At 23, Matt Johnson had it all: the business plan, the VC money, and grand designs to dominate the untapped college market. Then the BigWords boy wonder got a harsh lesson in dotcom reality.
A lifetime ago, in the headiest days of the dotcom bubble, Matt Johnson founded a company called BigWords. It was 1998, a time when a babyfaced college dropout could walk into a conference room full of partners at a Silicon Valley VC firm, hand over a business plan, make a pitch, and walk out with millions of dollars. Those who were present for Johnson's spiel - delivered with a depth of conviction rarely seen at any age - ranked it among the best they'd ever heard, and rewarded him with $70 million. He was 23.
"We have a demographic that's incredibly lucrative, but almost impossible to get to." So began Johnson's description of BigWords' mission: to sell college textbooks online. "Our product is a must-have, and the current system to purchase that product is broken - a disparate industry of 3,000 college bookstores. We've been able to put it all together, and we can use this must-have product as an entrée. Then we can expand horizontally and vertically."
Two years and 400,000 customers later, BigWords filed for bankruptcy, laid off its employees, and changed the locks; a trustee was appointed to account for and liquidate the assets. On the last day of business, Johnson was outside the company's San Francisco offices kicking a dumpster, annoyed that his travel expenses would likely go unpaid. "I'm going to get screwed if this isn't taken care of today," witnesses remember him complaining.
A few days later, the creditors changed the locks on the company doors for a second time, this time leaving Johnson without a key. The last of the payroll checks bounced, spurring an outpouring of posts on FuckedCompany.com attacking Johnson and fellow executives. "Fuckmaster MJ has managed to half-ass everything he's ever touched," wrote one of the milder anonymous posters. "He left this whole mess unresolved."
At 25, Johnson's dotcom ride was over.
Even today, as dozens of companies with twentysomething CEOs crash and burn around him, no one is more emblematic of the ride from Internet euphoria to Internet depression than Matt Johnson. A guy without a college degree or any significant management experience - armed only with an ambitious idea and overdeveloped moxie - built a brand at lightning speed and scored big during the easy-money heyday, only to see it all vanish faster than it had appeared. These days, the most substantial things he still has are his Mercedes CLK 430 (it's leased), his rented San Francisco apartment with panoramic views, and his engagement to Andrea Reisman, CEO of another startup, the all-but-defunct Petopia.
And yet, on the same early December day that the bankruptcy trustee would sell the remaining BigWords inventory to MBS Textbook Exchange for around $1 million, Johnson's mood is upbeat. He's preparing for a three-week vacation to Bali with Reisman, and, as short as BigWords' run was, he says he learned a ton. Next time, he'll have an entire curriculum of experience to draw on. "I was able to come in with street smarts and build something," he says, sinking into an overstuffed sofa in his apartment as the sun sets behind him. "It was the most expensive business school education ever."
A shade under 6 feet tall, the blue-eyed, sandy-haired Johnson has an open, inviting face that bespeaks a gee-whiz affability. But when work is the subject - say, his discussions with Amazon.com in 1999 about a possible investment - he's intense. There's a momentum to his sentences that builds with each word, as if his mouth can't keep up with his thoughts.
He got his "street smarts" while growing up in Ottawa. As a teenager, he worked part-time in his father's office-furniture store, but spent most of his spare hours on a bicycle, racing competitively in Canada and Europe. When he was 16, Johnson spent the summer racing in Belgium on a junior world cup circuit. The next year, he won a Canadian national championship and found he could earn money in Europe just for showing up. "If you could wear the national champion jersey in the races, you'd get paid $500 a start," he says. "So I sent out letters ahead of time to race directors that said, 'I want to come to your race; I want $500.'"
