We've seen a major crash in crypto and speculative tech. But it's happened so fast, that it hasn't fully sunk in yet. So when do people really accept that it's over? What's it like when a bubble truly ends? And how does it feel to go from wildly rich to broke? Tech founders during the dotcom era all experienced this. On this episode of the podcast, we speak with Stephan Paternot, the co-founder and co-CEO of TheGlobe.com, an early online community that was famous for having the biggest one-day IPO popp of all time. We discussed the runup to the boom, the crash, and how he recovered from it. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
What TheGlobe actually did — 4:51
The path to an IPO — 6:20
What markets were like in the summer of ‘98 — 9:26
How the IPO actually priced — 15:17
What it was like being really rich — 23:03
What all boom/bust cycles have in common — 28:04
What it’s like to lose it all — 31:02
Lessons for crypto and Web3 — 39:04
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Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
So Tracy, I think you know, and I think listeners know that at least for me, my interest in markets like really came about during dotcom bubble.
Tracy: (00:25)
Yes. You have brought this up a number of times and I have to say, I love hearing the stories of you losing money during the bubble bursting.
Joe: (00:32)
I made a little money too! But also I lost it, but for me, like so many things or things that I've sort of learned, or internalized about how markets work, still come from more or less that period. And I think it's obvious that on some level, what we're seeing now in markets right now, what we've seen in crypto, what we've seen in tech, has some pretty obvious parallels to that period.
Tracy: (00:57)
I feel like the late nineties, early 2000s bubble would be a good grounding for the current market situation, so I envy that experience, but the thing that interests me a lot about 2000 when the bubble burst and all the tech stocks collapsed and all of that is when did people actually declare like tech is over? Or the tech bubble has burst, this is it. Because this is a question that comes up a lot now.
Joe: (01:25)
Right. So it's like, what is over and what is real and what, like, so obviously a year ago there were a lot of people who on paper were worth a lot more money than they are right now. But presumably, people are like “Where's the bottom. When does this bounce back?” What sticks with us? Like these are all really interesting questions. And of course, no one knows the answer, but you know, all of these conversations happened after the late 90s bubble. And you know, I think people forget that for years, no one talked about Amazon, like 2001 through say 2006 or 2007, it was not a particularly prominent company that people talked about.
Tracy: (02:04)
So this is the other thing that interests me. It's what comes out of the wreckage of a bubble bursting because everyone was very excited about the internet in the late 1990s. And so you saw a bunch of companies rise up to come up with some sort of internet-based business model. And then it all kind of went away after the bubble burst. But some companies that did phenomenally well, decades later actually emerged out of that rubble. And the question of course now is whether or not the same thing might happen?
Joe: (02:33)
So the question is how do you know it's over? What comes after that? What is it like to lose unbelievable gobs of money, which a lot of people are going through now. So, you know, obviously there were a lot of like dotcom IPOs people remember — Pets.com, which was sort of infamous. There were like hundreds in the year 1998. But I think the real first one, the one that really caught people's attention, just like, ‘wow, this is an unbelievable amount of wealth here...’ Do you remember the TheGlobe.com?
Tracy: (03:07)
You know what, it rings a bell, but I'm not that familiar with it. I think it was famous for at the time being like the biggest one-day pop in IPO history?
Joe: (03:17)
It was, I think at one time and it was definitely like one of the first ones. It was like a little bit earlier than the rest them and so it sort of had this meteoric rise and fall. The co-founders of the company, they were like in the media, and they’re famous for like being really young and really rich and wearing plastic leather pants to parties as one does when you’re young and really rich. And then of course the bubble collapsed.
So I'm very excited. I just wanna jump right into it. This is like a personal thrill for me, because of course, this got me interested in markets. We are gonna be speaking with Stephan Paternot. He is currently the co-founder and executive chairman of Slated, which is an online film finance marketplace, but also he was the co-founder and co-CEO of the TheGlobe.com. So we're going to hear some stories about what those years were like, and maybe some takeaways for people today. So Stefan, thank you so much for coming on Odd Lots.
Stephan Paternot: (04:21)
My pleasure. That's quite an intro.
Joe: (04:23)
So let me start with like, maybe an embarrassing question. And I don't know if it's an embarrassing question for me, or maybe it's an embarrassing question for you, but, you know, I know a lot about TheGlobe because I remember the surge. I remember the IPO. I remember that you and your co-founder were extremely rich. I remember you were in the media. I remember the plastic pants. What I don't remember is like, and I don't even think I knew it at the time, what did TheGlobe do?
