How I managed to lose millions on the Net

Michael Wolff (below) knows what it is like to build, and lose, an electronic empire. Melanie McGrath talks to the author of the best- seller `Burn Rate'

Two years ago, Michael Wolff's online content company, Wolff New Media, was preparing to float on the New York stock-market at a valuation of $150m. Wolff's personal stake in this motherlode was to be $15m. From starting out as a minor player in the Internet game, publishing his first guide to the Net only two years previously, Wolff was about to become, in the parlance of New York City financiers, a Big Swinging Dick. It seemed like a brilliant hallucination. It was.

Back in 1991, Wolff had been working as a magazine journalist in New York when a friend asked him - as a favour - to talk to the "burdened, humourless" proprietor of an Amsterdam-based computer magazine, Language Technology, who was looking for a US distributor. At the time, Wolff was impressed by the man's zeal but could not see much of a market for his magazine.

The man was Louis Rossetto. In January 1993, he published the first issue of his reformatted magazine, now called Wired. Only a year after that, Conde Nast bought 15 per cent of Wired for $3m.

By then, Michael Wolff had decided that he wanted in. "It was like Hollywood in the teens. A new American industry was being born," says Wolff in his blistering account of the scramble for bandwidth, Burn Rate - How I Survived the Gold Rush Years on the Internet.

In January 1994, working on the presumption that the Net would turn out to be an entertainment and information medium much like TV, Wolff New Media published NetGuide, a listings magazine loosely modelled on America's biggest-selling TV Guide. The response was instant and overwhelming. CD- roms and other online products followed. Wolff New Media was on a roll.

There was only one problem. In common with many hi-tech start-ups, Wolff New Media's monthly "burn rate" (its cash expenditure over income) was running at $500,000, meaning that however profitable it might be, within a month or two Wolff New Media would still have trouble meeting payroll.

Michael Wolff was not too concerned. There was always outside finance. In the frenzied Internet start-up atmosphere of the mid-Nineties, every Tom, Dick and Search Engine was attracting venture capital and going public, often at a value 50 times its projected revenues.

Virtual schoolboys were becoming multimillionaires overnight. There was Netscape, Excite and Yahoo. Venture capitalists were practically begging to invest in new technology start-ups. This was the equivalent of the Klondike. Picking up his gold pan, Wolff went to Wall Street. He was about to make a "devil's bargain".

The "devil", in this case, was the financier Bob Machinist. For a substantial consideration, Machinist and his company, Patricof, proposed to float Wolff New Media at "north of $200m". The figures differed, but at this early stage, they were never less than $150m. Eighteen months after the initial public offering, Machinist predicted, Wolff would exit the company richer by $15m to $30m. Wolff was mesmerised. "It was a way of looking at the world in which impediments to the most overachieving daydreams are just procedural hurdles, a series of capital requirements."

Through Machinist, Wolff met another venture capitalist, Jon Rubin. Rubin was young, clever, well-connected and, most important, rich. Wolff New Media needed short-term financing of $5m to cover payroll and prepare for its floatation. Rubin, it seemed, was ready with the money so long as Wolff New Media was likely to float. During much of 1996, Rubin, Machinist and Wolff shuttled between coasts trying to get a merger or partnership deal that would pitch Wolff New Media at the kind of flotation value Machinist was predicting.

As Wolff himself admitted on his recent visit to Britain, Burn Rate is a story of extraordinary vanity and hubris. `The VC [venture capital] guys' world is a world of theories. It was attractive to me. I would sit in rooms with these guys and before I realised they were eating me, I'd be thinking: `yeah, they're very smart'.''

For six months Wolff, Rubin and Machinist kept talking big figures and bigger promises, but they seemed to be no nearer to cutting a deal. "If you have the money, if you are a buyer, then you want to own something. The fact that the Internet is not ownable is an annoyance that few buyers are willing to accept," says Wolff. "They know there must be something they can buy."

In 1996 that something was content. Having carved out territory, Net businesses were anxious to exploit their newly won turf by creating or buying in content on to which they could peg advertisements. As Wolff points out: "The assumption was that on the Web users would settle into specific habits and favour specific content selections... The Web would become a predictable world for advertisers."

Content was exactly what Wolff, as a former magazine publisher, knew how to deliver. With Rubin and Machinist, he flew to the West Coast to set up merger talks with the Robert Maxwell-owned search engine company, Magellan. But just at the point of agreement it became clear that Machinist was angling for control, and Magellan pulled the plug.

During one brief upturn, Wolff sold his original NetGuide idea to CMP Media, a $500m-a-year company specialising in trade magazines. "I genuinely believe they thought that they were buying the Internet from us," Wolff says in Burn Rate. "Without the experience of the medium, it was almost impossible to fathom that the known world of cyberspace at that moment would be wholly remade the next moment."