Back home, Johnson enrolled at the University of Ottawa as a kinesiology major, hoping to pursue a career in medicine. But he continued cycling. In December 1994, he and an acquaintance decided to spend the winter break training in Southern California. They spent their days "riding, riding, riding" and their nights huddled in sleeping bags on the floor of an $800-a-month rental near the Pacific Coast Highway. But when the winter's endless rains swept across the hills of Malibu, Johnson found that his dedication had its limits. "I was riding on the PCH, getting splashed by Ferraris in front of these million-dollar houses. I was in the best shape I've ever been in, and I was doing really well in the races. But then I said, 'You know, this is for the birds. I'm done.'" That day he turned his bike around, rode it back to his rented house, and didn't touch it again for six months.
Determined to join the budding dotcom revolution, he started surfing the Web. In April 1995, he began hanging out with a group of USC graduates, including a technologist named Jeff Sherwood. They had founded a company called InterVerse and were designing Web pages for The Spot, an online soap opera. To Johnson, Sherwood and his compatriots epitomized a hip new lifestyle in which business and home intertwined: They even had a T1 line into their live/work loft in Venice Beach. "This place was awesome! It was on fire!" he says. Johnson persuaded his new friends to hire him as an intern. Before long, he had appointed himself as their salesman, calling on potential clients and working through the summer.
He returned to college that fall, switching his major to computer science. But school had lost its hold on him. "I wasn't a huge fan of school to start with. I was good at it! I always got good marks," Johnson says. "But I'm action-oriented, and sitting in class building theoretical models and plans would just drive me bananas."
Over the next two years, he worked as a Web consultant and made enough money to buy a BMW Z3 roadster. At 22, he was a moderate success. He started thinking about launching his own business - something that would make a splash and make him rich - and began bouncing his schemes off Sherwood and Web site designer Leri Greer. In spring 1998, after dispensing with more than 30 ideas - a service that would provide driving directions by telephone was one - Johnson found his killer concept: selling textbooks online.
Amazon had already proved the value of Web-based bookselling, in part by plugging inventory holes through the adoption of a wholesale distribution system controlled by two companies: Ingram and Baker & Taylor. But Amazon hadn't yet gone after textbooks, where the distribution system was more fractured. "They didn't even sell some of these books," Johnson remembers.
The college textbook market consisted of not only several large publishers, but also several hundred small publishing companies that fed products to campus bookstores. On the retail side, college bookstores often had local monopolies. As he researched the business, Johnson saw an opportunity to centralize the distribution while exploiting student dissatisfaction with poor customer service and high prices. "Every time I got to the next step," he says, "it made more sense." He convinced Sherwood and Greer of the idea's potential, packed his belongings and a stack of business plans into his Z3, and drove back to LA.
The normally fast-talking Johnson makes the jump to hyperspace when discussing his business plan. "I built a fantastic business plan," he says. "It was glossy, it was in color, it had everything you needed to know. It was square, 8 inches by 8 inches, like an annual report for a company!"
BigWords launched out of Sherwood's new Santa Monica apartment. Johnson let himself in early every morning, while Sherwood and his girlfriend were still asleep. He worked at a laptop on a card table in the kitchen, looking for investors and sending out business plans, all the while scarring the wall behind him with black heel marks from his constant nervous kicking. "Matt always had his eye on the goal, and the goal was to be the CEO of a multibillion-dollar, multinational corporation," Sherwood recalls. "Other things didn't matter."
From the beginning, it was clear that Johnson was the boss. When the original three agreed, for example, to bring in John Bates, a gung-ho early webhead who had helped start the Virtual Vegas site, as a cofounder, Johnson insisted that Bates' shares be carved from Greer's and Sherwood's lot, leaving Johnson with 60 percent of the equity. "His rationale," Sherwood recalls, "was that when we raised financing, he wanted to have enough shares to be able to have his voice heard in the board meetings. Matt said, 'If I don't have the ability to make decisions when we get VCs in here, we might as well just pack up and go home.'"
Johnson says he was just protecting the team's mutual interests. "I knew as soon as we had an investor what the equity structure would start looking like, and I would have a very small stake."
When it came to seeking financing, Johnson made control a key factor. Although he had received more lucrative offers, Johnson chose 21st Century Internet Venture Partners to provide BigWords' initial round after he became convinced that 21st partner Peter Ziebelman wouldn't rush to bring in a new CEO. "My question was, Are we going to go with a big firm and take a chance on being replaced?" Johnson remembers thinking. "I wanted to have a chance to learn."