Stephan: (04:51)
Well, you're not the only one who may have known TheGlobe primarily because of its stock price — much to my chagrin. TheGlobe.com was one of the first virtual communities. So back then we didn't call it social networking. It was called virtual community. And it was a much broader idea that the internet was new and there was this idea that maybe people could plug in, log on and exist online and build relationships online and interact with other people online. And that was the concept of virtual community. The tools to do it hadn't been built yet. So chat rooms and forums and homepage building, all these basic primitives is what we needed to build. And now we take that for granted today, right? You don't think of these basic primitives anymore. Just think, you know, I'm on Facebook, I'm on TikTok, right? I'm on Twitter, I'm on any of these things and you know, I just upload and share and post that's just, it just works. But back then, that wasn't obvious. So that's what we created, were first generation primitives for virtual community and lo and behold, it became one of the stickiest business models we could have ever imagined. And of course you know, Facebook ran with that, much more successfully than us in the early 2000s.
Tracy: (06:05)
What was the journey like from starting this virtual community to eventually, you know, listing in a public market? Because that seems like, you know, it's quite an upward trajectory, so how did that work?
Stephan: (06:20)
Well, it was non-obvious. So of course looking back 30 years later — and that's terrifying to even admit that it's been that long — it all seems obvious. Like this was always gonna happen, but back then, no one understood what the internet was. So 1992, Tim Berners-Lee is one of the creators of the HTTP protocol and HTML. And it's something that's super fringe, running on the DARPAnet that's been built and only university professors and some really geeky university students are logging on to the worldwide web and creating webpages. And you really could only go browse other university websites. So it was really cryptic, hard to use. You really needed to know what you were doing and to even get started, you needed to download, what was called a browser and the first one was really Mosaic.
It was an old beta version of Mosaic, which was something that Marc Andreesen had created before Netscape. And it just so happens that my old college friend, best friend at the time, Todd Krizelman and I, we downloaded Mosaic. We had dial-up modems. I was using a 14.4 modem. He had a 19.2 kilobit modem, so super slow, but we both logged in and found our way into what was the first chat room we ever experienced. That's how primitive things were at the time. And, you know, startup culture wasn't typical, not everybody was doing startups. It was very much a Silicon Valley thing. Most people who were in university like us were there to go get their degrees and then go and maybe become a banker, a lawyer and, you know, earn your stripes that way.
So for us to wanna go and try to do something different and create a startup in college, let alone one in this new universe called the internet was super risky. Our parents didn't understand what we were talking about. Most of our professors didn't understand what we were talking about and we just sort of had to wing it and say, look, I think Todd and I want to, we think there's something there. There's this thing called the internet. It's just beginning, there's only a few million people around the world using it, but we've stumbled on this social experiment and chat that is so addictive.
We think that could be the beginning of something huge. So that's where it started. Non-obvious. We were taking the path less traveled by certainly not the safe choice that, you know, most of our friends were gonna go and get jobs and earn, you know, $50K, $60K, $70K a year. We were gonna go make nothing. There was no such thing as online advertising, right? Or e-commerce or any way to make money, though. It was going, we were going into the great, scary, unknown, well before there was ever the concept of an IPO related to the internet space.
Joe: (09:01)
So let's talk about that IPO. I think it was 1998, which is a little bit earlier than the real mad rush. A little bit earlier out of the gate than a lot of these companies. The stock surge 606%, according to something I'm reading here. Its market cap was a little bit under a billion. What is that like? What was that day like and how much were you worth like the day before that day and how much were you worth that day?
Stephan: (09:26)
I think for you to fully comprehend what it felt like that day, you would have to understand the four years between the inception of TheGlobe and us going public.
There was no IPO mania, only a few companies had gone public in this space. One of them was Yahoo. One of them was Netscape and it sort of blew up and it became this news item. Yahoo went public. And then that also became a news item. But in the short months after they'd gone public, their stocks had tanked. So people were going, “Okay, wait, I don't, we don't quite understand what this Netscape thing is. This Yahoo thing doesn't seem to be working well. What is TheGlobe bringing to the table that’s new or different?
Well, what we were bringing to the table — and in 1998, four years later — was this super addictive social interaction online that was capturing people's imagination. It was still at a point where the market wasn't receptive to IPOs. So we didn't know that our IPO was gonna work. We were in a recession in the summer of 1998. The markets had come down because Long Term Capital Management had collapsed. We were running outta money. And we were thinking, I don't know that we're gonna be able to go public.
We're probably gonna run outta money. And our business is just gonna go under and no one will ever discovered what the internet is, let alone virtual community. And that's a bummer because we've just been at it for four years talking about virtual communities. But by November — and it really was on Friday the 13th, November, 1998 — the market turned that week. And suddenly there were a couple other companies that went public, a company called Fox went public, and then a couple other small dotcoms went public that went up pretty quickly.
