In his book Adventures in the Screen Trade, William Goldman (most famous for writing the screenplays of Butch Cassidy and the Sundance Kid and All the President’s Men, if you’re a boy – or The Princess Bride, if you’re a girl) sums up his industry in three words:

Nobody knows anything.

He was talking about Hollywood but the same maxim could easily be applied to Silicon Valley and the rest of the Internet industry. And if there’s any single aspect of the Internet industry in which knowing nothing has been elevated to an art form it’s the calculation of what companies are worth.

In business if you want to work out the value of a company you have a few options. If the company is a public one – that is, one listed on a stock market – then all you had to do (I’m simplifying very slightly) is take its share price and multiply that by the total number of shares that the company is split into. As the price of each share goes up, so does the overall value (the ‘market capitalisation’) of the company. Using that calculation, the highest valued companies in the world are, at the time of writing (in billions of dollars):

1. Exxon Mobil (oil & gas) $410.65

2. General Electric (everything) $358.98

3. Microsoft (talking paperclips) $275.85

4. Citigroup (banking) $247.42

5. AT&T (telephony) $229.78.

A second method, if a company isn’t listed on a stock market, is to look at its revenues. That is, the amount of money that comes into the company from customers.

Say a company is bringing in £1 million a year in revenue, a potential investor would multiply that figure by a magic ‘x’ number to work out a valuation. This is sometimes referred to as an ‘x times revenue’ valuation. The value of x depends on a number of factors: the nature of the company, what valuation similar sites have received… that kind of thing.

There’s just one small problem with an ‘x times revenue’ valuation – they are prone to being total bullshit. So prone, in fact, that they’ve become enormously popular among start-up companies that don’t have any revenue at all but want a nice juicy valuation to attract investors without having to give too much of their company away.

I know this because I’ve been in the room when entrepreneurs have been working out their valuations. The conversation tends to go like this.

Entrepreneur: ‘What are we saying revenue is for year one?’ (Bear in mind this is a total guess – at this stage the company hasn’t even launched.)

Business partner: ‘A million.’

Entrepreneur: ‘Okay, let’s do three times revenue – three million?’ Business partner: ‘Can we say 3.5?’

Entrepreneur: ‘Okay. 3.5 times revenue. We’ll value the company at three and a half million.’

Business partner: ‘Another drink?’

Entrepreneur: ‘Can we make it a triple?’

But while in traditional businesses that kind of bullshit can be controlled by ensuring that a company’s ‘x’ value is roughly the same as similar companies in the market, the Internet doesn’t allow those kinds of comparisons.

Internet companies are the Emo kids or Goths of the business world: they might all look and smell basically the same but, actually, they’re all So Freaking Unique that they defy categorisation. According to its own figures, YouTube brought in a total of $15 million in revenue for the whole of 2006. In big business terms, that’s chickenfeed: the same amount of money that Exxon brings in every twenty minutes . And yet YouTube, we’re supposed to believe, is worth $1.6 billion – which is 107 times its revenue, give or take. Meanwhile, Amazon, which is traded on the stock market and had revenues of $10.7 billion for 2006, currently has a market capitalisation of $37.74 billion. So if Amazon was valued based on its revenues, it would be worth less than four times revenue. Two Internet companies – one worth 107 times its revenues, the other less than four times.

Welcome to the wacky world of Internet valuations, where the only accurate value of a privately held company is what some idiot will pay for it.

Another example: about a year before the YouTube deal was announced, auction site eBay decided it wanted to buy a two-year-old company called Skype. Founded by Janus Friis and Niklas Zennstrom (a Dane and a Swede), Skype’s service was as simple as it was ingenious. In brief, it allowed Skype users to make free phone calls to other Skype users via the Internet. All you had to do was download the special (and also free) software and the Skype service would take care of the rest. As an added bonus, Skype users could also make and receive calls to and from the traditional global phone network for a small extra cost. This cost was far, far below the normal cost of an international (or even a national) call as that part of the call was connected across the Internet, with only the last few local miles needing the normal phone network.

