My Days and Nights at an Internet Goliath


By J. David Kuo

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In the tradition of Liar’s Poker and Barbarians at the Gate, dot.bomb is a gripping insider’s account of e-business gone berserk — the unforgettable story of the rise and crash of a major Internet startup.



Copyright © 2001 by J. David Kuo

All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review.

AUTHOR'S NOTE: The reconstruction of critical events and dialogue has been based on extensive interviews, news reports, document research, and my personal experience as senior vice president of communications at Value America. Only the name of Greg Dorn has been changed.

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First eBook Edition: October 2009

ISBN: 978-0-316-08553-3


Dream Weaving

The twin-engine puddle jumper circled once above the single-strip airfield, turned its nose down, and dove for the ground below. In seat 3A, Craig Winn gazed out the window at the rich green carpet of maple trees undulating into the distance of the Shenandoah Valley. Seconds later the familiar thump, thump of landing gear meeting runway welcomed the little plane's passengers to Charlottesville, Virginia. It was Independence Day 1996. Craig Winn was arriving at not only his new home but also the new home of his newborn Internet retailer, Value America.

The dense heat and humidity of Virginian summer life socked Winn as he got off the plane. He'd left 70-degree temperatures that morning when he said good-bye to his recently former home — a multimillion-dollar estate in Palos Verdes, California, sitting atop perfectly manicured grounds overlooking the Pacific. Now he was panting and sweating as he gathered his bags from inside the three-gate terminal, looking for the familiar fair-skinned round face of his sandy-haired comrade in computer code, Joe Page.

Each man had something the other needed. Page had a car; Winn didn't. Winn had a home; Page didn't. Winn was therefore confident that Joe would be there to give him a ride, but he wasn't too confident about how Page would react to what he was about to tell him: The moving vans were days away. They were going to have to stop at Wal-Mart to buy camping mattresses, sleeping bags, towels, and kitchen utensils for Winn's vacant McMansion in the Glenmore section of Charlottesville.

Curbside, Page leaned against his old black Jeep and waved to Winn.

"Man, I'm sure glad I've got a real bed to sleep in tonight," Page, who had driven out from California, said with genuine relief. "The Jeep hasn't been too comfortable!"

Winn tacked on a big, impish smile and shrugged his shoulders dramatically. He did that at "gotcha" moments like these.

Page, who had been working with Winn on Value America's early programming for several months, knew that look. "What?" he said with alarm.

Winn explained. Page listened, cranked the wheel hard to the left, and headed for the shopping center. The two men plowed through Wal-Mart getting the bare necessities for Winn's house and also for the office they would occupy the next day.

After a night of camping in Winn's new home, the two men headed for State Farm Road and the fine offices of Commonwealth Clinical Systems. Double-fisting bottles of Formula 409, they marched through the front door, climbed up the center stairs and then one more flight of stairs to greet Value America's new world headquarters — an attic full of wires, cables, dirt, strewn files, and upended furniture, all sitting on a carpet Winn preferred to think of as rich burgundy, but everyone else thought was blood-red.

For the next six hours Winn and Page wiped down every square inch of the discarded furniture that would be theirs and the 500-square-foot space that would serve as the office for them and three other men currently inbound from California. As Winn and Page wiped and sneezed and wheezed and vainly tried to open windows to get fresh air into the space, they talked excitedly about the future — about Value America and about how it was going to revolutionize retail, creating a "living store" that would be the "marketplace for the new millennium."

In mid-1996, Winn's Value America vision was arguably the most ambitious Internet retailing vision in existence. While other Internet retailers of the day were building online specialty shops selling books, CDs, and zithers, Winn's goal was not just to sell a lot of one kind of stuff or another. He wanted to use the Internet to revolutionize every facet of retail, creating a one-stop Internet shopping site of unparalleled selection, product information, and efficiency. It would be for the Internet age what Harrods was for the entire British Empire at its height: the shopping source for all things. Winn knew it was an inspired — and possibly psychotically lucrative — vision.

