Dot.com meltdown

One day you're worth the GDP of a small country, the next you're down to your last million: Nigel Cope considers the outrageous fortune of the shrinking rich

Wayne Lochner and Terry Plummer are two dot.com entrepreneurs who have a £1m head-ache. That is the sum they borrowed against the value of their houses four years ago to set up Affinity Internet, an e-commerce services company. Their timing looked inspired. They floated the business on the stock market in April last year, valuing their shareholdings at £4m apiece. Within months the dot.com boom took off and their net wealth, on paper at least, was soaring day by day.

Wayne Lochner and Terry Plummer are two dot.com entrepreneurs who have a £1m head-ache. That is the sum they borrowed against the value of their houses four years ago to set up Affinity Internet, an e-commerce services company. Their timing looked inspired. They floated the business on the stock market in April last year, valuing their shareholdings at £4m apiece. Within months the dot.com boom took off and their net wealth, on paper at least, was soaring day by day.

With the shares rising 10-fold between October and February, their stakes were worth a staggering £540m each at one point, although they had not cashed in a penny.

As Mr Lochner observed when he and his business partner rocketed into The Sunday Times Rich List: "We are a bit like old royalty - paper rich and cash poor.

"Our houses are still mortgaged to the hilt, and we are not allowed to sell any shares within a year of floating."

Now the bubble has burst and Mr Lochner, 43, and Mr Plummer, 50, can only watch their paper fortunes go up in smoke. Affinity shares peaked at £82 in March. They have lost 90 per cent of their value since then, with their stakes currently worth just £54m each. They dare not sell any of their stakes now, for fear of damaging the share price further.

When asked to comment on their ever dwindling fortune, a company spokesman says they will decline the offer, thank you: "They are not particular keen to talk about their diminishing wealth. They don't want to court attention as individuals. They are still paying back the interest on the £1m they borrowed to start the business."

Welcome to the internet's new club of entrepreneurs - the Shrinking Rich. Or as one American newspaper dubbed them "The 90 per cent club," a reference to stock market-quoted dot.coms, whose shares have lost 90 per cent of their value.

In the United States, this not so exclusive club includes companies such as eToys, Web Van, Ask Jeeves and Priceline.com. Here, the roll-call of the broken-hearted includes the entrepreneurs behind QXL.com, Lastminute.com, Affinity Internet, Durlacher and 365 Corporation.

The disappointment for most of these people is that they came within touching distance of being able to crystallise the value of their holdings but couldn't quite manage to sell out in time.

Martha Lane Fox and Brent Hoberman, the co-founders of Lastminute, have not taken a penny out of Lastminute.com and have to rub by on their annual salaries of £100,000. Tim Jackson, the founder of QXL.com, did better. He managed to sell £1.7m of equity in the online auction site, although his 13.2 per cent stake is now worth £1.4m, against a value of the £400m in March. And at 365 Corporation, the online sport and music specialist, the chief executive Dan Thompson has remained locked into the plunging value of his company.

But it could have been worse. The Brit club of dot.com pioneers could have done what 36-year-old Michael Donahue did in the United States. The former engineer found his stake in his InterWorld business-to-business company soaring to £450m last year. The Wall Street Journal said: "He then did what many red-blood Americans would have done. He splurged big time."

Mr Donahue bought a $9.6m second home in Florida, sponsored his local polo club to the tune of $100,000 and shared the cost of renting a Hawker-Siddeley private jet to shuttle between meetings.

Then the roof fell in. The InterWorld share price collapsed and Mr Donahue was asked to repay a $14m loan he had taken out, using the value of his shares as collateral. The Palm Beach house is now up for sale and Mr Donahue is a chastened man. "Going up was easy. But when it starts going down, no one wants to talk to you."

In Britain, the early dot.com millionaires had a cruelly short time in which to enjoy their paper wealth. The stock market boom in internet-related stocks only started in October last year and then peaked in March. At that time many dot.commers thought they were the new Masters of the Universe and were actively seeking public recognition for their achievements. Philip Beresford, who compiles The Sunday Times Rich List, recalls that when he was preparing the list at the peak of the e-commerce boom in the spring, he was bombarded with calls from internet entrepreneurs demanding to be included. This came as a shock to Mr Beresford who is more used to the genuinely rich doing their best to conceal their wealth.

He recalls that one particular individual became hopping mad when it became clear he was not going to be included.

"It was quite a bizarre episode," Mr Beresford says. "He was saying: 'Well if you value my business like this when I am worth this much.' I said I couldn't put him on the list on the basis of the information he'd given me. He was really very angry."

Since then the decline in internet valuations has been so steep that the dot.com hotshots have barely had a chance to adjust. One minute the young Turks were looking at the price of Maseratis in Mayfair car showrooms and wondering whether to buy a Scottish estate; the next, they were being told by their City advisers that the lucrative float was off and, by the way, could they repay that little loan.

While there will be few tears shed for the Shrinking Rich of the internet, some dot.commers get quite shirty when asked how they are coping with the new environment. Martha Lane Fox is one. Shortly after the company floated on the stock market in a blaze of publicity in early March, the 27-year-old Oxford graduate found her stake in Lastminute worth a staggering £51m. Now it is worth just £7.7m.