Clearly Skype had the potential to annihilate traditional telecoms companies, and eBay decided it wanted in on the action. At the time the deal was done, the service had a modest turnover – some $30- $50 million a year – so some experts expressed surprise when eBay offered to pay $2.6 billion in cash and stock up front, plus a further $1.5 billion if Skype met certain financial targets. A total of $4.1 billion.
Madness.

Or perhaps not. What if Skype did rise to a position of dominance in the telecoms market? Remember AT&T’s valuation of $229.78 billion? Suddenly $4.1 billion for Skype starts to look like chickenfeed. Who can say whether $4.1 billion was a bargain or a fortune?

And to take one more example, who knew if the $580 million Rupert Murdoch paid for social networking site MySpace (along with its parent company) the same year was a bargain or whether he got shafted?

No one knew anything. Even Barry Diller – former chief executive of Paramount and Fox, owner of QVC and Ticketmaster and one of the leading media players in the world – was forced to admit in an interview: ‘[Murdoch] has either bought these things very cheap – or they’re worthless.’¹

As it happened, when it came to Skype even eBay had no idea whether they’d got a good deal or not: in October 2007, two years after the sale was agreed, the company reduced Skype’s valuation by $1.43 billion.

The industry shrugged its shoulders.

Nobody knows anything.

Do Skype’s Zennstrom and Friis care that their company turned

out to be totally overvalued? Of course they don ‘t – they’re already working hard on their next business: a service called Joost, which promises to be the future of television and which has already attracted $45 million in funding. Some experts are already suggesting that, thanks to deals with media giants like Viacom to distribute content through Joost, the company could one day be worth twice as much as YouTube.
Or it could be worth nothing at all.

Nobody knows anything.

4.1

With news of YouTube’s $1.65 billion dollar valuation still sinking in, I phoned Sam Lewis to see if he fancied a drink. He was in the middle of writing a business plan for a new business – a site that hoped to change the way people socialise, using mobile phones – and I was keen to hear how he was getting on. I also knew I could rely on him to bring me back down to earth when something was bothering me. We arranged to meet at the Chandos, the pub across the road from the International bar.

‘ So how about YouTube?’ he asked, before we’d even sat down. ‘Sick with envy? Puking your guts out with jealousy?’

‘Fuck off, ‘ I said. ‘You know the two of them are only a fraction older than me. In comparison with them I’m a total failure.’

‘Mate, I’m thirty-five, ‘ he replied. ‘How do you think I feel?’

‘Yes, but you’ve had one successful business. And your new thing could turn out to be the next YouTube – easy. Or at least easier than The Friday Project could. Do you think anyone will pay a billion for a publishing company.’

‘Perhaps not. But that’s not what this is about and you know it, ‘ he said.

‘No, it’s not-’

‘It’s about the fact that you want to be famous – and you don’t think anyone will ever become famous starting a publishing company. You’re jealous that Chen and Hurley are on the front of the papers and that everyone’s talking about them. And that no one gives a toss about you.

‘I’m not jealous.’

But I was, of course I was. Bitterly so. How could I not be?

‘So why don’t you launch a web service? What is it you always say – writers have ten ideas before breakfast? So have a fucking brilliant idea. Stop fucking moaning about it.’

‘It’s not as easy as that.’

Have a fucking brilliant idea – what kind of advice was that to give someone? Have a fucking brilliant idea. Win the fucking lottery. Trip over a fucking cure for cancer and land inside a fucking supermodel .

But, actually, he had a point. A brilliant idea was all the YouTube founders had had eighteen months ago; a brilliant idea was all it took Alex Tew to become rich and famous. And, wait a minute – I did have a brilliant idea.

Sort of.

4.2

For the last couple of months our online editor Karl and I had been working on a plan to develop the online arm of The Friday Project. The suggestion had come from Anthony Cheetham who thought having a web service of our own would boost the company’s valuation during the public offering.

I’d kicked around a few possible ideas for a site but the best one I’d come up with – the one that everyone in the company had agreed to let me spend the grand total of twenty grand developing – was a site we’d code-named Fridaycities. Fridaycities would be an exciting and hugely ambitious reinvention of the London by London newsletter: a site that would allow people who lived in any city in the world to come together to swap information about every aspect of the place they lived, in real time.