A year or so and a reported $15m later CMP realised it was trying to hatch a rotten egg. The Net was moving too fast for guidebooks. "It was almost a commonplace that all cyber-transactions were a case of someone taking advantage of someone else," says Wolff with a sly smile. "I can't say I am particularly proud of much that I did, except ultimately to leave."

Sometime in late 1996, Wolff began to realise that the game was up. He was no nearer to getting the money he needed. More worrying still was that after all the West Coast dinners and fancy VC set-ups and red-eye flights back East, he still had only one source of even remotely reliable finance at his disposal - Jon Rubin.

"In my heart, I knew it was boys' games," says Wolff. His wife, Alison, who was also Wolff New Media's attorney, kept advising caution, but Wolff was too caught up to listen. "The fact that I could step into the role of someone who could believe he would be worth $100m is absurd, but that is what I did," he says. "I probably did take it too seriously. Success in this business means you have to become a financier because the software business is run by financiers and the goals of financiers [are] short- term, unstable, risk-oriented.

"It necessitates that your interest is nothing more than the appreciation of capital. The key issue for financiers in all these businesses is first and foremost, `What is the exit strategy?' And often their exit strategy turns out to be leaving others to hold the bag."

Two things began to happen at Wolff New Media. First it became increasingly clear that content was no longer king. Wolff became convinced that the advertising model of content provision would not survive. "The price of content got lower and lower until content became as near to being free as you can get," he says.

The second thing to happen at Wolff New Media was that Jon Rubin started demanding more control. "The VC guys say they're here to back the entrepreneur, but they're not," Wolff says. "Like so many things in business, they mean the opposite of what they say. It's not that they're lying, but you're supposed to know they mean the opposite of what they say.

"So I found myself in a position where I wasn't in control any more. There began the process of understanding I had made a serious devil's bargain and I was going to be seriously messed about."

In exchange for meeting Wolff New Media's payroll bill, Rubin presented Michael Wolff with an agreement giving Rubin effective control of the company with Wolff as its titular head. In response, Wolff did what any desperado might have done. He banked Rubin's cheque, switched off his mobile and pretended his father-in-law was in hospital undergoing major heart surgery. In the intervening few days, Wolff's wife took the teeth out of Rubin's agreement and sent it back to Rubin to sign. Predictably, Rubin erupted, but there was nothing he could do. Wolff New Media had met its payroll, but Michael Wolff knew that it was only a matter of time before the whole edifice started to crumble.

"The personality type who will triumph is the entrepreneur who is really a manager. [Louis Rossetto and I] were like deer in the headlights when we realised that we had given up control in our own show. Having made this devil's bargain we started to fight it," observes Wolff dryly. It was to be a fight he would not win.

A few weeks later, after further tangles with yet other venture capitalists, Michael Wolff caved in. In an act of breathtaking chutzpah, he wrote himself a pay cheque to cover the salary he'd forgone in the previous six months to help ease Wolff New Media's cash-flow crisis. He faxed his resignation to Rubin's attorney, cleared his desk and waited for the security guards to escort him out of the building. He'd lost "somewhere between $5m and $7m".

Michael Wolff returned to his old profession, writing. His caustic account of his adventures during the scramble for bandwidth has just been published in the UK. "It's a morality tale, though it started out as a process of getting even," notes Wolff. "What was not clear as I began was that it's also a very funny story." And believe me, it is a very funny story. Wolff's portrayals of the sly, Machiavellian Machinist and the spoilt, bullying Rubin and his own desperate moves are alone worth Burn Rate's cover price. Which may not be much solace for Wolff the entrepreneur, but is surely sweet revenge for Wolff the writer.

"I heard from a mutual friend that since the book came out, Bob Machinist had heard from a lot of people he had lost touch with and he was figuring that could only be good for business. And you know what? I think it probably will be," chuckles Wolff.

Not surprisingly, Wolff has no immediate plans to set up in business on the Net again. "You have a business is which nobody knows what they're doing, what's going to happen tomorrow. It's all about some future state. That's why the Wild West metaphor is good, because anybody can be a big man. It's still very much, `So who's riding into town today?' "

Wolff is no longer convinced that there is such a thing as a Net industry.

"No one is seeing this as a utility, but that's really what it is. It's not a medium to send a coherent message.

"The money is to be made in traditional businesses which happen to use the Net for distribution. Soon, we'll no longer think of the Internet as anything but a distribution medium, an incredible telephone."

`Burn Rate' by Michael Wolff (Weidenfeld & Nicolson, pounds 18.99)