Chapter One: A World Without Limits
What's New About the New Economy
We have it in our power to begin the world all over again.
-- Thomas Paine
The young people in high tech, who have not learned to talk better, describe it as a "holy shit experience." This is how it works. You are a graduate student living in a group house and paying $375 a month. You have no steady source of income; you are just barely making ends meet. But you have a Big Idea for a company. You've developed software that enables corporate Web sites to handle large volumes of traffic. Or you've figured out a way to use the Net to improve efficiencies in the medical supplies business. Or you've got a new idea for making web sites more interactive. Whatever.
It doesn't matter who you are or where you come from. You are now the founder of a company. You come up with a cool, offbeat name -- something techno-sophisticated, like QuantumFour.com, or offbeat like Waitingforgodot.com. You approach investors with your plans for taking over a whole sector of the market. You promise the investors a "ten bagger," an investment that increases tenfold in value. They're skeptical about where your company's profits are going to come from, but you emphasize that at this point "mind share" is really important.
Somehow you manage to convince them that your idea is hot and you are cool. They give you start-up money, and you hire a lawyer and establish a corporate identity. You set up a bank account, find yourself a logo, design some letterhead, and then hire a dozen employees. You've got a bookkeeping guy, a Web guy, a marketing guy, and so on, but you've made it clear to them that there is no strict division of labor, and everyone takes turns taking out the trash. You give these employees options, which at this point are worthless pieces of paper.
You and your team set up shop in a beat-up old office that you've leased for a year at $1,000 a month. It doesn't get too much sun and the landlord had better hope the fire inspector doesn't drop by. Otherwise it serves the purpose. Basically, you move in. You put in eighteen-hour days. Sometimes you fall asleep on the secondhand sofa; soon you start keeping a toothbrush at the office. You dress like a slob and live on Whoppers, Twinkies, and cherry Coke. You rarely read the newspaper, and you don't return phone calls from friends and family. You're totally focused on making your concept work.
Sometimes it doesn't. That's the fear that haunts every start-up. And you know what failure means, because you've seen it happen and you know it ain't pretty. You don't want to default on the rent and have to fire all your employees. You don't want angry investors banging on your door because they got back only eight cents on the dollar. Most of all, you don't want a year and a half of your life to go to waste. But that's the chance you take, as you set your sights on that Wall Street version of Powerball: the initial public offering.
The IPO is the Silicon Valley equivalent of hitting the jackpot. It's even better than being bought by America Online or Yahoo! Either way, forget about moving up the ranks in a traditional company, meticulously putting aside a bit every month, and building up your savings so you can retire with a nest egg, a pension plan, and a gold watch. What you and your friends are after is instant tycoon status. The Big Score. So far things look promising. Your company seems to have people talking; you've got "buzz."
But what will the Big Day bring? You just don't know. So you and your employees sit around the table, and you wait. At first, nothing. The minutes tick by, slow and unforgiving. You get jitters. Then you feel the first nauseous pangs of a panic attack. And then, kaboom! It happens. Your stock price goes up, up, up...it isn't stopping...it's still going up...you can't believe it! By now your employees are cheering and shouting, "Holy shit! Holy shit! This is so insane!" Finally it stops and, almost delirious, you do the math: you are suddenly worth $51 million. Unbelievable! Everyone in the room is a millionaire.
Now you are rich. You can do anything you want with the rest of your life. What a feeling! Now you can afford to fly to Paris for the weekend. You can eat at the Tour d'Argent, and cheerfully pay $3,000 for a bottle of 1982 Château Pétrus to complement your meal. You relish the thought of tossing out a couple of hundred thousand to join that exclusive golf club that your father's boss, the grumpy old fool, still plays at. The there's the Lamborghini you've always wanted. You know you can't do all this right away; after all, your money is tied up in stock. You are, as they say, a multimillionaire "on paper." Even so, it doesn't hurt to plan ahead. What you find most striking is that even in your moment of triumph, you know that neither the French cuisine nor the golf, not even the Lamborghini, will be enough. You're beginning to get the germ of another Big Idea. You crave a second Big Score. In short, you have to do it again.
Yes, it's a new economy. If you read the business papers, if you listen to CNBC, you've heard that before. But if we're going to explore the ramifications of it, it is extremely important to understand what precisely is new about today's economy. Some commentators passionately assert that "interest rates don't matter" or that "stock prices have nothing to do with profits" or that "we've repealed the business cycle." That's wishful thinking. Economic logic and historical experience cut the other way. Others point to a more obvious novelty: technology, and specifically the new frontier of cyberspace. But even cyberspace isn't new. Cyberspace is where you are when you talk on the phone. It's been around since Alexander Graham Bell and his pal Watson had a rendezvous there more than a hundred years ago.
Still, the wishful thinkers are responding to something that is real and new, namely, that this is an economy on Viagra, an economy that is rafting on white water, the best economy the world has ever seen. Forget about the Gilded Age or the Roaring Twenties or the Halcyon Fifties and Soaring Sixties; the United States has witnessed an economic juggernaut that got started in 1983 and, far from losing force, has actually gained force and shows no signs of stopping. Somewhat to our surprise, we are in possession of a perpetual money machine, and it keeps spitting out silver coins and green notes.
Of course, there's been volatility. April 2000 was a very cruel month indeed, when the Nasdaq plunged 30 percent. It was motion-sickness time, especially for those who had invested in technology stocks with borrowed money or money they could not afford to risk. For the first time, there were news reports of Internet companies going under, laying people off. It's been a bumpy journey of late. Within a twelve-month period Internet giant Softbank Corporation saw its shares soar from $100 to $1,900 and then go down to $475. The people who say that markets are inherently rational have a lot of explaining to do.
Volatility is here to stay, especially in the Internet sector. The reason is that it is extremely hard to estimate the current value of companies with uncertain future earnings. Even so, let's keep a sense of perspective: we are in an economy where, most of the time, the bulls have been right. The bears have had their moments of vindication, but these moments have been brief. "See, we told you..." they say, but before they can finish the sentence the market has gone back up. In general the momentum has been relentlessly onward and upward. The last twenty years have seen a tripling of the gross domestic product from around $3 trillion in the early 1980s to around $9 trillion now. A