Say you lived in London, and wanted to know where the best oyster bar was, or the best place to buy a viola – you would post your question on the site and within a couple of minutes you’d have a couple of dozen answers from other users. No more waiting a whole week for the newsletter to arrive. Users could also set up personal profile pages, detailing their likes, dislikes and areas of expertise; and this information could be used to suggest questions and answers they might be interested in.

What I envisaged was a kind of MySpace for the grown-up city dweller. But unlike MySpace, we’d employ professional editors to ensure some basic standards of grammar and spelling: I’d always suspected that the sign-up process for MySpace somehow disabled all the vowels on your keyboard; that’s the only explanation I could think of for the levels of illiteracy one sees on the average MySpace page.

Rather than bringing me back down to earth, my chat with Sam had only made my mind race faster. With work already under way on the Fridaycities site, it was quite possible that, without realising it, we’d already started building the next YouTube.

Sam had a hot date that he needed to get to so we agreed to catch up the following week when I’d had more of a chance to think. I, too, had to run: I was late for a networking event that I was supposed to be attending.

As I walked across Trafalgar Square and down the Strand towards Adam Street, I passed a man dressed in purple handing out free copies of the London Paper . Without thinking, I grabbed a copy and carried on walking. The top showbiz story on the front page concerned a star whose drunken behaviour had been uploaded on to YouTube for the amusement of the world.
Bloody YouTube. It was everywhere.

4.3

The Adam Street private members ‘ club lies behind an anonymous looking black front door, just off the Strand. The only indication that you’ve come to the right place is a small brass plaque with an engraving of a bowler hat, the club’s logo. London has dozens of these private clubs, from showbiz haunts like the Groucho Club on Dean Street and Soho House around the corner on Greek Street, to distinguished old-school gentlemen’s clubs like the RAC² on Pall Mall and the Garrick on Garrick Street. But Adam Street has an interesting gimmick: it caters specifically for entrepreneurs.

The club was founded in 2001 by James Minter (Jamie to his friends) when he took over some basement vaults underneath a row of terraced houses owned by his father. It boasts a bar and an excellent restaurant, which are open to both members and guests, but the real draw of Adam Street is that it offers countless opportunities for networking. Walk into the club at any time of the day or night and you’ll see them – either hunched over a laptop in the library or attending a working dinner in one of the club’s two private dining rooms or dancing the night away after a networking event in the basement function room. Adam Street is the place that London’s new wave of entrepreneurs calls home. It also helps that the club bans lawyers, accountants and other professionals from touting their services in the club in the same way that the Groucho and Soho House ban paparazzi.

Since moving to London, I ‘d spent a huge amount of time in Adam Street, partly because it’s where all of my friends tended to spend their free time and partly because of the club’s late opening hours and excellent cocktail menu.

Tonight, though, I was here strictly for work; for an event called ‘The Next Big Thing’ where a group of successful entrepreneurs and investors would take to a small stage in the basement function room to share their predictions for the future of the Internet. The range of speakers was incredibly impressive, including venture capitalists Sean Seaton-Rogers and Nic Brisbourne, veteran entrepreneur Angus Bankes and web wunderkind Alex Tew.

Arriving late, I ‘d just missed Angus Bankes’s presentation but made it just in time to see Michael Smith take the platform. In his opinion, The Next Big Thing would be companies that kept things simple rather than building complicated web services which most people couldn’t understand and wouldn’t use. An interesting view from a man who invents puzzles for a living, I thought.

At the end of the evening a microphone was passed around, I introduced myself as a former journalist-turned-book publisher, made a weak joke about getting drunk on Alex Tew’s tab and we all headed off to dance the night away at the Gardening Club.

It had turned out to be a great end to a great night, with Alex being chatted up by a group of four very pretty girls who had read about The Million Dollar Homepage and were suitably impressed to be in the company of a real-life millionaire. At a pound a drink, he could buy them a hell of a lot of vodkas and tonic. Not wanting to be outdone, I got chatting to a stunning blonde American girl at the bar and decided to pretend to be Tom Anderson, the founder of MySpace. Despite my complete lack of American accent, she was almost convinced that I was telling the truth, especially when Michael – who had been standing behind me listening – tapped me on the shoulder and yelled over the music ‘Hey, Tom – let’s do shots!’ For that stunning bit of wingmanship, I finally forgave him for the map.