The mid-'90s were an age that no one really knew, but many were beginning to suspect, would be an Age. The Internet and the World Wide Web were without definition but full of wild expectations. While few Yahoo!'d, America Online was just a dorky company in a bland Virginia suburb, and the expression sounded odd in conversation, there was an expectant sense that those were just temporary realities — that the Internet was going to change the world, and the retail conducted over it would be the engine. What that meant wasn't exactly clear. Only the visionaries could describe the future for everyone else. And few revealed the pixels of the unknown future as well as the brilliant salesman with Ted Koppel–like brown hair, darting brown eyes, slightly doughy cheeks, pudgy hands, and a self-illuminating grin.

Craig Winn had been waiting for a revolution like this almost his whole life. He'd predicted it in the early 1980s, while a young manufacturer's representative in southern California selling household goods. Someday, he'd said, technology would change retail forever. It was, he argued, a historical inevitability that retail underwent a revolution every decade or so. During the Eisenhower era in the 1950s, department stores took off, replacing mom-and-pop shops. Then the real '60s revolution came, in the form of discount chains, which were amazingly efficient retail outlets. In the '70s, enclosed malls gave consumers unprecedented convenience, and they reigned supreme. The warehouse concept popularized by Price Club and Wal-Mart took over in the 1980s, again by selling quality goods en masse at a value, effectively transforming warehouses into stores and collapsing costs.

At some point in the future, Craig Winn had prophesied in those years before the Internet, retail would be dominated by technology, obviating the need for traditional retail stores or warehouses. Someday, Winn knew, there would be a single device that combined the information-conveying potential of television and the communication-efficiency of the telephone, allowing consumers to shop for everything from the comfort of their homes or their offices and manufacturers to ship the products directly to those consumers. This device and the retail world it ushered in would be the ultimate retail solution.

Winn knew his life had been created to make this inspired vision real. His father had been a manufacturer's representative with an office in their southern California home — right off the kitchen. Dad used to bring home new products, put them on the couch, and ask his son to critique them. After graduating from the University of Southern California in 1977 and spending a single day in law school (it occurred to him in the middle of the first day of classes that he'd never met a lawyer he really liked, and therefore he probably shouldn't become one), Craig Winn started selling for a living. His father was still a manufacturer's rep, and he gave his son the chance to call on his worst accounts. The stores to which Craig tried to sell his plastic cups, fly swatters, smoke alarms, toaster ovens, and other housewares had either already turned down the Winn Company or demanded under the table payoffs to take products. They weren't exactly blue-chip prospects. After those stores rejected him in his first week of work, Craig had to find new sales targets. By combining a list of all the retail stores that sold housewares and a very good map, Winn plotted stores by geographic location and started making cold calls. His efficiency didn't lead directly to success. His first year, he worked eighty-hour weeks, got rejected more than five hundred times, sold two accounts, and made $12,000.

The next year, Craig Winn earned nearly $300,000. The year after that, he made $500,000. The sudden success wasn't the result of better products, a dramatically better economy, or being given much better accounts. The difference was Winn. He'd done what he discovered he liked to do best — invent an entirely new way of doing business.

Winn's father was the consummate salesman — gregarious, a back slapper, smooth, and polished. Craig Winn was shy. He couldn't sell simply by the force of his personality or through the strength of lifetime relationships. So he decided he wasn't going to sell. Instead, he was going to present people with what he knew they wanted. This could work because, after his failed first year, Winn realized he had an otherworldly intuition about what other people needed and wanted. That insight, combined with his own painstaking research into the products he offered for sale and the stores he wanted to buy his products, made it exceptionally easy for Winn to craft his presentations — he stopped using the term sales calls — to his audience. And it worked. Between 1977 and 1981, Craig Winn helped the Winn Company grow to a $40-million-a-year business. A nice life accompanied his business success — a house on the Pacific coast, a sailboat, country clubs, nice cars, a family. In 1983, the younger Winn bought out the older Winn and grew the company even faster. But even as he became a better and better rep, learning more and more about the products he represented, the brands that paid his commissions, and the retail market in general, he was restless for the next thing — the new arena he could revolutionize.

