Burn Rate

by Michael Wolff

  “I’m not sure that that’s anything other than what we knew before,” I said. “Tell me if I’m wrong.”

  “Michael, when you have dinner with Hayden tonight,” Machinist said, “you’ll tell him that the Maxwells are out of the company. I want this to be understood before we go any further.”

  “It sounds like something we should handle as part of the overall negotiation and not make it punitive. Over dinner makes it a slap in the face, I think,” I said.

  Machinist made a sound that seemed to indicate a slap in the face was exactly what he wanted to give.

  “I would like that issue to be addressed,” Rubin said.

  They wanted Hayden to suffer. All right, I could deliver the slap.

  David Hayden was staying at the Athenaeum, among the most expensive hotels in New York, on Sixty-fourth Street off Park. We had dinner at the Park Avenue Cafe, just around the corner, a thoroughly genteel restaurant that was, coincidentally, in the Park Avenue building where Jon Rubin’s parents maintained their Manhattan apartment.

  It was a pleasant, almost soporific, dinner.

  I said, almost casually, “There is a concern about Isabel and Christine’s ongoing role.”

  “That won’t be a problem,” Hayden said. Everyone understands what happens in an ongoing situation.”

  Then I said, because it seemed to be the thing to say when you had a mole inside, “Is there anything you want to tell me before we go into what I hope will be the final deal meetings? Any surprises? Any skeletons in the closet? Anything we should put on the table?”

  Pause. “No,” he smiled and shook his head. “Not a thing.”

  That’s what I would have said, too, I thought. I wonder if anyone really ever confessed.

  It was a full house on Monday morning at the Patricof offices. It included the Patricof team: Machinist, factotum, factotum’s factotum, factotum’s factotum’s factotum, and drop-ins by other Patricof partners. We were clearly the biggest thing going that day. There was Rubin’s team, including the technology advisor and another business advisor, holding their cards closely. There was Alison, weighing everyone’s motives and leaps of logic, accompanied by her colleague, with his affable skeptic’s air. On the Magellan side, David Hayden maintained his calm and elegant exterior, his marketing director seemed crisp and clear-eyed, and his lawyer acted like he had a straightforward job to do; his CFO, however, seemed uncomfortable, pulling at a tight collar.

  And there was me. I was curious and nervous; cold drops ran down my sides.

  “I thought I might just take a second,” David Hayden opened, “to try to refocus us all on what we’re trying to do here. What the goals are and what the opportunities are. The way this business works, for those here who may be more new to it than others, is that it requires a large, upfront investment before anyone will see a significant payout. We’ve obviously made a large part of that investment—a larger investment for a larger return, we could argue, than you’ve made. I don’t think, though, that any of us here think that’s a useful direction to go, trying to gauge relative sunk value. The premise here is that by joining these two companies we produce a combined entity that can make an immediate and significant impact on the marketplace. Search engines are going to be at the center of this business. If you believe in this business, if you want to be in this business, then there’s no better place to be than involved with a search engine, and no bigger opportunity than to become one of the leaders in this area.”

  Machinist was getting impatient, perhaps even indignant. “Okay,” he said.

  “No, Bob, really, I think it’s important that we understand the business that we’re operating in and the competition that we’re up against,” Hayden insisted.

  Machinist’s face became expressionless. He made a hand gesture that said “Go on,” and seemed also to say “Hang yourself.”

  Hayden rambled. What he was trying to do was to explain a premise that everyone understood: you had to sink a significant sum to launch a product and build a brand. But it was a mistake to put it this way. In the end, there is not an acceptable rationale for how much money you’re going to lose, only an acceptable rationale for how much you’re going to make. Hayden had, understandably, become focused on his losses. They stared him, hungrily, in the face.

  The sourness that had begun with our video conference and the doubts that had been raised about the status of the mezzanine financing, which had deepened with the CFO’s back-fence conversation with Rubin, expanded. Hayden appeared to be saying: Let me lose money because I am so good at it.

