The Golden Calf

by Helene Tursten

  Ph.com is an example of the many dot-com companies that grew like mushrooms toward the end of the nineties. I won’t address their finances in this chapter; greater detail can be found in Chapter Six: The Advisors—Investment Banks and Bankers. Instead, I would like to paint a complete picture of what happened and why. The incredible saga of ph.com’s success and fall began in 1998 when Philip Bergman and Sanna Kaegler met Thomas Bonetti at a party in Göteborg. They’ve told the tale of how they decided to become an Internet company in various interviews.

  All three of these young people believed strongly in the new trade that had started to take off on the Internet. In the United States, there were already successful Internet companies such as Netscape and Amazon (see Chapter Four: The First Internet Companies in the United States), in addition to others like Intel, Apple, Computer, and Compaq. The quick returns tempted institutional investors to place investment capital into these kinds of companies—even those not yet on the stock market. American retirement fund managers were very particular about investing in the new high-tech companies. According to an American journalist, during the nineties, up to 40 percent of venture capital firms’ money came from retirement funds.

  Between the summer of 1998 and 1999, Internet stocks rose by 400 percent. Interest in the new companies was enormous, and it seemed the stream of money would never end. New Internet companies of this era rarely lacked investors.

  In hindsight, it is shocking how careless investors were. The new Internet companies weren’t making profits and, in fact, many of them were racking up huge losses. The value of stock was based on popular opinion that the Internet revolution was going to change everything. No one wanted to miss a thing. During that party in 1998, the trio came up with their grand plan: create an international Internet company and get it listed on the stock market as soon as possible. There weren’t any discussions on what they wanted to sell, just that it would be sold via the Internet. They wanted to become one of the leading Internet companies worldwide.

  Philip Bergman and Sanna Kaegler had just sold their shares of the clothing boutique Zazza. Rumor has it that they were forced out by the other owners, the brothers Gillis and Walther Rothstaahl, because of difficulties working together. Bergman and Kaegler insisted that they’d tired of Zazza and were looking for something more trendy. “We took Zazza from the backwaters to the absolute top, and now it’s time to move on,” said Philip Bergman to a Göteborg Post financial reporter. Zazza bought them out at seven million kroner apiece, a good return since they’d only brought one million to the table.

  Philip was a visionary and had the gift of gab. He was incredibly charming and charismatic. To put it bluntly, he had everything he needed to become a successful Internet entrepreneur.

  Sanna was highly aware of the latest trends and had a nose for the future of fashion. She’d been successful as PR and Marketing Manager for Zazza. Although she could also be quite charming, she was more introverted than Philip. She never opposed any of Philip’s ideas. They complemented each other and were each other’s best defense whenever things got rough.

  Thomas Bonetti stood out in their company. He was definitely not ‘one of the beautiful people,’ and he never would be. He wasn’t interested in fashion at all and knew nothing about the industry. However, he had worked internationally and had contacts within the large banks from his year spent working in London.

  The three of them should have been a winning combination. They planned to create the first European Internet company, so they could have the “advantage of being the first big player,” as Thomas Bonetti would tell his new business partners.

  In March, they’d decided to sell expensive clothes paired with matching accessories. If a customer bought an Armani suit, he or she could also choose appropriate shoes, tie, shirt, and cuff links to match. Even the right socks and aftershave.

  “We’ll be able to give the customer everything he needs in a single minute. It’s perfect for the time-stressed modern man,” Philip touted at the first (and only) meeting for the company’s initial employees.

  At the end of April 1998, the trio traveled to London and checked into the exclusive London Hilton. Though Sanna expressed worry at the expense, both Thomas and Philip believed they needed to set the right tone. All three of them were certain of the company’s global success. They wanted to attract the kind of risk capital indicative of a world-class financial center. Their London trip needed to foster the right connections to give their project legitimacy. Before they even arrived, they’d already scheduled meetings with the most influential law firms and accounting firms in the city. If they had partners with good reputations, it would be easier to contact financial advisors who could introduce them to the big investment firms.

  The trio realized fairly quickly that they should find an American investment bank. The United States was still the biggest market in the world. In order to create the right impression for the biggest fashion houses, they wanted to prove that they had good advisors with contacts on Wall Street. So, not surprisingly, they went directly to HP Johnson. Representatives from the American bank’s European office were soon victims of the Swedes’ charm. Philip boldly asked for a $100 million investment right off the bat.

  The HP Johnson bankers would receive a return of 7 percent, which meant seven million dollars right to the bank. HP Johnson was definitely interested.

  Since HP Johnson was an old investment bank with a good reputation, ph.com would be their first step into the world of the Internet. Many of their competitors had already entered the market, and the bank’s managers thought it was high time to get involved. By the fall of 1998, HP Johnson gave the green light for ph.com and became their official financial advisors.

  There is nothing to indicate that the bank ever checked into the background of the three Swedes. We can only speculate why they were remiss.