"I couldn't tell you what my shares are worth now, or what they were worth at the peak," she says. "That really isn't the reason we get ourselves out of bed in the morning. And whether my shares are worth £1m or £8m, that is still a lot of money."

She denies reports that she flew 35 friends to the south of France for a Millennium celebration last year. But wasn't she ever tempted to splash the cash a little? "No, it would have been foolish."

Brent Hoberman, Lastminute's chief executive, is equally adamant that he spends no time weeping over what might have been. This is despite his paper fortune having dwindled from £78m to £11.7m. "I know its very boring, but we've always said we are doing this because of the enjoyment and because we believe in it. There has been no adjustment."

Mr Hoberman, 31, says he still lives in the same two-bedroom flat in London's Kensington and drives the same beaten up K reg Volkswagen Golf. "I've got no plans to trade up," he protests.

Dan Thompson, founder and chief executive of the sport and music information website 365 Corporation, is another dot.commer who has seen his paper value shrivel.

Mr Thompson owns 3.2 per cent of 365, which became one of the first UK internet firms to float on the stock market in November last year. At one stage, Mr Thompson's stake was worth £20m. With the shares hitting a new all time low this week - it has fallen to £3.4m - he is philosophical about his vanishing paper wealth. "I hate to see the share price fall, but I've been fortunate enough to have had previous business success and made a bit of money. If you were a first-timer, it would be much more difficult."

This is a valid point. It is a feature of the UK internet economy that many of the first wave of dot.com entrepreneurs were already financially comfortable. Martha Lane Fox comes from a wealthy family. Her late grandfather set up the upmarket Lane Fox estate agents and her mother is the niece of the sixth Marquess of Anglesey. Brent Hoberman was not short of a penny, despite the impression conveyed by his battered blue Golf. The founders of Click Mango, the failed online health products retailer, included Toby Rowland, son of "Tiny" Rowland, the former Lonrho tycoon. Affinity's Wayne Lochner had enjoyed a successful career in the City. And Dan Thompson at 365 had already made a pile after selling a video company to Time Warner for £5m in 1994. Mr Thompson says: "In the US people started getting excited about the internet in 1996-97 and the capital markets were prepared to support good ideas. Here, the window of opportunity was very narrow. So it was the previously successful people who could raise funds quickly and develop their businesses."

This category of people included Geoffrey and Graham Chamberlain, who run Durlacher, the stockbroking firm that turned itself into an internet specialist, which not only advised internet companies but took stakes in them. Durlacher's investments include 365 Corporation, Talkcast and Bizzbuild.

Geoffrey Chamberlain, the chairman and chief executive, had already made a fortune from the derivatives market. And he cashed in £3.7m of share options in Durlacher last December when the boom was just getting into full swing. So when his stake in Durlacher fell from £330m to £33m he could afford to be philosophical. "It needed something like this to pour a bucket of cold water on an overheating system," he said earlier this year.

It is hard to see many tears being shed for the lost millions being suffered by the internet trailblazers. The sight of cargo pants-wearing, mobile phone-toting, Clerkenwell-dwelling twentysomethings making huge fortunes by just switching on their laptops provoked a wave of jealousy in middle England.

But there is a positive side to the downturn for the more established e-commerce companies. First, those dot.coms that did manage to float their young companies, now have valuable cash piles, which can be used to vacuum up smaller companies with good ideas that would not have been previously available. As Dan Thompson at 365 says: "We have £45m of net cash and the downturn has created a huge set of opportunities. We probably get 10 to 20 approaches a week from companies interested in some sort of deal."

The dot.com fallout has also restored greater order in the labour market, with good staff now being available at much more sensible salaries than before. This view is backed up by recruitment firms specialising in new economy jobs. Ben Lowe at MRG New Media says: "A year ago everyone was jumping ship to join a dot.com. Now candidates are less willing to move. They'll go to an AOL or a Freeserve. But the dot.com shake-out has placed a big umbrella of scepticism over the industry."

With dot.coms battling against a wall of negative sentiment, where does a good internet entrepreneur turn now? One possibility is to return to corporate life and help a large company to develop its own internet ventures. According to Steve Tappin, a specialist in the corporate venturing market, blue chip firms are crying out for entrepreneurial talent. He says the market is growing for "corporate venturing" where big companies set up new concepts such as Prudential's Egg and Dixons' Freeserve.

"There is a route out for dot.com talent," he maintains. "Major companies are taking their brand knowledge and marketing muscle and doing their own ventures. But they will be looking for people with the flair or entrepreneurial talent to actually make them work."

Although entrepreneurs who have run their own companies may struggle to fit back into the straitjacket of corporate life, Mr Tappin reckons the blue chip companies will have changed in the past couple of years. He also says the huge resources of the major companies will come as a welcome relief to internet specialists who had to get used to penny-pinching.

"There is a way back for some of these people," he says. "It is there if they could change some of their prejudices about the big companies and the big companies could change some of their perceptions of them."