Relationships Over Transactions, A Learning from the Bubble
This post is part of Om Malik's bubble-a-thon.
Five years ago, I was the President and co-founder of a B2B Exchange with a $1B market cap. Seems right on the 5th anniversary of the bubble to revisit the rational insanity and fess up to your part in it.
A few years before, Sean Whelan and I were above a garage in the Mission district with a website brokering bandwidth. RateXchange was a relatively simple business. The telecom industry was full of the fattest cats imaginable, arbitrage opportunities abound and the margins were insane. Sean knew the industry and had a simple concept of bringing some price transparency through a website. For a year and a half we worked with hardly any salary, publishing rates and having conversations with phone brokers, buyers and sellers. We pitched every VC and they still didn't get it. I look back on this period fondly. We were exploring new territory, creating a market and learning from people who worked profitable magic with only a phone, fax and a rolodex.
Then, Boom. Suddenly what were doing all along was called B2B. We raised $35M and $10M in debt overnight. A dearth of B2B equity offerings drove us to go public with sixty thousand in revenue. We went on a roadshow to meet people that had already participated in our oversubscribed offering. Our business model was a fat butterfly, and we had to get fatter.
Flush with capital, we embarked on an elaborate plan to foster a commodity market for bandwidth. Not because the bandwidth market was growing like gangbusters, but because the market was grossly inefficient. This was before there was B2B transaction software. A year before, Chemdex spent $32M building such a system, cost us about a buck to develop our own in partnership with Trading Dynamics (later Ariba), a year later you could get one for $60k. Beyond transaction efficiency, delivery was a mess of tangled wires, and contracted to deploy 14 pooling points in colo facilities to trade and deliver 91 routes in near real time across three continents. We sought to create a spot and forward market to help carriers manager risk.
For a damn good reason, the value of their assets was declining at 1000% per year for major routes and there was no mechanism to manage volatility. Yet they kept building and buying. After all, bandwidth was like a vacumm, and convergence promised smart layering of new services with elastic demand. The more you build, the greater the demand, blah blah blah. But for some reason, the sellers largely didn't ask to play in markets they couldn't control. Around this time the Gorilla came in, Enron and its market making magic, offering their own market mechanisms. Energy companies were ripe to play, but they still had little to sell. Eventually we figured it out and liquidity was fostered, but it was too late for the equity markets and companies that were supposed to cumble, did. Most of the rest is history.
Me, I would get up at the crack of dawn with my wife, logon at the desk I am sitting at now and look at how our paper value increased by a buck or two. We would laugh in disbelief. Private Client bankers called us before eight in the morning with schemes to turn paper into cash flow. I hopped on the train to the city trying to figure out how to get the industry on board before it was too late for all of us. Surely the market would flock to automated efficiency, to frictionless transactions, wouldn't it?
Around this time I picked up a copy of the Cluetrain Manifesto. Markets are conversations. This drum cut my ear, blew my mind, as it did many.
Somewhere around the peak of the boom we forgot something. That lowly
phone broker who knew how to make money in the market. Not because he
could process transactions straight through to the bank. Near the bubble's pop, we were partnering with energy brokers, as they knew the people at energy-cum-telcos that wanted to play. They didn't talk about efficient systems. They talked about talk, they guy they knew they could extend credit or cut a deal because they knew they would get it back when they needed it. Just like the phone brokers from a couple of years before, they knew markets were relationships. Markets are social.
But it was too late and the industry collapsed. I moved on, and it wasn't easy.
Five years later I find myself with another startup, emulating the lesson learned as much as I can. Now I am in the business of fostering social capital, of helping people connect through conversation. Helping groups be more productive by tearing down false walls. A revolution in simplicity, beyond aspirations of complex efficiency. Going for sustainable growth, but also making choices based on relationships over transactions. My customers are my business. I work with some of the best people I could hope for, something I couldn't have said back then. Even some of the Cluetrain authors, for which I am not worthy. My network extends with people that value people. My company produces social goods. Even if Socialtext doesn't pan out as we hope (hey, it's possible), we have fostered a social software industry that will change the world. Which is why I made the move from non-profit to public sector to private sector in the first place.
RateXchange lives on as an investment bank, MCF, thanks to the people that followed me, and one of its competitors went public three months ago. It all happened so fast I never had a chance to vest or cash out. Some investors made a thousand-fold return, which is more than fine by me. I'm not sure I have regrets because I learned what I learned. Markets are markets and somehow I maintained my own ethical integrity through boom and bust. I still believe the network is the market, that bandwidth trading could have saved the industry and that similar businesses will thrive.
I have learned two things from the bubble and have one theory that remains to be proven out. One, relationships are the only thing you cannot commoditize, which makes them so valuable. Two, by consequence, it matters who you work with. Three, if you pursue what you believe to be the right thing, learn from failure, and innovate at the margin -- your rewards will be greater than what you could speculate.
This post is part of Om Malik's bubble-a-thon.