Ziebelman not only reassured Johnson, he also granted the young entrepreneur's request for an additional seat on the board of directors that would give representation to the common shareholders - with a vote that Johnson cast, along with his own, at every meeting.
In the summer of 1998, before Johnson ever met Ziebelman, he had made several unsuccessful attempts to secure investors. Venture firms were intrigued by the business plan and its flashy presentation, but most shied away from the founding team's lack of experience. Neil Weintraut, a 21st Century partner, also passed on the opportunity at first. "He told us we had a problem common to most Southern California startups: We weren't thinking big enough," Sherwood remembers.
If BigWords was going to be a multibillion-dollar company, it didn't just need to be a good business, Weintraut told them. It needed to dominate the market. "This is going to be trench warfare, hand-to-hand combat, and frankly we would need to find a more experienced team to back it," Weintraut wrote to Johnson in an email. Johnson fired back: "We know how to do this better than any other company you can find." But Weintraut's "no" was firm.
With the fall 1998 semester looming, the BigWords team decided to press on with sales to prove the viability of the business. "It was like the chicken and the egg," Johnson remembers. "We finally said to ourselves, 'We don't have a business yet because we don't have enough money, but they won't fund you because you don't have a real business. Screw that! Let's just start our business!' So we stopped calling VCs."
They moved from Sherwood's apartment to a hole-in-the-wall office in Santa Monica, began developing their site, opened accounts with publishers, and searched for a warehouse company to handle distribution. During its conversations with investors and publishers, the team realized that others had latched onto the same idea. BigWords' launch in late August came a week after competitor VarsityBooks.com went live.
Within six weeks, BigWords had received orders for more than 2,300 titles from 1,200 customers - all funded by only $75,000 contributed by friends and family. The team embarked on a guerrilla marketing campaign at a select number of California universities. Donning coveralls inspired by the Beastie Boys' onstage costumes dyed the yellow-orange color of the BigWords logo, they strolled along campus walkways handing out flyers.
In October, Johnson and Bates generated a buzz at Internet World in New York City when they made the rounds in their coveralls. At a raucous party held on an old warehouse rooftop in Manhattan, the two entrepreneurs found themselves surrounded by a flock of attractive women just as Weintraut walked in. "Matt tapped me on the shoulder and whispered, 'Neil Weintraut! Neil Weintraut!'" Bates says. "He walked up to us and fell into our trap. He said, 'So what's the Big Idea?' And we said, 'BigWords is the Big Idea! You have to check us out again!'" The business, they explained, was more than textbooks. It was about becoming a household name - something like MTV - which would allow BigWords to eventually sell multiple products to the 18- to 24-year-old audience. "It was clear at that point that everyone wanted to sell more stuff," Johnson says. "You had to get as many things in the box as possible."
The next week Weintraut and Ziebelman visited BigWords' Santa Monica offices, their hesitancy about the founding team's lack of experience now assuaged by the results of the fall semester and the presence of a recent addition to the staff - self-described "token old guy" Dick Hackenberg, a 63-year-old former TBWA Chiat/Day interactive media manager. At the conclusion of a follow-up meeting a week later at the 21st Century offices in San Francisco, Ziebelman slid a term sheet across the table. Feeling ill-equipped to respond, Johnson raced to his attorney's office for a tutorial in the basics of dealmaking. "They gave me a crash course: 'Here's all the key issues,'" Johnson remembers. "It wasn't a lot, but it was enough."
At a dinner meeting in Palo Alto, Johnson and Ziebelman dickered over the size of the option pool and the length of the vesting terms. Eventually, the two reached an agreement which included the requirement that BigWords relocate to the Bay Area.
