TheGlobe.com was a social network that went bust 22 years ago. It was a primitive chat box that linked users. The platform was founded in 1995 and is a distant ancestor of Facebook.
TheGlobe.com allowed users to create an online ID. Like Facebook, it was started by Ivy League students. The founders Stephan Paternot and Todd Krizelman were Cornell students.
Unlike Facebook, the user’s identity was not socially verifiable. Also, posting photos and videos were out of the question. This was the dial-up Internet era when bandwidth was limited.
TheGlobe.com will not be remembered for its fancy graphics. Instead, it set an IPO record that has yet to be beaten. TheGlobe.com listed on Nov 13, 1998. The par value was set at US$9, but the first trade was nearly 10 times that number. It opened at US$87 and climbed to US$97. TheGlobe.com set a record 606% first-day pop.
Paternot and Krizelman, then in their early 20s, were worth US$100 million each. The duo were feted by the media as visionaries. CNN filmed Paternot dancing with a female friend on a table in a Manhattan club. He wore shiny vinyl pants in a throwback to the Elvis Presley era.
TheGlobe.com’s pitch was on the relentless growth of its “eyeballs”. Eyeballs was a non-financial metric that was common in the dotcom era. It refers to the number of viewers on a site.
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A company justified its exploding losses, by projecting its growth in eyeballs. TheGlobe.com was expected to triple its eyeball numbers in two years.
Most of TheGlobe.com’s five million users are now in ripe middle age. They may be undergoing hernia operations, rather than looking for dates online.
But, the users are in better shape than its IPO investors. The market grew frustrated. The eyeball count did not translate to revenue growth. The stock lost 95% of its value and fell to 10 US cents. After several years of purgatory, it closed in 2008.
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This week, TheGlobe.com fiasco may have come back to haunt investors in Singapore. Zilingo is one of Singapore’s highest profile start-ups. It connects merchants and factories in the fashion industry.
Ankiti Bose was an analyst in Mumbai at Sequoia Capital, one of the world’s leading VC firms. On a trip to Bangkok, she noticed that fashion designers in Asia had difficulty generating scale. They did not have access to working capital or marketing. The 23-year-old Bose founded Zilingo to address this.
For instance, using her platform, a small-scale designer of T-shirts in Manila can connect with purchasers in America. Zilingo provides the technology for struggling designers to gain scale.
Bose was eloquent and confident. Her pitch raised investment from Temasek and Seqouia. The media celebrated her youthful vision, as it did for TheGlobal.com founders.
However, a dark cloud Zilingo has descended on this sunny start-up. Zilingo had been about to close on US$150 million ($204.5 million) to US$200 million funding at a valuation of US$1.2 billion. The auditors questioned its accounting practices. According to Bloomberg, Zilingo had not filed its accounts since 2019. There were alleged irregularities in accounting.
Bose has been suspended as CEO by the board. She has denied the allegations. According to her lawyer, the suspension is without cause.
The controversy reminds us of the key risk in tech investing. Investors in tech need to be aware of accounting risks. One risk is that of manipulation of metrics. In the dotcom era, eyeballs were the honey that drew the bees. Investors were unconcerned about weak revenue. Bleeding cash was justifiable, as long as the number of eyeballs were expanding. Eventually, eyeball growth did not translate into revenue growth, let along profits.
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Today, e-commerce players make pitches centred on gross merchandise value (GMV). It is defined by Investopedia as the “total value of merchandise sold over a given period of time through a customer-to-customer exchange site”.
If a shirt sold online is worth US$100, the entire value of the item is recorded as GMV — despite the fact that the revenue that accrues to the online seller would only be US$5.
The problem is that GMV is not a financial metric. It is not governed by accounting rules. Its definition differs between e-commerce companies. JD.com includes returned items in its GMV calculation. Alibaba does not.
Investors should be wary of non-financial metrics. They could be manipulated. Instead, traditional metrics like free cash flow should be the guide. That would help investors avoid the next dud led by a CEO in plastic pants.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)