But I didn ‘t do shots with Michael and the others – in fact I stayed remarkably sober. I had too much on my mind to start mixing it up with drink. The YouTube deal; the ovation that had greeted Alex Tew; Sam’s encouragement to have a fucking brilliant idea . Jesus, why couldn’t I just put my ego away and be happy with what I had? What the hell was wrong with me?

4.4

What happened next is something of a blur, but on 7 December 2006 – my twenty-seventh birthday – I announced to the world that I had negotiated a buyout of the online arm³ of The Friday Project for an undisclosed sum.

The sum was undisclosed because it was basically tiny. I ‘d have to give up some of my Friday Project shares and pay a year’s worth of four figure monthly instalments. Friday Project Media would retain a 10 per cent stake, and I’d step down from the board of FPM Plc. ‘An undisclosed sum’ always sounds far cooler than the truth, and, sure enough, the trade press lapped it up.

But, of course, I couldn ‘t start an entire business all on my own, so Karl and I went out for a drink to talk about the future. Of course he would come, too, he said – taking a stake in the new company, even though it meant giving up his Friday Project salary and any semblance of security he’d managed to build up. It was an amazing display of loyalty and one that made me feel much better about what could easily have been the most reckless decision I’ve ever made. We also convinced Savannah Christensen, a friend of mine from law school who was now editing a start-up independent newspaper called The Penny, to join us as the site’s new head of community – the person who makes sure that the users are looked after and that vowels are used at all times.
The fact that we had no office space, no business plan and, most critically of all, no money in the bank, didn’t faze us. After a few meetings in my living room to sketch out a business plan and divide up between the three of us the dozens of jobs that needed to be done in a start-up, we were utterly convinced: Fridaycities was going to be the next YouTube.

We couldn’t fail.

At least that’s what we told ourselves.

In reality, we were terrified.

4.5

But terror would have to wait. With the buyout just a week or so old, we knew we had a huge job ahead of us if we were going to finish building the test site and start populating it with test users.

Our first, and most important task, was to raise some start-up capital and, given that I’d just kissed goodbye to my salary, and was still paying rent on a flat I couldn’t afford, it was time to start begging.

Over Christmas I put together a set of financial forecasts that basically showed we could set up the new company and finish building the test site for just over £50, 000. On the strength of the business plan and no small amount of familial loyalty, my parents and my uncle Hugh agreed to become our first investors, each putting up half of the money. This injection of cash gave us enough working capital to survive for the first three months of 2007, by which time we’d either have to have found an additional investor or we’d end up on the streets.

Despite our modest capital and the uphill task ahead of us, our confidence was rock solid. Fuck it – weren’t business plans and projections so last century? YouTube had gone from launch to $1.65 billion in a year and eight months, almost by accident.

I already had the contacts in the industry; I had the big idea; we had the beginnings of a management team. Okay, so I’d never actually run a pure Internet business before, never actually raised money for one, but I’d seen enough people of my age who had. And I had one big advantage that no other first time dot com entrepreneurs had: for four years I’d basically been a spy – first at the Guardian, where entrepreneurs would gladly let me peek inside their businesses; reveal their secrets in the hope that they might translate to a few favourable words in print. And then at The Friday Project where I’d had even more access: acting as a sounding board for their future ideas and plans and listening while they tried to convince me that these plans could provide material for book spinoffs. If anyone knew the secret of what made a successful – or unsuccessful – new media business in London, surely it was me.

But, of course, nobody does know the secret of what makes a successful new media business. Nobody knows anything.

Duh.

Chapter Five: ‘Children, animals and the love of your life, oh my…’

1. He said it at the 2005 O’Reilly Web 2.0 conference, a Mecca for entrepreneurs involved in the second dot com boom/bubble. [↩]
2. Unlike the Garrick, the RAC does actually allow women inside, providing they don’t get too uppity. [↩]
3. Which, by this point, consisted of a very basic skeleton version of Fridaycities with a few thousand test users, plus a mailing list of several thousand people who subscribed to London by London [↩]