And suddenly after having done a three week road show for our IPO and having been turned down by all the institutions that were looking at the market collapsing. As the market turned, the phone started ringing off the hook. They're calling all of our bankers saying, ‘Hey, hold on, what's this thing you guys have been saying again about the internet and virtual community? TheGlobe.com? We want in.’ And suddenly this little three million share offering, we had had something like 45 million shares of demand. Massively oversubscribed, 15X. We didn't manage to move the price up much, again cuz we were worried that the market would turn again and our S-1 filing would go stale and that the IPO again would never happen and we would die right there.
So we just we just told the bank, let's not try to mess with the price. Let's just take what we can get. And that day we were pricing at $9 a share, which was way down from what we had been hoping to raise earlier in our IPO process. But that there was enough interest and that morning the bankers were telling us, ‘Hey guys, the interest is climbing. We're gonna go, you guys should be pricing right around 11:00 AM.’
It's 9:30, 10:00 AM. But it looks like this is gonna price at $20 to $30 a share. And we were like, wait weren't we priced at $9. How's it going up to $20 to $30? What's going on? Cause this was very unusual. Stocks weren't popping that way. And another half hour later, they're saying, oh, never mind. It's not gonna go at $20 to $30 a share. And they're like, okay, so what is it? $9, $10, $11. And they're like, ‘No, it's actually gonna go at $50 to $60 a share.’
Wait. What's going on? And within another half hour, right as we're coming up to 11:00, the main trader that day suddenly yells out “$87!” and then “497!” And I just remember that hundreds of bankers on that floor at Bear Stearns stood up to look where we were standing, not understanding what was going on and it turns out our stock had run up from $9 to $97 in the span of a couple hours. And we started getting phone calls on our cell phones and people were telling us, “Oh my God, there's something on CNN and CNBC. And they're talking about TheGlobe IPO and the world record”
And you know, so my partner and I talk, we were like totally caught off guard. This sort of blew our minds away. It was head spinning. It was exhilarating. It was also terrifying. We didn't really know what an IPO was. We were 24 years old and the fact that it went out of control, up a thousand percent and was all over the news, was unusual. And they're telling us it's a world record IPO. Is that good? Well, it's good because you're all over the media, but very quickly it was like, my God, you guys left so much money on the table. Like, okay, well, but Bear Stearns didn't wanna reprice this up, you know, to $10 or $11 or $12, let alone $97. So there was, you know, it was an exhilarating crazy day, but we knew we had a new lease on life. Our company was gonna survive. Everyone was now saying, whoa, what is this internet thing going on? And our IPOs somehow ended up becoming this lightning rod and kicking off IPO mania, where every dotcom wanted to go public. And the same thing happened to them that just happened to us.
Tracy: (14:36)
I have so many questions. I'm gonna try to fit them all in into one mega question. Okay. One, what did you do that night? Did you go out and celebrate? Secondly, what do you think accounted for the big pop? You know, this was a sector that a lot of people were unfamiliar with, as you mentioned, there'd been some IPOs that had flopped recently. So like why did everyone suddenly come together and, you know, seemingly wanna have a slice of TheGlobe.com and then thirdly, what was it like pricing with the bankers? Because, you know, you mentioned you, you went public at $9, it felt like you might have left money on the table. How did they actually work out that number?
Stephan: (15:17)
Well, let me start with maybe this last question and then work my way backwards from there. So there had been a huge amount of capital sitting on the sidelines in the market because of the recession that had kicked off and LTCM had unwound. Everyone was freaking out with capital pull out of the markets. So there's a lot of money sitting there waiting to be deployed and something like a hundred plus road shows had been canceled. So tons of companies that would ordinarily go public that year had pulled their IPOs. We were one of the last companies on the road show that refused to quit because we knew we were gonna go under if we didn't raise the money. The way that the pricing worked was, you know, the banks would like you to believe that there's some giant brilliant formula behind all this, but all they can ever really do is look at comps and what are comps based on other comps? And what are those comps based on? Other comps.
So it's like, okay, it's basically what are other companies similar to you in concept? What are they trading at? What's their multiple to revenue or in the case of internet companies that have very little revenue, it was, well, you know, how big is your audience? You know, you guys have, you know, X millions of users versus Yahoo. How do we, you know, what are they valued at right now? Well their stock is low. So maybe you guys shouldn't have such a high stock price either. So it's arbitrary.
