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Making the Best of a Bust

Lessons from a Declining Economy

Commentary by Michael S. Malone

Editor, Forbes ASAP

Special to

B U R L I N G A M E, Calif., Oct. 24 B OK, have we learned anything?

By most indicators, we are sliding slowly into an economic downturn, perhaps even a recession.

The presidential election will probably do little to change that. Both George W. BushBs tax cut and Al GoreBs spending may make the landing softer and the hard times shorter, but they canBt stop it. This is a deep structural purge that likely wonBt be denied.

But as unpleasant as recessions are, they are also salutary for several reasons. For one thing, they winnow out the bad companies, bosses and workers that only held their positions because of the buoyancy of the boom.

Downturns also provide a breather period for the next wave of start-ups to hire newly unemployed top talent, develop products and get to market B all while their mature competitors are paralyzed.

Finally, and most important for our purposes here, economic slowdowns allow us to take stock on the boom that just passed and to decide what weBve learned from it.

What Have We Learned?

Nothing B I donBt mean that cynically, but with a certain curiosity. Typically, we come out of a boom cycle with some hard-earned knowledge about what it takes to build a successful company in the new business environment.

To me, the creepy thing about the recent e-commerce boom and bust is that I havenBt seen a single description in the business or management press of a successful new e-business model. The big winners B if indeed they are winners B like AOL, Yahoo! and eBay, seem either too fragile or too eccentric to be role models. The hundreds of other, smaller, success stories seem hardly worth emulating.

Still, somewhere out there is the solution, and it is likely to be discovered in the next six months (trust me, it will be found: too many smart people searching for it). When that model appears, smart investors will recognize it early and invest in those firms that best emulate it.

When You Start to Think Your Common Sense is Worthless, DonBt B There was a point, around the end of last year, when most of us industry veterans began to think the world had gone mad. At cocktail parties, business conferences, even in my own office, my mutterings that these wild valuations couldnBt stand, and that e-commerce was headed for a crash, were met with pity and shaking heads.

I just didnBt get it, I was told. This boom can go on forever. One of my own young editors looked me in the eye and said, BDonBt you understand? ItBs a new world. All those old business rules you lived by are obsolete. WeBre making our own rules.B

I told him he was nuts. But in the back of my mind, I began to doubt. Maybe the Internet has changed everything, I said to myself. Maybe weBve finally suspended the business cycle.

IBd like to say that my common sense won that debate. But, like everybody else, my doubts turned into the first glimmerings of true belief. And so, like millions of others, I held out for that last 10 percent B and watched helplessly as my stock plummeted. IBd forgotten the third rule, which is ?

The Game is Fixed BThis doesnBt mean there is some conspiracy out there. There are no omnipotent overlords secretly plotting to keep the little man down and control the direction of history (if there were, the world would appear much less random).

Rather, the fix emerges at the unique nexus of the market and human nature. If you think of the stock market as a brilliant, but unconscious 100-million headed brain, then it should have been obvious that high tech stocks were going to start sliding this Spring.

Why? Because that was when the first great wave of e-commerce stock options was going to emerge from their lock-out periods. The market knew this was coming. It knew that the companies these shares represented only had value as long as the employees were emotionally and financially committed.

Most of all, it was not going to allow the economic chaos of 10,000 new deci- and centi-millionaires being blasted into the economy. So, by suddenly selecting for long-term performance, the market put those options underwater, B and will keep them there until the number of these young tycoons is reduced to an absorbable level.

All of us holding drowned options may hate this reality, but, this is all about the survival of the species, not the happiness of individuals.

Lessons for the Next Boom

Now the hard times have returned. We have a few months, maybe a year or two, to catch our breath, contemplate the past and scheme the future.

So, how do we apply the lessons of the last boom to the coming one? Here are my suggestions (though donBt expect me to be wise enough to follow them):

1) If youBre an entrepreneur, use this downtime wisely to build your next firm.

2) If you are an employee or investor, donBt wait for the boom to peak to jump in. Get in early, take the company public as quickly as the underwriters will allow, and then fight like hell for the shortest lock-out period possible. In other words, be part of the first, smaller wave of selling, not the tidal wave that follows.

3) Keep watching venture capitalists, the management press and top industry analysts looking for that viable new business model. It will be the feature that defines the InternetBs second, greatest era. When you spot it, make it the chief criteria for your investment portfolio, for your next employer, and for the company you dream of starting.

4) Finally, when things start to heat up again, trust your instincts and your common sense in the face of everything your hear from your friends and read from people like me. If things seem nuts, they probably are. And when mankind starts screaming that it has escaped the fetters of the earth and will fly to the sun, just remember: Gravity always wins in the end.

-- (on@the.sidelines), October 24, 2000


Corn Bread and Beans, are not too bad. Poor I was born, Poor, yada yada. You should see life, from this side of the fence. No harm intended.

-- Take it from one (, December 29, 2000.

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