Shortly after Johnson and Ziebelman shook on the deal, another VC firm made a competing offer, which Johnson rejected. A year later, he was sorting through a stack of papers and came across that second term sheet. By now much more savvy in the ways of venture capital, Johnson recognized the spurned offer as the better proposition. "I read it, and I was like, What was I thinking? This one was much better!" Johnson says, while hastening to add that he doesn't regret his decision. "It was the best deal we ever did. A lot of the other people were more caught up in the hype that we already had a term sheet. They wanted to scoop the deal, rather than focus on what we were actually going to build."
On the face of it, the college textbook market seems incredibly boring, but Johnson and his team decided success meant getting students excited about BigWords. Johnson, the self-appointed guardian of the brand's identity, launched a crusade that bordered on the religious. BigWords would storm the ramparts of archaic college bookstores and free students from their oppression. Like Amazon, BigWords wouldn't position itself as a low-price leader; it would be price-competitive. Its main selling point was convenience. The company developed a slogan that was, as Hackenberg recalls, grounded in humor, irony, and the unvarnished truth: "At BigWords, we promise not to rip you off as much."
The humor was reinforced by a series of marketing stunts. At the opening of the fall 1998 semester, BigWords used a cherry picker to drop 10,000 yellow superballs bearing the company's logo on the UC Berkeley campus; some of the balls offered free textbooks. A similar event near NYU included not only free textbooks but cash-laden briefcases. The campaign resonated so well that by the end of January 1999, BigWords had surpassed VarsityBooks.com in traffic and sales. The next fall, at Johnson's urging, the company hired comedian Tom Green to host a series of manic, irreverent television ads. The spots, one of which featured Green repeatedly screaming the company name as fast as he could, were an immediate hit. (In its quest to attract traffic and build a brand, according to one former executive, BigWords would spend more than half of its $70 million in financing on marketing.)
Johnson wanted to control his brand at every customer touch point, just like Jeff Bezos does. At first, he contracted with independent distributors to handle his warehousing and shipping needs. But the third-party distributors couldn't pick and pack as quickly as Johnson wanted, so he built his own distribution center, in Kentucky. "It was completely automated, had all the latest warehouse management technology," Johnson boasts. "We had 400,000 books inside."
Then Amazon came calling in the fall of 1999, as Johnson was preparing to close another round of financing. He hoped to schedule an IPO as early as January 2000, but was willing to consider a strategic investment. "You guys could add a lot of value," he remembers telling the Amazon dealmakers. "We're really just focused on this demographic, as opposed to all these categories, like you guys are. And look how many we've already captured!"
But Amazon was interested only in an acquisition - textbooks were too close to Amazon's core business to justify a minority investment, Johnson remembers being told. He agreed to let Amazon send a team to pore over his business plan. "They spent about nine hours in my office, going through every piece of the business," Johnson says. Then Johnson raised the issue of price. Amazon wanted to do a deal based on the $110 million valuation of the recently concluded round. But when Johnson made it clear that the acquisition price would need to be much higher, Amazon, he says, backed away.
"The markets were booming," he says. "There's no reason we couldn't have been worth a billion dollars. And we said, 'A hundred million versus a billion - that's a big difference.'" So Johnson turned down the Amazon overtures, closed his investment round, and began preparing for the IPO.
"We got the business moving really well," Johnson says. "We blew away all our projections." In spring 2000, Media Metrix reported that BigWords was the site most visited by 18- to 24-year-olds. And thanks to the company's "tell-a-friend" program, customer acquisition costs fell. "We were acquiring 20 percent of our customers for only $3.50 each. Our investors were ecstatic. We were doing $500,000 days - it couldn't have been better. We were on fire. We were ready to go."
After bringing Hackenberg on to work the brand in fall 1998, Johnson set out with Ziebelman to hire a bevy of old economy execs who could bring experience and polish to the company. "What we did was fairly innovative," says Ziebelman. "It was the first peer-to-peer management system." Translation: Everyone would report to Johnson, but at least in theory the executives would enjoy an unusual degree of autonomy.
