After we got the loan guarantee, we were just spending money left and right.
And that wasn’t with regard to politics.
7 thoughts on “That Was The Story Of The Dot-Com Boom”
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After we got the loan guarantee, we were just spending money left and right.
And that wasn’t with regard to politics.
Comments are closed.
That takes me back. The jargon was bizarre. “Burn rate” is my favorite, it measures how fast the business is going bankruptcy. A high burn rate was considered worse than a low one, but companies which spoke of “burn rate” had one thing in common, they weren’t close to turning a profit. It’s something like saying a person covered in burning gasoline is healthier than one covered in burning potassium.
Also, I wonder why they didn’t “stuff the channel”. When you have inventory building up like these guys did, you create a retail channel to sell the product, move all your inventory to the retailer, mark it as sold, and hope that the retail branch can sell the stuff. They should have been able to buy another three to six months of life, maybe pick up another loan or two. These guys were total amateurs, well aside from getting the half billion loan in the first place.
It’s really not that unique.. to a certain type of investor “looking poor” is the worst way you can appear. The thing about the dot-com boom* was that the floodgates of venture capital were open. Some people really don’t know what that means.. it means people’s 401ks were being invested in these companies. “Looking lean” is popular for investors now because those floodgates are firmly shut.. they’re different investors.
So why does a government “investor” want companies to not look poor? Because they can’t go to their constituents with a barely struggling startup and claim to have a winner, can they?
* BTW, this also is the reason why XCOR is lean compared to Rotary Rocket.
From the article:
“Solyndra’s ability to secure federal backing also made the company eager for more assistance, interviews and records show. Company executives ramped up their Washington lobbying efforts, hiring a former Senate aide to work with the White House and the Energy Department. Within a week of getting a loan guarantee commitment from the Energy Department, Solyndra applied for another, worth $400 million. It never won final approval.”
In other words, they were working it like a Ponzi scheme. It worked so long as new suckers could be found but quickly collapsed when the money dried up.
The cost of money is key. If you get a large amount of upfront cash (as Rotary did) you have to produce returns quickly, especially when you are competing with other VC funded enterprises for funding (as during the dot.com boom).
XCOR has been in business for 11-12 years now, and while they have made steady progress, the business models are totally different. There is/was essentially no competition in the suborbital space and no established market provider with whom to compete, while Rotary had to compete for launches in the comsat arena. One couldn’t go lean and wait a dozen years to enter the market.
The real Ponzi is a curious case. He was no accountant. He was attempting a legitimate arbitrage. His failure is he didn’t shut down when red tape made that arbitrage unfeasible. That is the point when it became the scheme we love to hate. Because he was no accountant, it made it much easier to continue than to settle accounts. Plus he was highly motivate to continue, not because he was a criminal, but because he was a fool.
His investors loved him because he did pay them. He won his early court cases defending himself. We really don’t know how long he could have kept it up had the government not shut him down. He was attempting to find other ways to make money to pay his investors, but just wasn’t realistic about it.
Things that are structured like Ponzi schemes work all the time. While it’s easy to show that a Ponzi scheme can’t work mathematically, you have to do it by ignoring a critical factor, rate of growth. A Ponzi scheme can continue forever, providing profits even to late comers (even the same profits as earlier investors) if the rate of growth stays within a window that is more likely than not when structured properly. The typical “you sponsor two people” is about the worst structure.
The moral difference between things that are Ponzi schemes is their purity. Are they simple mathematical tricks or are they based on a legitimate tangible investment. All indirect investments have some things in common with Ponzi schemes. They wouldn’t work if they didn’t. What’s immoral is twofold: paying earlier investors only from later investments and promising returns that are not possible for all. Any promotion to have customers bring in new customers is a form of Ponzi scheme.
Capping returns on investors is one way to make a Ponzi scheme more feasible but is not very popular.
How do you think you can get a $400 million loan on revenue of $280 million with $535 million in debt already? At prime plus two (impossible in itself), the interest alone would be almost 18% of income. On a solar project!? They couldn’t possibly have thought that was possible. Obviously the lender didn’t.