And you know, Bear Stearns had basically said to us, listen, we're gonna take you on the road show to our institutions, to the T. Rowe Prices and Janus funds. And we think we can sell this at, you know, let me think, uh, finger in the air, um, you know a hundred million dollar company and the numbers may be inaccurate because it's been 30 years, because I don't remember exactly, but you know, that's at $11 to $13 a share price. And as we went onto the road, we said, okay, fine. A hundred million dollar company or $90 million company, $11 to $13 a share. We don't have a better guess. I mean, either way, we were only generating a few million in revenue. So these multiples seem big. Who were we to complain? But as we went on the road show and the markets were crapping out and all that capital got pulled out, everyone would take the meeting with us. They all thought the concept was, I guess a little bit mind blowing. Okay. There's this thing called the internet. There's virtual community. People are interacting with each other. Okay. You know, no one had seen the matrix yet. And most people hadn't read Neil Stephenson’s, Snowcrash.
So they couldn't really imagine a world where you plug into this thing called the metaverse. But there was something to our story, a virtual community, right? That we're not just a site online where you look up information. It's not just a magazine online. It's not a place where you just shop online. It's a place where you will build relationships and spend hours of your life. Cuz that's what our users were doing. Spending hours of their lives in chat rooms. Something about that resonated with all the institutions on the road show. But what didn't resonate with them was the markets are collapsing. You guys should stop your IPO. Didn't you notice everybody else cancel it? So we unfortunately, after the three week road show had no choice but to lower the price.
They're not taking it at $10. They're not taking it at $9. They're not taking it $8. Like, okay, so no price is low enough. And eventually Bear Sterns, and this is just I guess, Bear Sterns, where they got some of their reputation. They were thinking that well, we'll scoop up the whole of The Globe and buy the whole thing. It's $6 a share. And it felt like so sharky of them to want to pull that. And we were like, no, we're not gonna do that. So we held off and it's only because the market turned around at a critical juncture where everyone was suddenly going. Oh, what are the new IPOs on deck? Fox? Cool that got priced 10, 15% below their pop. So it was like, well priced. And then there was another little dotcom called EarthWeb that went up a couple hundred percent.
And I think that made everybody click and go the action is where these dotcom companies are. Who's the last company we all met with that? We liked TheGlobe. So suddenly the timing, those vectors came together and Bear Sterns, you know, we then had to twist their arm to convince them, listen, move the price back up. You know, six bucks a share is insulting. You know like, okay. Eight, like come on. That's way below our IPO price. It should have been $11 to $13. Okay. Fine, $9, but we can't go higher or we'll lose the interest and everyone will walk. And your one's gonna go stale on Monday. And it's Thursday today. So we felt, we were sort of stuck between a rock and a hard place. They wouldn't want, they didn't want us to interpret the 45 million shares of demand as something that should require moving the price.
Even though everyone on our team thought the price should move. We kept it at $9 and that's how it got set at $9, it's because of an accident in our market timing that brought us further down. Everyone else that went public the following week and thereafter were suddenly coming in way above their price ranges, forget $11 to $13. They were pricing at $20, $25 $30 a share on the, you know, the same scale. And so we realized that this sort of blew everything up for everybody else. Unfortunately we were the guinea pig. And what's more unfortunate for us is that all of these institutions, these big players that are supposedly there to own shares in your company and hold for the long haul. And if the banks, you know, when they're taking you on the road show, they're telling you all about their institutional clients are gonna hold your stock.
And you know, they're big buyers buying, you know, $5 million chunks and they're gonna hold it for the long haul, that that's gonna be your base. You know, a very little piece of it will go to retail. But what happened is, is the day of the IPO. When the stock went up a thousand percent, all these institutions that bought in at $9 were like, holy, Christmas came early, were dumping it. So they sold all their stock to the highest bidders, which were the ones bidding all the way up to $97. There were a lot of institutions and day traders at that time that didn't put in limit orders. So they were just buying at market, you know, at $87, $97. And you know, it meant that all the institutions dumped the stock, the stock traded hands on average five times that day. So 15 million shares a 3 million share offering. And it meant that TheGlobe was left being primarily held by retail investors. People who didn't understand what was going on. You know, the institutions did extremely well, but it meant that we had a base of investors that weren't classically long, long holders of stock. So sort of that, that set us up for not a good start to our, our public life.
Tracy: (21:42)
And what did you do that night?