The first to sign on was former Wired Ventures executive Todd Sotkiewicz, who came on as VP of operations. Paul Skillen, a former Corel executive, became VP of engineering. Then Martin McClanan, who had helped get Premium Brands online, was hired as VP of product marketing and business development. In November 1999, Johnson landed a CFO with perhaps the most impressive resume of all: Richard McKinley, a Gap executive with 17 years of experience, including a stint as head of finance at the Old Navy division.
Yet, almost as soon as the team was assembled, the executives realized that they would have neither the power nor the autonomy they had been promised. Where Johnson saw an open structure, they saw chaos and micromanagement. "It was the least process-oriented organization that I've ever been involved with," says McClanan. "There was no clear chain of decisionmaking. Matt is a very skilled marketer and a skilled communicator, but when it came to fields that were outside his realm of experience, he had no way of responding, and he dismissed them with very little discussion."
Hackenberg - still indignant about his experiences - recalls an October 1999 meeting of the VPs headed by Johnson and Ziebelman, to address the management issues that had begun to crop up. Zeibelman asked everyone to air their concerns. All the VPs told Johnson he wasn't listening to his managers. But Johnson had the last word. His response, says Hackenberg: "'I see things a little differently.' He didn't even acknowledge the consensus!"
Bates clashed frequently with Johnson over his treatment of employees. "Matt can be inspiring, but when he yells and becomes apoplectic, you come to loggerheads over that stuff," Bates says. "I was that little guy who comes along behind the circus elephants and scoops up the huge turds. I had to go in afterward and say to people, 'Hey listen, I know Matt just made it so that you're gonna quit, but you can't quit, because we need you.'"
As soon as McKinley joined, he began trying to impose big-company discipline on the increasingly dysfunctional organization. His priorities included extracting reliable numbers out of the company's chaotic finances by setting up a formal financial system. "One of the really cool things in a situation like that is, if you have some experience, you can do four or five things to make the company better from the time you hit the door in the morning until the time you sit at your desk," McKinley says.
Even before McKinley's arrival, Johnson had begun meeting with bankers to discuss his IPO plans. But when McKinley joined BigWords, he realized that there was much to be done before that could happen. He had to stabilize the business. And yet the more he tried for reform, other executives say, the more he butted heads with Johnson.
McKinley refuses to detail the conversations he had with Johnson, but he alludes to a deepening disagreement. "In January I had started discussing the transition we needed to make out of startup mode into real mode, where you have to run on protein as opposed to adrenaline," McKinley says. "And we hadn't made that shift."
When it launched in the fall of 1998, BigWords had done $12,000 in business; the semester that started in January 1999 would bring in $500,000. By January 2000, the company was looking at $15 million in revenue for the season. McKinley's concerns about the company's ability to handle its rapidly expanding sales became part of a larger discussion about whether Johnson should continue as CEO. "Matt was caught in the classic dilemma of not wanting to control everything but wanting to be in the middle of it all, because that's what he started out to do," McKinley says.
In Johnson's eyes, McKinley's calls for a protein diet were fiscally irresponsible. "He wasn't nearly as conservative as I was, in terms of how we spent money," Johnson says. "I didn't think we needed to switch from QuickBooks. I didn't want to scale systems until they needed to scale."
When McKinley laid out a financial forecast that explained the consequences of Johnson's plans for simultaneous vertical and horizontal expansions (which included hiring an editorial team to produce original material and turn BigWords into a youth culture portal à la MTV), Johnson dismissed its conclusions as too pessimistic. So McKinley decided it was time to leave - after five months on the job. "I'm not saying either of us was right or wrong," McKinley says, "but it came down to judgment. Matt believed that people would pay more, or that we would get more visitors, or advertising would be more productive, or our margins would be higher, or cross-discounts would be deeper. It was not any single issue. It was a cumulative process, a lot of little things adding up to a larger impression. Bottom line: I didn't think the plan he was advocating could succeed."
"I don't know what his reasons were," Johnson says of McKinley's March exit, shrugging. "No one really knows. He was uncomfortable, I guess."