In mid-1986 he found his next something — lighting. In a casual conversation with two Price Club buyers, he discovered retailers' frustrations with their lighting suppliers. Their complaints, he was told, were that prices were prohibitively high and quality was embarrassingly low. In addition, lighting products were merchandised poorly — their containers were bad, their packaging was bad, their displays were bad.

Within weeks, Winn had $1 million in initial funding for Dynasty Lighting Classics, a company that would create and sell high-quality lighting merchandise for less. Instead of plain brown boxes, Dynasty's boxes would be white, with four-color pictures and lots of information about the lamps on the outside. There would be in-store displays highlighting his products. And in this business such things were revolutionary.

Dynasty's fundamental business insight centered on Winn's favorite word, value. There were, he believed, two kinds of value. First was what he called perceived value. That is what causes a consumer to buy a product in the first place. It is what the consumer thinks he or she is buying. Perceived value is enhanced by packaging and display and underscored by a reasonable price. If consumers think they are getting a great product and are surprised by the low price, they are going to be happy consumers. The second type of value was actual value. There were, he knew, a lot of things initially transparent to consumers that, in fact, were very important to them in the long run. Actual value was about creating the best possible product, engendering the best possible feelings from consumers who used that product, and believing that positive feeling would translate into future sales.

All of Winn's innovations — packaging, easy access to information, high-quality products at reasonable prices — were about driving value. And value paid him back. Dynasty's sales rocketed to $30 million by the end of the second year. By 1989, sales hit $65 million.

In the early 1990s, with the help of Morgan Stanley and Salomon Brothers, Dynasty went public at $12 a share and started expanding. The stock went up 44 percent right after the offering. Winn then expanded into Christmas lights, wall art, mirrors, and ceiling fans. But the expansion ate up money, and sales were slow, and by early 1995, Winn was discovering all the things about retail that manufacturers hated. Increasingly, his products were displayed only by massive retailers like Wal-Mart. Those retailers, he felt, tried to rape manufacturers with burdensome rules and regulations about how they could ship and label products, take returns, and the like. It became clear to Winn after one particularly financially devastating run-in with Wal-Mart that it was time for him to leave the manufacturing business.

So in November 1995, after bringing in others to run the now foundering Dynasty, Winn left the company and looked to a future with a lot of questions. He was in his early forties, with millions of dollars, a beautiful wife, and two great little boys. But beyond that, life was not promising. Unless the world somehow changed, he was done with business forever. Value, he now believed, was a lost business art.

Then a former lighting colleague called him. Like most people in the housewares industry from the '80s to the '90s, Linda Stevens had heard Craig's retail revolution pitch. She wanted Winn to help her build something she called an Internet store. It was, she assured him, his ultimate retail vision. Winn listened as she described how new companies were popping up to sell things "online" over the "World Wide Web."

Winn hung up the phone, spun around in his chair once, and looked out at the Pacific Ocean stretched out before his home office. Maybe, he thought, the world had changed.

Thus, in late 1995, Winn dug into what little Internet research existed and began exploring whether the Internet was the missing link for his retail revolution. The Internet, he learned, had the potential to wire and interconnect the entire world. It was already a communications device and an entertainment device, but its potential as a retail device was untapped.

Winn found that Jupiter Communications, one of the world's first Internet research firms, forecast online consumer sales would grow from about $90 million in 1995 to more than $4 billion by 2000. In 1995, about half of all Internet sales were from airline tickets. Another 10 percent came from a pair of fairly successful online grocery delivery companies — Peapod, based in Chicago, and Harvest America, in Las Vegas. The rest of the market was fragmented into stores where shoppers could buy clothes, shoes, CDs, books, pens, pizzas, and Amish quilts. The online Amish quilt shop was especially delicious — a technophobic religious sect from central Pennsylvania selling their wares online. It was precisely this kind of incongruity that was getting people hot and bothered when they contemplated the Internet's future.