Stephan: (21:45)
So yes, that night there was some celebration, but bear in mind the day before, two days before, we didn't know we were going public. So we didn't really have time to call up all of our friends and tell everyone like guys, you know, Friday night we're gonna be celebrating. It was very impromptu, but there was going out. There was, you know, some champagne or vodka at one of my favorite nightclubs. And me explaining to my then very new girlfriend that something had crazy had just happened that day. And she didn't really understand what the hell I was talking about. But it was a surreal evening for me and for Todd and for our company. We went from our company's gonna go under to new lease on life and apparently we did a world record with it. So this could only mean good things.
Joe: (22:35)
So how much were you personally worth? How much were you and Todd personally worth at the top and what was the deal with the plastic pants?
Stephan: (22:51)
Those questions. Yeah. So yeah, that's a story. We all have embarrassing fashion choices.
Tracy: (22:58)
Vinyl was big in the late nineties...
Stephan: (23:03)
Was it? So yeah, I mean, Todd and I each had a million shares in the company. We owned 10% of the company each. So technically at that peak day, we were worth 97 million each. And that was sort of the headline at the time, you know, net geeks strike it rich on the cover of the New York Post and pretty much all the tabloids.
So suddenly having my doorman at the building recognize and go, “oh my God, congratulations! I felt suddenly vulnerable that everybody knew too much. But yeah, the vinyl pants that happened a year later. Among all of the wonderful media coverage and celebration and growing the business and becoming somewhat of a sensational story, cuz back then ‘dotcom wiz kids’ wasn't a thing. So this was sort of the beginning of that whole thing.
And everyone was fascinated like international media in particular. For them, this is a quintessential Americana dream. Only in America can you be a young entrepreneur or a young celebrity and make it rich. And that doesn't happen in Europe. So Europeans were just fascinated with this story, you know, a dorm room college startup that suddenly ends up at the nexus of Wall Street worth a billion dollars. Like that was completely surreal to them. And it was pretty novel as well in America. But in America, you know, there was a much more entrepreneurial spirit in general and the startup, the concept of startups, was not atypical. You know, maybe a public company at 24 was a little bit atypical, so some of the media wanted to just, you know, most of the time when we're being brought into interviews, it wasn't to get into the nitty gritty of our platform.
It was like, ‘Oh my God, what's it like being rich? Have you guys bought new houses? New cars? Tell us, tell us, tell us you're getting marriage offers.’ It was sensational. And so to a certain extent, Todd and I accepted that. Like if we've become these dotcom wiz icons, then okay let's just play that game. This is how we get the media coverage and drive our traffic up. Let's not be boring about it. Let's play into that fantasy. Let's explain to them this great new virtual world we've created, let's act like we're the cool, we're the cool kids who always knew what they were doing and that they were ahead of their time. We didn't. But eventually CNN came calling and they were launching a new series.
I can't remember what it's called. I think it was called CNN Movers, a half-hour documentary with Jan Hopkins. And they wanted to follow us around. They wanted to know what what was the life like of 24-year-old public company CEOs? So there I made the fateful decision to let them into my life, you know, let them into our homes. That's what they wanted to do and follow us out. They knew that I liked to go out and go to a club and go dance. And they're like, can we follow you? And I said, sure, well, I wasn't gonna go on CNN and just dance in jeans was I?
Joe: (25:56)
No, obviously you can't go out dancing in jeans.
Tracy: (25:59)
There are important decisions taken by a CEO.
Joe (26:00):
You gotta dance in vinyl pants.
Stephan: (26:03)
Exactly. Look, I mean, and back then, you know, this was way before the days of, you know, Elon Musk smoking weed on Joe Rogan. I was thinking what's the most crazy thing I can do that will capture everyone's imagination and go, yes, this is the embodiment of the American dream. Well, I'll put on my vinyl pants and some tight t-shirt and spike my hair with gel and we'll go to a club and I will dance on a table and make sure that there's other pretty girls dancing there and, you know, shake a bottle of champagne. I don't remember everything I did, but the cliche, what is now clearly a cliche, but now of course it's so tame.
Tracy: (26:50)
So part of me wants to just ask questions about what it was like clubbing in the 1990s, becauseI think that would've been an interesting experience, but I want to ask a serious question, which was you did the IPO, you raised a bunch of money. You had fundraisings before that. What were you planning to do with all the money? Like was there actually a plan for expansion or acquisitions and things like that?
Stephan: (27:14)
Yes. So there was definitely a method to the madness and we had raised, I think a couple hundred million over four, five, six rounds of financing. It's nothing magical. You raise the money, you need to buy more servers, hire more people and build out your infrastructure and your team. And you know, you never have enough money. Right? Cause back then it was called — Netscape coined the term GBF: Get Big Fast.