  If you stop selling the larger vision, the long-term fantasy, the grand strategy, and find yourself saying that others have to buy whatever it is you’re selling because you have to eat, you’ve lost the sale.

  Machinist interrupted Hayden quietly but firmly: “This is how I’d like to proceed: I’d like to finalize a memo of understanding for the merger agreement, and I’d like to set up procedures for producing a set of combined financials. With those documents in hand, I’d like to engage Lehman in a discussion with regard to the bridge financing.” He folded his hands.

  The meeting hung awkwardly for a second. Then Hayden said, “Bob, we want to finalize the memo of understanding, we think this is going to create a great company, we are all enthusiastic about the prospects, but what my board has asked me to do, and what they would like to do prior to finalizing the merger terms, is to come away with the specifics of the Patricof commitment to the deal. I was speaking to our board this morning about this. The board feels pretty strongly that that’s the proper order we should be going in.”

  Machinist let a shroud descend over the long table. Then he said, “That’s not how we invest our money, David. I don’t think you’ll find any funds that would invest on the quid pro quo basis you’re suggesting. Either the merger makes sense from an operations and market and personality standpoint or it doesn’t. We believe it does. You seem to believe that, too. The way in which we finance this enterprise is, while a no less important issue, a separate one. I have expressed to you my belief that this is a business that I’m confident would be of considerable interest to Patricof, and with a merger agreement and combined financials I think Patricof can begin to consider whether this company is an appropriate place for its funds.”

  I was always amazed, and impressed, by how artfully and effortlessly he slipped out of giving the money that I would have sworn he’d offered.

  “Bob,” Hayden said, “that doesn’t make a lot of sense from our point of view. From the beginning, I think I’ve said how much value the Patricof involvement lends to this deal.”

  “David, we’re involved in this deal. We’re as deeply involved with this company as we are with all the companies we represent and hold an interest in.”

  “Bob, come on.”

  Machinist remained unforthcoming and impassive.

  “Bob, this is not what we discussed. I made it clear, from the beginning, that you would have to take a meaningful position. I understand your procedures, but I’m sure they can be expedited.” His voice was hardening. His face was getting red. “Let’s get real about this, okay? I can’t fool around anymore with this. I have a payroll to meet next week.”

  Mistake. Big mistake. I knew it. It was the utterance that would change everything.

  You can’t say to investors, I have a problem, I have a big problem.

  You can’t say, I need your money to feed the mouths I have to feed. I need your money to pour down the maw.

  You can’t say, Hey, what did you think was going on? There’s a fire burning like crazy that we have to keep throwing dollar bills on.

  And that was, unmistakably, what Hayden was saying.

  And while that was true of his business and of every other business in the new Internet industry and while everybody knew it was true—that is, that cash was just being consumed at a rate and with an illogic that no one could explain, much less justify—you must never, never admit it.


  The facade of the business compact hangs on these premises: that value can be and must be measured dispassionately and that the purpose of business, and certainly the purpose of a businessman, is to maintain control, compartmentalize, deal, and always keep his cards judiciously close to his chest.

  “I’m sure you’ll find a way to meet your payroll, David,” Bob Machinist said.

  Hayden literally threw up his hands. They went back, involuntarily, spasmodically. “Then we have nothing to talk about,” he said. “This deal is dead!” Under the even fluorescence, there was a separate light of emotion on him, hot and illuminating.

  “I don’t think the deal is dead, David,” said Machinist, firmly but calmingly. “If you have a problem, I think we should look at it as partners. Why don’t we all just take a break for a minute, and then we’ll start again.”

  What happened after the break was something almost close to a show trial. Machinist had spoken to Hayden, man to man, during the break, and Hayden had returned, understanding, it seemed clear, that he had few options other than those that emerged from this meeting and that if he threw himself upon the mercy of the court and Bob Machinist, things would go much better for him.

  The meeting went on for several hours, with all concerned held there by both fascination and embarrassment.