  By then, ph.com was in full swing. They’d hired one of the world’s most famous law firms, Andersen, Andersen & Schoultze, as their legal advisors. Until then, ph.com had been financed by the Bergman-Kaegler-Bonetti trio, but now they brought in outside investment capital. An investment memorandum stated that each one had contributed $150,000 in start-up costs, and invoices recorded another half a million—a total of $950,000.

  The three of them began to prepare for a tour of Europe and the United States to continue contacting merchants and procuring capital. After the round of financing which ended in February 1999, ph.com had raised $40 million in starting capital. It—

  “SOMETHING TO DRINK?”

  The flight attendant’s voice interrupted Irene’s reading. She glanced at the drinks on the cart and asked for Ramlösa mineral water. They’d get coffee a few minutes later.

  Irene nudged Kajsa, who was sitting beside her, snoring with her mouth open. She started as she woke up.

  “Coffee … or Fanta … with milk,” Kajsa mumbled.

  “She also wants a Ramlösa,” said Irene.

  They were given the bottles of mineral water. A flight steward arrived a few minutes later with a cart of sandwiches and plastic coffee mugs.

  “Were you able to read through all of that?” Kajsa nodded toward the bundle of paper on Irene’s lap.

  “No. It’s not all that easy, since I don’t understand all the concepts. I did manage to get that they made it to the top of the financial world—not because they had something to sell but because they were good at charming old bankers. It’s unbelievable.”

  “Yes, it is, isn’t it?” Kajsa said through a mouthful of ham sandwich.

  Irene had a feeling they weren’t talking about the same thing, but she let it go. She hurried through her breakfast so that she could continue reading. She skimmed through the next few pages, which detailed who invested how much when, and picked up the story further on.

  • • •

  In December, Philip found a large office complex near Charing Cross Road. He hired Swedish architects to renovate the building to have more of a ‘cool atti
tude,’ as he put it. The renovation was scheduled to finish in January. Before the last carpenter picked up his toolbox to leave, ph.com was already hiring employees. They had no trouble finding competent young people eager for a job. They used England’s most famous recruiting agency to find a hundred employees, with an average age of twenty-five, for the London office. Many came directly from consulting and their own connections to influential managers. Ph.com began its global expansion in the spring of 1999. They opened a large office in New York with another hundred employees. More offices followed in Stockholm, Frankfurt, Paris, and Amsterdam.

  Philip Bergman’s vision included a ph.com launch in both Europe and the United States. The website, to be designed by Electroz, would be in six languages. Country-specific prices, customs fees, and taxes would be automatically included and converted into the appropriate currencies. All the clothes would be available in several colors to be combined with many different accessories. The format of the website would revolutionize the market and amaze customers with its fresh take.

  A few advisors recommended a smaller launch, since constructing such a website would be complicated. Both Philip and Sanna were adamant, and Thomas Bonetti supported them. Bonetti’s financial experience meant he knew what it would take to create a high value on the stock market: many hits for the website, quick growth, and numerous employees. They could not show any doubt about their company’s success.

  Other advisors were against the idea of ‘selling a lifestyle.’ They believed fashion houses wouldn’t agree with the concept and would demand that ph.com buy an entire collection before the season opened. This would mean enormous warehousing costs and the risk of buying the wrong things. Sanna was enraged. “I’ve worked in fashion and design for years, and you don’t know what you’re talking about!” After that, the critics were silent. It’s unwise to bite the hand that feeds you.

  No one was allowed to question the work ethic of the company, either. It was part of the culture of the workplace to come early, leave late, and work weekends. If an employee protested, his or her job was gone. Employees had no right to a family life. They were surrounded by other ph.com employees at all times, and before too long, an inner circle developed around the management trio. Everyone in the company believed in the future of ph.com.

  Worldwide media began to pay attention to Philip Bergman and Sanna Kaegler. The two of them loved the spotlight and often gave tours of their trendy London apartments to writers from glossy interior design magazines. Thomas Bonetti also lived in a fine home, but he refused to give tours. Their rents were paid by ph.com. Their salary was $150,000 a year. They were on the cover of Fortune magazine. Their mantra was that their website would reshape Internet retailing.

  Then the problems began. Bergman and Kaegler kept vetoing any of the website designs that Electroz proposed. Electroz gave up after February 1999, and ph.com was left without a technical partner. For the first time, Philip Bergman was nervous. He had promised investors that the site would be up and running by April, and the trio was supposed to conclude another round of investments in March. No one wanted to derail these plans by officially delaying the launch.

  Around the same time, Thomas Bonetti pointed out that the company’s financial procedures and checks were either lacking or being ignored. Departments were placing orders without informing the accounting office, which was his area of responsibility. No one was writing their monthly reports, so it was impossible to find out the true state of the company’s finances. Thomas’s worries were consistently rebuffed, and Bergman and Kaegler began to work against him. Before too long, employees noticed a division in the top management. Perhaps Thomas Bonetti had already decided it was time to take care of himself. During one particularly drunken party, he revealed to other employees that he planned to leave the company as soon as it was introduced on the stock market and he could sell his shares. The second round of financing was spectacular. Ph.com also found a new technical partner, Watsis. However, Watsis had doubts about the short timeframe. Completing an entire website by the first of June was impossible. In spite of this, Philip Bergman made the launch date official. He had to keep his investors happy. The trio kept web designers in New York, while administration and logistics offices stayed in Stockholm and Berlin. Because of the extreme deadline, their expenses were higher than normal.