So it was all about spend, spend it as fast as you can to grow as fast as you can. Everyone. The only thing they cared about were eyeballs. Whoever's getting the biggest audience. Doesn't matter what your revenues are yet. Doesn't matter. Forget profits just grow, grow, grow, grow, grow. So after our IPO and IPO mania kicked in and all of our competitors, you know, we'd raised $27 million in our IPO. Everyone else was raising $60, $70, $100, $200 million. We're like, ‘Oh my God, they're outspending us in ads and servers and hiring.’ It became this race. And by the way, these are the parallels of every single crypto boom-bust cycle.
Joe: (28:13)
It’s interesting because of course Netscape was founded, as you mentioned by Marc Andreesen. Get Big fast. We just did an interview talking about the Andreesen Horwitz companies that have taken on that Netscape GBF model. And now it's like this is the thing that really defined tech in this modern age.
Stephan: (28:41)
Yeah. Well look, every boom-bust cycle goes through that, right? When you start off building something you are really in uncharted territory. No one's excited. Everyone thinks you're crazy. And they're very scared about putting money in. So first you have to tell the story and build a market and get the users, and then other companies need to tag along. And eventually when the demand is there and the excitement is there, FOMO kicks in, right? That's when all the fast followers come in and of course investors, they go through their wave as well. There's the laggards. And then there's the ones with the FOMO, not right in the beginning, but a little bit later who go, ‘Oh my God, everyone's doing well with that. I got a pile in.’ That's where valuations go sky high. That's where the industries get built because billions of dollars flow in.
But inevitably we pass peak madness and then, you know, eyeballs isn't enough. We need revenues and then revenues isn't enough. You're losing money. Like crazy. You know, remember Amazon, they were losing billions of dollars a year famously. So when the bubble burst in 2000, 2001, it's because there wasn't enough profits, there wasn't enough advertising dollars or e-commerce or the margins weren't big enough to sustain all of this. So using capital as this defensive moat to just outspend your competition that started in the dotcom era and then it got carried through again in the 2016, 2017 to 2018 ICO mania. It also has been part of Web 2.0. From Uber to Lyft to you name it, using capital as a defensive moat became a core strategy and it inevitably always leads to this shakeout.
But the beautiful thing is we always come out of the bust cycle eventually, right? Some of the original players who usually started before a mania kicks in and have been working from first principles, not from crazy heyday money showering down on them, but from really good first principles, usually those players survive. Some of them don't. But it's the ones who work from first principles who usually do the best. Then the ones who are the most disciplined and not spending their money as fast as they can, who then continue. But those who come in later at the point of FOMO will do so much spending to catch up and try to overtake the market. They'll be the first to implode when there's a market correction.
Tracy: (31:24)
So can I just ask, when did you actually know it was over? Or let me ask two things. One, when did you know it was over that the bubble had burst? And then secondly, what was your first sign of real trouble? Like is there a moment or thing that you can pinpoint?
Stephan: (31:42)
Yeah. So we, for better or worse, were the canary in the coal mine with TheGlobe. We were early. We could see this was gonna be exciting before everybody piled in. And then we could see that as everyone piled in and more and more money was getting burned by all companies, that it was becoming untenable to keep spending our way to stay ahead and spending your money meant using some of that cash to launch huge ad campaigns, you know, hiring more staff bigger sales teams. You're doing that. But some of the cash and your stock as a public company was to acquire more companies. Well, if we can't organically grow fast enough, we will acquire companies. Then you acquire some companies, but their valuations are going up too. So you're now paying inflated prices for other small companies to try to bulk yourself up and you name it all the major companies, Facebook, Alphabet, and all that.
They've bought hundreds of companies over the years that don't largely get reported. So all we really ever see is this big top line growth number. But what you don't realize is what fraction of that was the original organic stuff versus all the acquisitions and then the padding and sandbagging of their numbers. So that the analysts can't quite see how you're buying your traffic. You're buying the revenues to try to help goose your overall top line figures. And we were having to do the same thing. We were buying more and more companies, they were helping, but not enough. And you know, there wasn't enough advertising dollars to go around for all the internet companies. So there's a lot of barter advertising going on, which was getting accounted by a lot of companies as revenues, but it wasn't real revenues. So there's some, you know, some percentage is phantom revenue.
And we could see that we're on the little, you know, guinea pig wheel here, running as fast as we can. And it's getting harder and harder to keep up with that wheel. We can't feed the beast fast enough. So we could see the writing on the wall here that at some point the music's gonna stop and there won't be enough chairs to go around. So we kept playing the game and doing pretty well all the way into the beginning of 2000. We had our best quarter ever, which I believe was like a $10 million quarter, $30, $40 million a year, a run rate, which back then that was a big deal, but we were still losing money, and that's when my partner and I felt like we couldn't keep up anymore. The sky was gonna fall and it was gonna fall maybe on us first.