  Piece by piece, excess by excess, expense account by expense account, Machinist deconstructed Hayden and the Magellan burn rate. He had a white board brought in and had Hayden, like a classroom punishment, list salaries and the value of perks and other bonus plans.

  It was not without a sympathetic interest that I followed the intricacies and the rush of this river of cash.

  When it was all spread out, after several more white boards had been brought in, Machinist outlined a solution for David Hayden. The Magellan company’s excesses would be stripped away, including its Range Rovers, the Maxwell sisters, and legions of its employees, and it would hand us control in a merged entity and use the cash we had on hand to meet the short-term operating needs of the enterprise.

  So that’s how it’s done, I thought. Not with a bang.

  It was a chastened mood. The enthusiasm and exuberance were replaced by a hard reality of business: Where there is profit, there is loss.

  The Maxwells, however, seemed to become more and more irked by the outcome. Kevin Maxwell, from points around the globe, began to call Machinist to replay the negotiation and to try to modify cause and effect.

  Clearly, in the combination of circumstances, in the tumble of events, in the climate of confession, Machinist had become very comfortable with his contempt for these people and for their business.

  “If this was a golden opportunity yesterday,” I asked, “how did Magellan become an object of our pity today?”

  There was no suitable answer here because practically nothing had changed. Magellan remained the same money-losing company (as did our company). The Internet remained the same barely born business.

  What had changed was that one of the players had faltered—had stepped out of character and panicked—and had stopped playing the game.

  For Machinist, the Magellan business became “a house of cards,” a “shell game,” a “fantasy land,” a “reality problem.”

  “Yes, but . . .” I kept saying.

  The problem, I understood, was not the reality but Magellan’s inability to sustain the fantasy.

  “Bad timing,” Machinist said. “If Robertson Stephens hadn’t bumped them in the winter . . .” he shrugged. “Magellan’s business, after all, is no different than Excite, Yahoo, Infoseek, Lycos.”

  “If that’s true,” I said, “then why are we so cool about the deal now?”

  Machinist seemed to genuinely consider this, to comfortably acknowledge that the logic had a flaw. “We’re not dealing with hard assets,” he said. “We’re not dealing with ordinary balance sheets. We’re not dealing with businesses that you can analyze in any conventional sense. This is a real-life drama. There really will be winners and losers. The winners will win because they have great luck and because they’re . . . well, tough sons of bitches. They manage to smile when their competitors get a quivering lip. Hayden and the Maxwells couldn’t hold it together. Then they got sloppy about it. Weak. Wet.” This was clearly revolting to him.

  The market for technology stocks, and Internet issues especially, held in the air and then dropped dramatically, dizzyingly.

  There would be no more search engines to go public. There would be few Internet companies at all to try to “get out” over the next year.

  “The window has closed,” Machinist said.

  “What does that mean about Lehman?”

  He thought my question was humorous, ironical, black. He laughed.

  He stopped returning David Hayden’s telephone calls. I made excuses for Machinist; then I stopped returning Hayden’s calls, too.

  The Maxwell sisters fired David Hayden. They briefly tried to do another deal, which failed. Then they hired David Hayden back again. In distressed circumstances, Hayden sold Magellan to Excite, the Kleiner Perkins company that had kept Magellan from going public in the winter.

  Chapter Five

  Internet Time

  “There’s a casting problem,” Machinist said, searching for a new strategy and stroke of brilliance shortly after our prospective deal with Magellan collapsed. “Everybody’s thinking—what’s that guy’s name . . . Netscape . . . super gentile?”

  “Barksdale,” Jon Rubin replied, naming the professional manager brought in to run Netscape, pursing his lip with just the slightest disapproval at Machinist’s casualness toward the names and addresses of our industry.

  “Who’s our Barksdale?” Machinist asked. “I want a Jewish Barksdale.”

  “I have CEO resumes a pile deep,” said Rubin, whose other cyber company, First Virtual, was trying to address its own casting problems.

