Burn Rate is a story of the Internet’s formative years as seen through the eyes of the book’s author, entrepreneur and long time practicing journalist, Michael Wolff (“Wolff”). Burn Rate chronicles Wolff’s struggle from 1994 to 1997 to raise sufficient capital so that his media company, Wolff New Media LLC (the “Company”), could make the transition from developing ideas for books, magazines, and television to creating and distributing original media on the Internet. In addition to detailing Wolff’s lessons learned through interactions with venture capitalists, investment bankers, lawyers, current and prospective investors, and would be acquirors, Burn Rate sheds light on the development of several early Internet players focused on delivering media content such as Wired, Time Warner, CMP Media, AOL, and Microsoft. Two primary themes underlie Wolff’s description of the Company’s foray onto the Internet:
Content is not king
Burn Rate focuses on the struggle by several Internet pioneers (including Wolff) to determine the role of original media content on the Internet. Many media and editorial professionals originally viewed the Internet as a new means to publish and distribute traditional media. They believed that content was king and would become the real value driver of the Internet, while technology would become a commodity. However, during the period in which this book was set (1994-1997), profitable business models based on delivering content over the Internet were largely nonexistent. For example, Wired was twice unable to price an initial public offering, Time Warner failed miserably with its Pathfinder venture, and Microsoft learned that there was almost no demand for its MSN and Sidewalk ventures. Consequently, the Internet industry began to realize that advertising alone would not support a content oriented Internet business, and subscription revenues were not a viable revenue source because of the low barriers to entry and increasingly crowded competitive landscape.
As search engines and Internet communities such as Yahoo, Infoseek, Excite, and AOL began to develop significant audiences, Wolff believed that the Company’s content could be used to engage and better retain audiences at these sites. Wolff felt that combining top quality technology and distribution with engaging content was the way to develop an enduring Internet presence. After struggling to merge Wolff Media’s Internet operations with a distribution partner that would enable the Company to develop sufficient traffic and sales volumes to support its burn rate (i.e. money spent in excess of revenues), Wolff concluded that content was not king on the Internet. In 1997, Wolff believed that the Internet was suitable for providing applications, enhancing efficiency, and retrieving data. He did not see, however, demand for content with a point of view meant to capture the attention of a mass audience.
Wolff observed that many of the rapid fortunes made on the Internet were largely a result of imagining the future, developing a business, and exiting before the viability of the business had been proven. In other words, Wolff felt that the basic economic model for Internet-focused businesses was that companies are as valuable as their vision. As we all know, especially during the period from 1994 to 1997, traditional valuation rationales were ignored if Internet businesses could sell investors on prospects of tremendous growth and staying power. The idea of selling the vision was particularly interesting when Wolff was courting venture capital and strategic investors. In connection with merger negotiations, Wolff stated that if you stop selling the larger vision, the long-term fantasy, the grand strategy, and find yourself saying that others have to buy whatever it is that your selling because you have to eat, you’ve lost the sale. Wolff learned that the unwritten rule during investment or merger negotiations was that a company’s desperate need for cash to contain its burn rate should not be focused on. Instead, investments and business combinations were usually justified because they were viewed as necessary to put a company on the path toward future growth and profits, which were often a fantasy at best. Wolff believed that Internet companies must have the ability to sustain the fantasy in order to be successful.