And my partner and I, Todd and I, we ended up resigning and bringing in a new CEO with more experience than us who could bring more discipline and maybe help control costs and would maybe navigate what we thought would be an upcoming storm better than us. And unfortunately, you know, even though our revenues were climbing and traffic was climbing, we could see the storm coming, my partner and I resigned. Bring in the new CEO and then months later, other dotcoms started going under, they were running out of cash. And then the stock market started to slide over the course of like mid-2000, spring of 2000 all the way until the beginning of 2001, everything fell 90%. So, you know, TheGlobe unfortunately we got called out early as you know, ‘oh, this is exactly what's wrong with the whole internet space. It was always a giant hoax, you know, run by these dotcom kids.’
But two months later, everyone went down, Yahoo, Amazon, 90% drops in their stock. Luckily for the big players, the market consolidated under them, right? They got to buy a lot of companies up on the cheap, they got to hoard enough cash. And they made it through. Yahoo obviously didn't make it through for very long after their renaissance. But out of the ashes, you know, Amazon came back super strong and then of course, you know, the next generation portals came along like Google. And then eventually the next generation social networks like Facebook, right? So there needed to be a total washout. All of the costs, the costs of building dotcoms needed to come by 99% for all these new second generation web 2.0 companies to sort of be born out of and have succeeded since.
Joe: (35:46)
So what is it like on a personal basis to go from a hundred million dollars plastic pants got the model girlfriend time to live a egregious frivolous life, is I think you were quoted too, I assume something a little less egregious and frivolous and a little less than a hundred million. I don't know. What's that like? And then how do you, I mean, you have a new company now, so why don't you just talk a little bit about, cause there're gonna be a lot of people right now going through that who are like worth a billion last year and now worth, you know, what's that process like?
Stephan: (36:19)
Look, I went through an existential crisis when TheGlobe essentially folded a year later after the dotcom bubble burst and the internet went under and the media was basically like ‘haha, we told you so.’ You know, it made me question my own sanity, ‘wait, were we all crazy about what this internet thing could be?’ And it took a couple more years of licking my wounds and retreating from the world. And by the end of all of this, not only did I not have $97 million, I was a million dollars in debt because I had borrowed a million dollars against my stock to try to also bet on other dotcoms. And they went under. So all of a sudden, I’m retreating from the world
I had to ask my parents to help me keep my roof over my head. And I barely pulled through financially. And luckily the reason I was able to pull through financially ultimately is because three, four years later in 2004, dotcom world came back with a vengeance, the internet renaissance kicked in, right?
You know, Google appeared and then Facebook appeared and I was able to corral enough of my original investors who had made 20,000% returns on TheGlobe. They had invested in early and sold at the IPO and made a killing. And luckily many of them said, ‘Hey, Steph, whatever you do next, we're in.’ Well I don't wanna run another company right now. I'm like still in shell shock here. But I see a lot of other entrepreneurs now who are going and doing their second companies.
So I think the internet is really coming back. And so I created a bunch of angel funds, brought my angel investors alongside me, made some bets. Those companies ended up doing really well, without getting through a list of all the things they did, they were part of the new fabric of internet 2.0.
And so that got me back in the game and rebuilt my confidence an investor and as somebody who understood the market well enough to see what good products might disrupt the world. But you know, look it's, to be honest, my confidence was really shaken as a CEO and as you know, flying that close to the sun and having my wings melt. It took me 10, 15 years to really want to really consider getting back in the CEO seat.
Tracy: (38:46)
Just on that note, I mean, when you look at what's happening in markets right now, I mean like the NASDAQ down, I think 30% so far this year, crypto crashing, people talking about crypto winter, what do you think is happening here? Is it the tech bubble all over again? Or is there something different about this cycle?
Stephan: (39:04)
Nope. It's the same game. New players, same game. It's quite obvious. And by the way, I got into Bitcoin back when it was on at Mt Gox. $60 Bitcoin in 2013. And I enjoyed watching it go from $60 to $600 and thought to myself, “Well, Jesus, $600. I better sell it now.” And then it only went up further. So I bought back in and then it only crashed. So I realized, okay, me trying to time the market and figure out, you know, mass investor psychology is not working. So what I'm gonna do here is go to first principles. Is this a long hold? Is the promise of Bitcoin or really more broadly blockchain? Does it really have the potential to change the world?