  “What I’m looking for—” Machinist paused to conjure. “We have Michael,” he said, letting me slip quietly into the third person. “And he’s our visionary,” he said, using an affectionate term of deprecation in the technology business not unlike writer in Hollywood. “Now we need someone who can really sell the shit out of this. I don’t want a dry eye in the house.”

  “We do need someone who’s hot,” said Rubin, warming to this approach, because even a rich man respects star quality (the only thing, perhaps, that he respects).

  “We need somebody who’s going to make you look good,” said Machinist, sizing up my deficiencies.

  “Let me restate that,” Rubin said. “We can hire somebody who can increase the value of this company overnight, two or three times.”

  I felt a kind of sudden schism between loyalty to myself, and my company, and a willingness to sell myself out for two or three times more than I otherwise would have gotten.

  “But who?” I asked.

  Rubin, keeping track of these things, reeled off the names of industry personalities whom rumors had identified as possibly looking to move on.

  No doubt because I was putting myself out of a job, I found that it was easy to quibble with each one.

  “What about Judson?” said Machinist, pulling down on his jowls.

  Rubin made a murmuring noise. “Perfect.”

  “Hmm,” I said, grasping how the story would unfold. Bruce Judson was an Internet personality at Time Warner. He was a hero in Ad Age (“a marketers marketer!”). He was, arguably, one of the few people in the cyber business who had experience selling ads. What’s more, lending the perfect sense of inevitability and partnership to our story, Judson was the author of the book we had published about marketing on the Internet. We could get a double bang for the money we’d already spent promoting him. I could see the press release:

  PROMINENT TIME WARNER EXEC

  JOINS WOLFF NEW MEDIA

  Internet Marketer to Lead Content Company

  “This will make a great press release,” said Rubin.

  “Except that
he loves Time Warner. He loves a big firm. He won’t do it,” I said.

  “You better get him to do it,” said Machinist, with a measured snarl, his Suge Knight side emerging.

  “Seriously, I know his wife, I know his mother—”

  Women did not frighten Machinist. “Set up a dinner,” he quickly replied.

  Machinist, at a table at Bice, the popular Eurotrash restaurant, was a little more like Sidney Greenstreet in Casablanca than Suge Knight but to the same effect. He knew, and by his physical presence others knew, that in the end all things would come to him.

  I had the sense, too, of the illicit side of the casbah, of a kind of trade in human (or, in this case, executive) flesh. Professional managers were the letters of transit for the entrepreneur. If you had one, you could proceed.

  Judson, in fact, was a wonderful choice. He knew the business as well as anyone. With only a little critical interpretation, you could say he was among the inventors of the business (its paternity would no doubt be as disputed as that of most inventions). At the very least, he would insist that he had sold some of the first ads on the Internet. Certainly, he was a promoter and a believer and, as many noted while taking a step back and out of the way of his whirling dervishness, a ball of energy. Additionally, I knew my job was safe, because Judson believed he could see the mountain top at Time Warner. He was blithely confident that Time Warner could be for the Internet what it was in cable and pay TV and music and movies and magazines. What’s more, Jerry Levin, the Time Warner chairman and CEO, had made his bones at HBO with an assignment not that different from Judson’s position in New Media. No doubt, Judson saw a direct line from the Internet to the top of Time Warner, one of those forgivable leaps of the imagination.

  Judson, who bore something of a resemblance to Dennis Day, the Irish tenor and Jack Benny sidekick, squirmed throughout the dinner. He squirmed not only because he knew I must be holding my breath (if he said yes, my company would be saved; by the same token, I would be out of a job) but because he had no idea what he should do. His role at Time Warner was no different in substance, responsibility, or workload than that of entrepreneurs who had paper fortunes worth tens of millions, but at Time Warner, he was a salary man. Still, he had built a career at a mighty organization. He had personal, if not financial, equity. Captains of industry took his calls. He had an old-fashioned secretary, too—a nurturing presence making appointments, serving coffee. You don’t see that much anymore.