Confederate Money

Let’s admit the truth: We’re building the web with confederate money.

I’m not just talking Robert E. Lee, either. I’m talking about the true idea of confederates, allies or accomplices united in a common purpose.

After all, no great web site is an island – it’s always a team effort. You need marketers, you need managers, you need programmers (especially database programmers) and designers – you even need writers. And if you sell goods, you need procurement, fulfillment, etc. – a whole host of functions and skills.

That’s why nearly all Internet businesses are stock companies. There are some sole proprietorships (mainly holding companies) and partnerships (some venture capital firms), but generally it’s all confederate money.

I call stock confederate money because from the beginning it’s worthless. Yet by the confederates’ agreement to trade in this worthless paper, a company can get going. You give the Venture Capitalists stock for their investment, you use stock to bring in Big Media Partners, you give stock to all your top managers, and you offer stock options to all your employees. This worthless paper ties everyone into the enterprise. By accepting stock for something of real value (cash, work, commercial time), your partners become confederates in your enterprise.

Silicon Valley veterans know this well. Many have been in so many start-ups that they could paper their walls with the worthless stock and stock options they’ve accumulated along the way. The fact is most Internet stocks and options end up as worthless as Confederate money.

The hope is always, of course, that stock can be turned into cash through a buy-out or into something even better, equity in an IPO. Once an IPO happens, confederate money becomes even better than the real stuff. The value of all of it becomes what the last person paid for a smidgen of it.

Take Andover.Net, the Linux community site operator that went public recently. According to Yahoo, Andover has 7.8 million shares of confederate money, of which about half – 4 million – actually trade. When trading closed before Christmas, the last price paid for an Andover share was $49.50. This meant all Andover shares were worth $49.50 each. (Please, no envy – a few weeks earlier they were worth $90 each.) The company itself had sales of $2.1 million for the year ending September 30, but registered a net loss of $5.8 million.

I’m not trying to pick on Andover.Net here – most Internet IPOs come in with similar numbers. Many become screaming buys. Imagine if you’d bought Yahoo or Priceline soon after the IPO, never mind the price or lack of fundamentals. Red Hat Inc. had sales of $5.4 million and lost nearly $3.6 million for the quarter ending in November, but had you bought it at the IPO, your investment would have gone up five-fold since then.

This is the power and the terror of the Internet economy. Huge amounts of confederate money are being created and turned into piles of the real stuff (with real presidents and all). But it’s money that bears no relation to profit or other values we were taught to hold dear in economics class. Instead, it’s value based on hope. So long as hope floats we’re golden. When hope fades we’re discounted. But who cares – it’s only confederate money. Let’s play.