And my feeling was, yeah, that this is actually more like the dotcom bubble before 1.0, this is like the laying down of Darpanet. This is like before people all get dialup modems. And before all of the great utilities of the internet appeared, right? This is laying down the fabric of the web, what is web 3.0 now. And so I'm gonna be a long hold and once I stop trying to bet the market and read people's minds and tea leaves about buying and selling then I started to do really well. And I went through the first bubble in crypto winter, and then the second, and then the third, and it's in the third ICO mania, where I was like, there's this other thing called Ethereum world computer. I'm all in on that. And it's the same thing. It went all the way up then came crashing all the way down, just kept holding.
And if you look at the four or five major bubbles and crypto winters on a logarithmic scale, they keep moving up another order of magnitude higher each time. And yes, because there's a huge amount of speculation and there's a huge amount of capital and FOMO and people throwing money at bad blockchain concepts and bad level-1s or bad level-2s, and god knows what other Ponzi schemes out there. But that's what had to happen with the internet to begin with until you got to internet 2.0, you could truly say internet 2.0 was where the world discovered the real value of the internet, right? It just became hyper centralized. Most of the world hasn't even dipped their toe in yet to crypto, right? It's all been about the currency, not the utility, the utility it's all started and focused on the Lego blocks, the building Lego blocks of the financial systems. Defi, right? And then it started to find a broader utility with NFTs. But again, very gimmicky, like, you know, Bored Apes and yacht clubs, and God knows what.
That's cool for capturing people's imagination, but that's not the true unlocking of the broader utility of what blockchain can do. That'll come later. So it's a 10- to 20-year play before the world will discover the true utility with the staying power. And that will become Web3. And I am beyond bullish despite seeing my crypto net worth plum plummet 75%. No problem. I haven't been buying into it because of FOMO. I've been in it since the beginning. And it's still early, early, early days. Imagine people panicking after Internet 1.0 bubble burst and dumping their Amazon stock right there, or dumping their Apple stock right there. Oh, it's all going under, it's all a fad. Well, you would've missed out on one of the greatest returns you could have ever had in the history of investments with Amazon. Well, so you gotta sit tight.
Joe: (42:40)
Stephan Paternot, honestly, a real pleasure and a real sort of thrill to chat with you and some incredible lessons. We should have you back. Hearing you talk about capital markets and that process was fascinating. We could talk longer just about like that period of being egregiously rich. We could talk about, there's so much more, thank you so much for coming on Odd Lots. This shows’ been like a real treat and some extremely interesting perspective on the internet and what's happening now in markets.
I loved that conversation, there were so many interesting things. I was just looking at TheGlobe's stock chart, you know, the peak valuation was less than a billion.
Tracy: (43:34)
Yeah. But it's crazy that you can still actually call that up because I think it turned into, so if you have a terminal, you can look TheGlobe.com. I think it turned into like a shell company...
Joe: (43:44)
And I think they were like doing VoIP stuff for a while. Yeah. But what's crazy. And Jim Chanos talked about this on a recent episode, like how tiny it was because like, you know, at its peak, Paternot was worth like a hundred million. The company itself never was worth a billion. And then of course, last year with like the SPACs we'd have these like, you know, $40 billion companies that didn't do anything. It's crazy how small the numbers were.
The other thing that struck me about that conversation was when he was talking about, “Get Big, Fast.” And it does feel like a lot of startups have internalized that motto. And you kind of wonder if it's ever gonna go away or if like just raising as much money as you can to get market share as quickly as possible, expand as quickly as possible, if that's just the standard forever
Joe: (44:27)
And the Marc Andreesen throughline, that that model started with Netscape and now through Andreesen Horowitz, it's really interesting. And then not only the Get Big Fast, but the broader cycle and how the late players to enter the game have to spend even more. And so it creates this race and then to hear him describe how in early 2000, it was the sort of like hamster wheel ‘We're spending so much money’ and it just like the marginal value of those acquisition dollars or growing traffic starts to decline.
Tracy: (45:02)
But also the realization that he described about having to bring in a new CEO and someone who could actually instill capital discipline and maybe have like a bit more of a strategy around finances, because it feels like with a lot of these startups by, you know, I don't wanna call him a tech bro...
Joe: (45:18)
Technology brother.
Tracy: (45:19)
<Laughs> Technology brother.
Joe: (45:22)
Technology brothers and sisters.
Tracy: (45:24)
It feels like what you need to start something up successfully in a garage and like develop new technology, may not be exactly what you need to run a multi-billion dollar company, right?
Joe: (45:37)
Yeah. I loved that.
Tracy: (45:40)
Yeah. All right. Should we leave it there?
Joe: (45:42)
Let's leave it there.
Follow Stephan on Twitter at @stephanpaternot.