But Winn saw nothing on the Internet retail landscape that would dominate the retail market. Sure, there were Internet malls. There was I-mall. Internet Gallery. Internet Plaza. Internet Shopping Galleria. InterShop. Net Mart. Net-Galleria. There was NetMall. Web Mall. Webmart. CyberMall. eMall. eShop. Each grouped together smaller Internet shopping sites, the places that sold the Amish quilts and zithers and things. But to Winn the idea of an Internet mall was madness. It was clear to him that no one would succeed in Internet retail by taking traditional models and putting them online. A new medium required something totally and completely new, something no one had ever done before. Something stunningly radical. Winn knew the next retail revolution had arrived. He also knew he was just the revolutionary to lead it. So, tentatively at first and rabidly thereafter, Craig A. Winn set about putting on paper the perfect company. There could be only one name for it: Value America.

It would be the perfect store, the ultimate one-stop shopping destination — the one online spot where people could furnish a house, buy a car, get groceries, find a dress, do Christmas shopping, make vacation plans, equip an office, or die. Well, not die exactly, but get the stuff necessary to die — caskets, flowers, a nice suit.

It would offer not only unparalleled selection but also state-of-the-art multimedia product demonstrations, so that consumers could virtually touch the products, learning more about them than they could in any "normal" store. There would be an animated personal shopper on the site to guide people. There would be voice recognition, rendering a keyboard and mouse moot. Purchases would be delivered straight to consumers' doors. It would be perfect.

As much as Value America would appeal to consumers, however, Winn's real targets were manufacturers. From all his business experience Winn knew exactly the problems they faced. The warehouse superstores had squeezed them dry, forcing them to sell quality products too cheaply. All the manufacturers Winn knew wanted a new place to sell their products. Second, they wanted more consumer feedback. Third, they wanted to be able to market their products on the basis of quality, not just price, and increase the perceived value of their products. Finally, they wanted to operate more efficiently. Winn's Value America would meet every one of their needs. It would be a vast new retail outlet. It would gather information about consumers' needs and behavior and share that information with manufacturers. If consumers saw that for a few dollars more they could get something far superior, they would pay extra for it. It would make selling much more efficient. It was the return of value.

Perfection came at a price. In return for giving the manufacturers everything they needed, Winn had two requests. First, the manufacturers had to pay for the multimedia product presentations featuring their products. That wouldn't be too hard, Winn figured, because they could highlight the merits of their products rather than just the prices. Second, the manufacturers had to ship directly to the consumers. Value America would pay for the shipping but never hold any inventory at all. With no inventory, Value America would never concern itself with warehouses, shipping, insurance, theft, damage, returns, or anything else. Bottom line? Whereas inventory ate up 10 to 20 percent of revenue in overhead, Winn's store would enjoy overhead in the low single digits. Value America was going to charge less and make more than anyone else.

The challenge, he knew, was how to get there first. Within a week Winn had completed a 250-page business plan. Shortly thereafter, he picked up the phone and dialed his buddy Rex Scatena in his San Francisco law office. "Rex," Winn said in a breathless monologue, "you've been telling me for three years to help you get out of your boring law practice. Well, I've got a proposal for you. We're going to start a technology company. I know you don't know a thing about technology. On top of that, it is going to be a retail company. I know you don't know a thing about retail — in fact, I'm not sure you shop … except for Ferraris … we won't have those … well, at least not right away. It can't be based in California. I refuse to base anything in California. It will, probably, be based somewhere in the South. You don't like the South. You won't make a salary for at least the first two years. In fact, not only won't you make any money, you'll actually be dropping several hundred thousand of your own dollars on the deal. Oh, and by the way, we may not make it."

Rex Scatena was no dummy. He was an accomplished lawyer. He lived in San Francisco. He'd heard the rumors about Internet riches. He'd even watched as a company called Netscape had gone public in August. The stock went up 150 percent its first day of trading. If his old buddy was onto something hot in the Internet space, Scatena knew this could be a once-in-a-lifetime deal. He also knew that if there was anyone in the world who could sell a story, it was his buddy Craig Winn. He said immediately, "I'm in."

With one phone call, Craig Winn had his founding partner and president. Next in were two other friends, Ken Power and Joe Page, to help with creative design and technology. Winn and Scatena each plopped down $150,000 to get the company started. Winn owned about 70 percent, Scatena about 25 percent, and Power and Page each shared a few percent. Within months they had all relocated to the sleepy little town Thomas Jefferson had called home — Charlottesville, Virginia.

