best to just grow the business. Raise the revenue, monetize the users better, make some acquisitions. We kept growing our traffic and growing our revenues. But despite that, because the stock had gone up 1,000 percent the first day, it spent most of the time sliding back down. Temporarily, on good results that we announced, it would move back up a bit, but ultimately, we were overvalued relative to when we went public, and so the people who bought the stock eventually dumped it despite the good business results. So, there was this cognitive dissonance where Todd and I kept improving the top line of the business, the bottom line of the business, and we were being rewarded with a falling stock price. That’s what was most frustrating for us.
IB: Do you consider yourself a pioneer who ended up taking the arrows for others? Or is that too lazy a way to describe your business legacy with theglobe.com?
Paternot: I feel that our legacy is defined by how others see us. I don’t know that I can state what my whole legacy is. I told my story in the book. I never describe myself as a social media pioneer, but that seems to be the label that others have subscribed to us in the Facebook era.
So, our business model was validated. Since Facebook became a wild success, of course the internet made a giant comeback. People then started saying, ‘Oh, those kids were, I guess, a couple of dotcom whiz kids. They were social media pioneers.’ I have to accept it whether I like it or not. At first, to be honest with you, I was envious and resentful and had a lot of emotional baggage tied to being compared to Mark Zuckerberg because it was like, ‘Great, he gets the real credit for being the real inventor of social networking and proving an online community has real value.’ I was a little resentful at first, but eventually I accepted that if that’s what people are going to say when they compare us — OK. I could think of worse comparisons, and Zuckerberg became a wild success, and we live in a Facebook world, but of course wait another 10, 15, or 20 years and Facebook could be a bad word.
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