  One team of consultants declared that the earliest date for a successful launch would have to be the first of November. Though Philip Bergman and Sanna Kaegler protested mightily, they finally acquiesced. If they were determined to have the trendiest and most advanced website in the world, they had to wait until it was actually functional.

  They kept up appearances to those outside the company, and positive reviews in the financial press kept things humming for ph.com. The demand for Internet stocks was still enormous. The second round of investment had finished, and people were already in line to be part of the third. The financial advisors at HP Johnson were rubbing their hands together with glee. It wouldn’t be long until the stock’s initial public offering (IPO).

  The third financing round’s success went above expectations. The value of ph.com had reached $150 million.

  During this period of initial success, the relationship between the Bergman-Kaegler duo and Thomas Bonetti became increasingly strained. By the fall of 1999, the split was obvious. Bergman-Kaegler wanted to get rid of Bonetti, because he “wasn’t moving in the same direction.”

  At the same time, it was clear the website would still not meet its extended deadline. It failed during test runs; the pages taking too long to load. The launch was delayed by another month.

  The glassy offices in Sweden, Germany, England, France, Holland, and the United States were filled with young employees who traveled all over the world and stayed at the best hotels. They pulled in huge salaries even though they had no actual work duties until the website was functional. No one in the company knew what they were supposed to be doing in the meantime. The young employees had fancy titles, and the company was filled to the brim with vice presidents. The new launch date was close, and everyone’s expectations kept rising.

  Soon there were problems with the merchants, too. Many famous brands pulled out. They would not agree to filling purchase orders for clothes only after they’d been ordered by consumers via ph.com. An employee at ph.com (who was never identified) went ahead and ordered complete collections from houses such as Prada and Kenzo. Suddenly and unexpectedly, ph.com had enormous amounts of clothes that needed to be warehoused immediately. They were forced to rent and staff a warehouse in London’s harbor—an expense no one had planned for. The company was rapidly burning through its money, and no one was keeping tabs on expenditures.

  At this point, an anonymous investor appeared who wanted to put $15 million into ph.com, which Bergman decided would take care of the entire fourth round of financing. By now, the company was valued at $350 million without having brought in a single penny in profit.

  The financial advisors at HP Johnson were content. Their investment had been converted into shares, and they now had ownership interest in the success of ph.com.

  At a board meeting, the web launch was finally set for March 2000 at the latest. Sanna and her designers had placed huge demands on the website. Moreover, she declared most of the webpage suggestions “ugly, banal, or unfashionable.” As a result, work kept being delayed, and the website became so over-designed that it was difficult to find the right button to click. Because of the pressing deadlines and changes in technical support, the platform was a mish-mash of overlapping source codes, making the website slow and buggy. In test runs, it could take up to forty-five minutes to make a purchase.

  Panic rose as the date for the launch approached. The website was not working as promised. But they could not keep the investors waiting any longer—they were beginning to lose patience.

  On the morning of December first, Philip Bergman popped a bottle of champagne to share with his exhausted employees. Finally p
h.com was on the Net! Bergman had high hopes for the Christmas rush, hopes which did not materialize. Many visitors to the site left because it was too difficult to make a purchase. Interest began to wane. By January 2000, even Philip Bergman had to admit that ph.com was a major catastrophe. They had not even reached 10 percent of projections. However, top management kept up a positive façade and didn’t bother warning investors of potential trouble—a practice that is illegal. In hindsight, it’s easy to understand why they did this; they wanted the company to have an IPO so that they could all get rich quick.

  The flood of money streaming out of the company, however, was beginning to affect the business. The trio decided to hold a fifth investment round. They needed at least $45 million. At a board meeting in January, they decided to hold off on an IPO until the following quarter.

  Another major expense was the advertising budget. Sanna Kaegler had run an expensive ad campaign prior to the website launch. The campaign was paid for by a $9 million line of credit, but now ph.com needed to pay back the money. Sanna didn’t seem bothered by this in the least.

  The debts were piling up. They had too many expensive employees, too many expensive foreign offices, too many high-priced consultants, and too many outrageous warehouse costs. The six-month delay of the website launch had cost the company a fortune. Sales were catastrophically low. The company was bleeding out.

  By Christmas, the trio had already tried to stem the tide by cutting expenses, but they refused to close any of the offices or fire employees, fearing it would send the wrong signal to investors. The only concrete savings plan they ended up with was to cut longdistance phone bills and travel costs.

  The entire ph.com project was built on one major miscalculation. Their concept was to lure exclusive customers who wanted to purchase designer clothes via the Internet. Like Bergman had said, “We’re going to bring a new kind of customer to the Internet! Our customers know what they want, and they have good taste and a great deal of money—but what they don’t have is time! By offering a time-saving shopping experience, we’ll generate profits with our large customer base!”