Serialisation: eBoys - Part 4 - Hoover Dam

This final excerpt from eBoys, the fly-on-the-wall story of the Benchmark Capital team, ends on the prospects for Webvan. Will it be worth $100bn or zero? See the end for that, and a chance to buy the book...

In August, Webvan filed registration papers for its initial public offering. This was an aggressive schedule, even by the standards set by other internet companies. The most recent period for which it could offer financial results was the one that had ended on 30 June, when its delivery service in the Bay Area had barely begun. Sales for the first six months of 1999 had only been $395,000, the actual cost of those groceries to Webvan had been $419,000, and the company had posted a loss for that period of $35m.

In September, on the eve of the IPO, the company's stature grew when Webvan announced that it had recruited as its new CEO George Shaheen, 55 years old, the chief executive and managing partner of Andersen Consulting. Shaheen's decision to jump to Webvan implicitly conferred on his new home the credibility associated with the firm he had headed, a $9bn company.

Shaheen arrived just in time to join the Webvan road show, bringing the forceful public persona that Wall Street demanded and that [founder] Louis Borders lacked. A professional CEO like Shaheen needed little time to acclimate: Just a week after joining Webvan, he smoothly articulated the company's potential business to institutional investors when the show arrived at the Goldman Sachs offices in San Francisco.

Custom dictated that the lead underwriter provide financial projections to the gathered investors, and Goldman Sachs's estimates of red ink for Webvan would give anyone pause. Revenues for 1999 would be $11.9m, with net losses of $73.8m, revenues would climb to $518m to 2001, but losses would be $302m. However, with $300m in cash in hand, no debt, and the expectation of raising another $350m from the IPO, it appeared that Webvan was financially well positioned to build out its centres nationally.

Louis Borders showed a slide titled "Enormous Addressable Market," which offered a listing of the annual revenues for three businesses - groceries ($449bn), drugstores ($106bn), home meals ($100bn). And then Shaheen described how Webvan didn't merely reach the customer's door, but literally crossed the threshold and stepped inside the home (when the Webvan delivery person unloaded the totes), creating an intimately personal relationship with the customer that no other net business had any chance of reproducing.

The Webvan vision appeared to cow sceptics in the room. The only questions that the prospective investors mustered concerned the picayune: How soon after ordering could the groceries be delivered? What percentage of orders are delivered when the customer is not home? How could online customers be induced to buy impulsively? The most substantive one posed in the session was this: What was to keep local grocery stores from adding technology so that they could deliver groceries, too? Shaheen had a ready answer: "They're adding cost to existing cost, the physical store becomes an albatross."

The Webvan road show proceeded on to other cities and the IPO would have been completed as planned were it not for an unexpected development. The Securities and Exchange Commission intervened and prevailed on Webvan to delay the offering. The SEC was upset that Shaheen had made comments about Webvan in an interview that was quoted in Forbes, which the SEC deemed inappropriate in the "quiet period" preceding an IPO. The commission was also upset that the contents of the road show had been disseminated publicly by Adam Lashinsky, a writer for TheStreet.com, who had listened in to a conference call version of the show.

The delay of the offering at the behest of the SEC, an unusual event, drew a slew of attention to the way that the democratisation of investing had still failed to fully democratise access to IPO-related information. The restrictive by-invitation-only nature of road shows required by the SEC - which Lashinsky had breached - kept members of the general public from knowing as much as the privileged, the institutional investors. Lashinsky asked, "Why not throw the show open to the great unwashed, if only in a listen-only mode?"

With an amended prospectus that incorporated the financial projections and other information that had originally been provided only to the road show attendees, Webvan was permitted to refile its plans for an IPO. It turned out that the publicity had worked in Webvan's favour, piquing the curiosity of investors who had not heard of the company before the furore about the unquiet "quiet period". Instead of pricing the issue in the $11 to $13 range as had originally been planned, the offering went out at $15 a share, and on the first day of trading it closed at almost $25 a share. Its market capitalisation was more than $8bn, or nearly half of Safeway's.

At Benchmark, no party was held to commemorate the successful offering. The company had only begun to realise its founding vision, and [VC] Dave Beirne was too superstitious to allow premature celebrations to jinx the venture. He swore aloud that Webvan was going to be a $100bn company - in annual revenues, not merely market capitalisation - but he also knew the risks related to execution that still lay ahead. Two years earlier, Louis Borders had declared that Webvan would either be a $10bn company - or zero. His prediction was fundamentally sound, he had been off only by an order of magnitude. A $100bn company. Or zero.

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