By Labor Day 1996 — two months after the exodus from southern California — the Value America team was up and running. Much was good. Winn had a great CD-ROM to present his vision, early support from a few key housewares brands, a powerful business strategy, and the programmed beginnings of an online storefront. One thing was bad — there was nothing behind the store. There was no technology infrastructure. None of the Web companies of the day — Netscape, Oracle, Broadvision, or Open Market — had anything to support Winn's inventoryless retail solution in the manner Winn wanted.

As much as he wished otherwise, Craig knew he and his Value America team would have to write the code for the entire store — or find something else to do in rural Virginia. Winn gathered his team, told them the facts, and let them make the decision. They looked at each other, wrinkled their noses a bit, shrugged their shoulders, and said, "OK, let's write the code!" That several of them didn't exactly know how wasn't too important.

Writing code didn't mean just deciding what the store was going to look like. First it meant writing the software they would eventually program to create the store. Then it meant writing the technological support structure to make the store run. They had to do it all. The upside was that they could use a commercial Microsoft program as a foundation for some of the work, but for the inventoryless system to succeed, they had to program everything consumers needed to complete an order: take credit-card information, provide digital receipts, route orders to the appropriate brand manufacturers, arrange for shipping — everything. In addition, the technology had to handle everything that could possibly go wrong: partial orders, back orders, mismatched orders, shipping delays … The list of problems, it seemed, was almost limitless. Programming and planning consumed their lives for the rest of 1996 and early 1997.

Almost every day at State Farm Road from September 1996 through spring 1997 began with a bunch of apples (Winn had heard they were power brain food) and ended with a gaggle of comatose men stumbling out of the cramped attic, hoping they had enough brainpower left to find their way home. In between the apples and the stumbling were blurry interludes of light and dark when Joe Page and a small techy team would "sling code" — write the store. Winn, eyes shut, leaned back in a chair, dictating every pixel of his vision to them. Winn described not only the Value America world; he drew from his retail memory to describe every scenario the code needed to address. Then all hands worked furiously to make it come to pass. Winn knew this was going to work — there was no other option. It was ironic to him, however, that the Internet he thought was his silver bullet the year before, when he wrote the plan, now was his Achilles heel.

In the momentary breaks they took during their days, the little team let themselves dream of the future. Craig tried to bolster the sometimes flagging crew by describing what it felt like to build a company from nothing, to sell part of it to the public, to watch the stock get traded, and to see your net worth fluctuate daily. It was a high. It was a rush. It was the businessman's Super Bowl. The other men sat intently listening, inspired by the man who saw the future they wanted. Then, full of adrenaline and excitement, they roared back to work.

As Value America was being built one line of code at a time, Craig's mind wandered to his other near-term challenge — getting more household brands into the store. His original plan called for a systematic rollout of key categories, beginning with items used most often by small businesses and home offices. That was the niche Sol Price exploited with Price Club and Fedmart and where Winn figured he needed to begin as well. But what Winn discovered in late 1996 was that getting computer, electronics, and office-supply manufacturers to pay him $15,000 to $50,000 a pop for online multimedia product demonstrations for a store that didn't exist was … challenging. The near universal response from everyone from Apple to Zenith was, "No." Many times, "Hell, no." Winn didn't believe he was wrong in his fundamental business proposition — manufacturers did want what Value America offered, hypothetically. They just had a hard time trusting that an anonymous company operating out of rural Virginia was their retail Messiah.

Winn knew he needed a big break. After diligent research he acquired his target — Hewlett-Packard. HP was the leading maker of home and small-business PCs, one of the most respected brands in the world and eager to increase its market share. Winn's meetings with low-level regional sales reps began in November 1996 and extended into winter and eventually spring 1997. His pitch was always the same: HP and Value America would be perfect partners. And HP's response was always the same: Possibly, but not right now. Winn closed every meeting by asking if there might be someone else in the HP family to whom he should speak.


On Sale
Oct 31, 2009
Page Count
320 pages
Back Bay Books