Shortly before McKinley left, the senior executives redoubled their call for Johnson to give up his title. Hackenberg arranged a meeting at MoMo's, a San Francisco power-lunch restaurant a few blocks from BigWords' South Park offices. In front of the other executives, he urged Johnson to relinquish his post. As Hackenberg recalls the moment, "Matt's view was that if we were going to take the company public, he would have to be the CEO." Johnson recalls the lunch differently. "I told them I was happy to bring in a new CEO, once we found the right person," he says. "It may have seemed like a big issue to them, but it was something that I and the board had already discussed."
Whether through intent or happenstance, the disorganization at the company worked in Johnson's favor. While BigWords talked to headhunting firm Spencer Stuart about recruiting a president or a CEO, insiders say, the agency was never hired to do the search. When BigWords folded, Johnson still had his title.
In March, as Nasdaq began its downward spiral, BigWords pulled the plug on its IPO. In June, the company closed its fourth round of financing, the one that had begun as a pre-IPO mezzanine round involving NBC and WPP. But the precipitous declines on Wall Street marked the beginning of the BigWords spinout. Like many other etailers, BigWords spent its financing as fast as it could, in a mad quest for growth. As a result, it was always in danger of running out of cash, and Johnson had become used to dancing on the brink of dissolution. But as the public market declines continued through the fall of 2000, the profits quickly became more important than growth. "The market kind of blindsided us," Johnson says.
In a last-ditch effort, Johnson revived talks with potential buyers, among them Amazon. In the late fall, he made several trips to New York, where he met with Barnes & Noble CEO Leonard Riggio about a deal that never came to fruition. On October 29, the BigWords board of directors voted to file for bankruptcy.
BigWords executives have since scattered to the wind. McKinley recently became CFO of the powerhouse Silicon Valley law firm Wilson Sonsini Goodrich & Rosati; Hackenberg is consulting. McClanan is now CEO of online gift vendor RedEnvelope. In December, Sherwood and Greer were planning the launch of a consultancy startup, while Bates was headed for a surfing vacation in Australia. I ask the former colleagues - with their own futures somewhat uncertain - what they see in the cards for Johnson.
"Matt has three of the four skill sets an ecommerce startup CEO needs," Hackenberg says. "He's a savvy financial guy - not about financial management, but about deals and valuations. He's technologically sound, and he's one of the most intuitive marketers I've come across. But his leadership skills, his communication skills, his management skills need a lot of work. But what do you expect? He's 25! If I were Matt, I'd go back to school. But he probably won't do that."
McClanan has a slightly different take. "I think Matt belongs at a software company," he says. "Something that's relative to music or athletics - something he cares about. He's a brilliant kid with a huge number of neurons to focus on making things happen. Hopefully, the learning process will allow him to realize that most people are more process-oriented."
Johnson says he hasn't made up his mind, but several people have already approached with offers. He has lined up a week's worth of appointments in New York after he returns from Bali. San Francisco has never been his favorite city, he says - it's too dirty. New York or even Toronto might be where he'll end up in the future. Besides, he got what he wanted out of Silicon Valley: experience. "It was an opportunity to learn all aspects of business that very seldom comes along," Johnson says. "I'm really grateful that I had the opportunity."
Rare though such an experience may be, it's eerily similar to what his live-in fiancée, Petopia founder Andrea Reisman, has been through. The two Canadians had their VC phases and subsequent investment rounds nearly simultaneously; they shared some investors. They even failed at the same time. Petopia will likely remain in business as the Web site for one of its investors, Petco, but its days as an independent operation appear numbered; in October, it laid off 60 percent of its staff.
Shortly before his trip to the South Seas, Johnson and I meet for one last time at his apartment; we drive in his Mercedes to a nearby coffee shop. He's eager to discuss the book he and Reisman are thinking about writing - a business title that would offer future entrepreneurs an inside view of the startup experience. "We went through the fundraising process together, and the going-public process together," Johnson says. "And now, unfortunately, a little bit of the windup process together." They haven't started writing, but it's never too early to think about a catchy title - something like BigWords - something that might appeal to college students. Maybe The Real World MBA. Yeah, that might do it.
