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[07/29/99]

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At this conference, however, Masayoshi was basking in triumph. He owned a third of the stock in Yahoo, then a $6 billion company. He owned a third of GeoCities, too, a Web-hosting service that had inspired the public markets to go gaga (and which has since sold out to Yahoo). Son was finally being accepted as what he wanted to be: a true Net mogul.

As Son spoke, slides flashed on a screen behind him. There were slides with circles, slides with line charts, slides with equations and summation signs. But there was one particular slide that got the audience palpably excited. It showed a small square with the names of some old school industrial companies written below it, a bigger square with new companies like Dell Computer, a still bigger square with the names of huge media companies, and a last, biggest square with the next wave of Net companies. The squares were supposed to represent the relative values of each generation of business giants. And the point, ultimately, Son claimed, was that the top companies of the Net generation would have a market value 10 times that of their predecessors. Of course, it was all hype. But the audience loved it.

I could not help thinking of Masayoshi Son earlier this month when three investors -- Son's Softbank, plus the investment bank Goldman Sachs and the venture capital firm Sequoia Capital -- let it be known that they had paid $275 million for 6.48 percent of the stock in Webvan. Webvan, as many readers of the business pages know, is an online supermarket headed by Louis Borders, founder of the Borders chain of bookstores. Webvan currently delivers groceries to customers in the San Francisco Bay Area. In investment speak, Webvan is a national online retail play trying to capture a big piece of the $350 billion dollar a year grocery market.

But more precisely, Webvan right now is a very big warehouse in Oakland, Calif., a headquarters office in Silicon Valley, an attractive logo, a fleet of trucks, some 300 employees, a computer system that links all these pieces together with an e-commerce Web site, a contract with construction giant Bechtel that commits the fledgling company to building 26 more warehouses at a cost of $1 billion, and a lot of hope. That's it. Six and a half percent of this is worth $275 million, which gives the whole thing a nominal value of $4 billion. That's an awfully pricey warehouse.

If you are scratching your head wondering how a warehouse with operations in just one small part of the country can be worth so darn much money, however, you're probably wasting your time. There are certainly ways to calculate the potential value of the business. You can look at the value of Safeway, the giant grocery store chain, whose stock has a total value of $26 billion plus. You can, conversely, look at Peapod, the first online grocer, a service that the Wall Street Journal plugged in 1994 with the headline "Peapod's On-Line Grocery Service Checks Out Success," whose stock is muddling along at a single-digit share price. You can talk about profit margins and argue about whether online groceries will succeed in achieving the 5 percent profit margins they hope for -- though most backers of online groceries will tell you that traditional supermarkets have margins of just 1 and a half percent and Safeway's are at 3 percent. The problem is that all of this entirely misses the point.

In fact, there is one overriding reason why this warehouse in Oakland is worth $4 billion: The money managers who have invested in Webvan have already made a whole lot of money in other Net companies. And so, like Son at his conference, they give the entire project a halo of invincibility, no matter how preposterous the financial assumptions. Those money managers are two Silicon Valley venture capital firms, Benchmark Capital and Sequoia Capital.

Next page | The venture capital pecking order