1995 was the year of the Internet – the start of the Internet as we know it now. By the end of 1994, Mosaic (later to be renamed as NetScape) browser was available and DNS service had simplified the URLs. Until then it was mostly used by companies and universities to do email and file transfers. It was a crude but very useful tool – although not ready for prime time. Most people used Internet at the office or dialed office to get on the Internet from home. Incidentally modems of that vintage were lightning fast: 9600 baud (roughly bit per seconds). I had started with modems at 300 bauds way back when. Most of the eighties they were 1200 baud. Most communication was textual. 9600 bauds meant that 800 characters transferred per second. Today’s home connections are easily 1000X. My home connection now downloads at 50 MBS (million bits per second)!

The browser changed all that. It offered both graphics and text. Video followed soon after. Netcom was the first ISP (Internet Service Provider) to offer home dial-in connections to end users at $19.95/per month. One had to get a separate phone line for that. Millions of people were signing on. By the end of 1995, 40 million people had downloaded Netscape browser. As usual, all the established players like Microsoft and Novell were caught flat-footed. To its credit, Microsoft pivoted hard and focused its energies on coming up with an alternate browser and caught up with Netscape by early 1997. Modems kept getting faster and faster. I remember 56K Bauds in the late 90s.

While the Internet was gaining momentum in the nineties, services like AOL ruled the roost. These services started as early as the mid eighties and offered users some private walled garden content, email and BBS (Bulletin Board Services), a predecessor to modern day chat-rooms. By the mid nineties, AOL had become powerful enough to swallow venerable media company Time-Life.

Exodus was launched by KB Chandrasekhar and BV Jagadeesh as a B-ISP (Business ISP). They figured that with that many end-users getting online businesses will soon follow. These businesses would be willing to pay tens of thousands of dollars for flexible, reliable Internet connections. I was able to see their logic and invest in them by the end of 1995.

Yahoo, eBay, Amazon and hundreds of other companies were launched around that time. NetScape went public at the end of 1995 and was highly valued though it did not have much revenue. It was eventually swallowed by AOL as a defensive move by AOL. Internet gold rush was on after that.

Hotmail, started by Sabeer Bhatia offered email on the web. Until then, mail was tied to the company ID for the most people. I was not impressed with Sabeer’s business model of giving away this useful service for free. But it had caught on; at one time 60,000 people a day were signing on. He was adding more and more servers in Exodus data centers. His expenses were mounting! He was poorly capitalized as his VC’s were not sure that he will ever make money. Sabeer told me that his goal is to reach 10 million users and he thought he would be golden then. He talked about up-selling to these users. I was skeptical as he had nothing to up-sell. I recommended that he start charging $10/year and promised to invest $1 million. He was reluctant but agreed to do it.

I went on a trip to India soon after, where I heard that Hotmail had been acquired for $400 million by Microsoft. That was my early education about the asset valuation. For Microsoft, Hotmail was a steal at $400 million. It was acquiring 10 million users at a mere $40 per user. It had spent $2 billion dollars to build its MSN service and had only 1 million users. I had also looked at and passed on Junglee for similar reasons. Junglee was acquired by Amazon for a hefty price.

By 1998, most of the early start-ups in the Internet space, including Exodus, had gone public and had commanded fabulous valuations. The Hotmail sale had turbocharged the environment. I was a more fundamentalist in my approach, and had not invested in any dotcoms. I focused on what I thought were the more robust companies offering picks and shovels to the gold diggers. I was sure that the dotcom phenomenon was a flimsy phenomenon and, felt very smug about being a value investor in sturdier companies.

I was prophetic about the dotcom companies. The bust did come, and most of them were wiped out. With that the market for picks and shovels also disappeared. In the beginning, the market punished everyone guilty of sin of doing dotcoms. Then it punished anybody involved with them. Eventually, for good measure, it punished everybody standing around.

The doom and gloom of Silicon Valley was not lifted until the Google IPO in 2004. And a new cycle was on!




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