Minimal sales, an unproven business model, huge losses—and a multibillion-dollar valuation amid a booming stock market. Sound familiar? Dozens of companies could fit this description today. But I’m thinking about Webvan, the online grocery company that went public in November 1999. Its leaders scaled a flawed business until it failed, blowing through $830 million and declaring bankruptcy less than two years after its initial public offering.
Webvan wasn’t alone. Who can forget Naveen Jain, CEO of directory company Infospace? He declared in 2000: “The nonbelievers will be converted when we become a trillion-dollar company.” The stock peaked at around $1,300 a share in March 2000. It then fell to about $3 two years later as investors soured on the company amid accounting irregularities.
There are plenty of great companies being created today, but it’s late in the cycle. Venture capitalists are funding questionable businesses they pray will scale. It’s hard to call the absolute peak, but the brew is frothy. As Groucho Marx in “The Cocoanuts” said of Florida real estate: “You can have any kind of a home you want. You can even get stucco. Oh, how you can get stuck-oh!” Who will be this cycle’s Webvan, eToys, Pets.com?
Honorable mention: Tesla. Forget Elon Musk’s $420-a-share buyout tweet. Unlike Google or Facebook —which deliver virtually zero-marginal-cost services—Mr. Musk actually has to make cars. Many Teslas still appear to be made by hand. Tesla lost $718 million last quarter and had negative $1.8 billion in cash flow through June, with debt due soon. Cash is available, but at what cost?
Harry Lange, who ran Fidelity’s Magellan Fund, once told me his rule of thumb for valuation: Divide a company’s market value by 10 and see if it eventually can make that in annual net income. Tesla is worth around $50 billion. To make $5 billion, it has to produce and sell a million cars a year with a $5,000 after-tax profit. That’s a stretch, especially with hundreds of competing electric-car models already announced.
First runner up: WeWork.