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STUMBLE---High-Profile Failures Often Impede
Road to Success
by HANS IBOLD
5/12/01
In literary
circles, tragedy is defined by the fall of the great and powerful.
And while the fall of some of LA's richest, most powerful and most
talented business leaders may not have reached tragic proportions,
several individuals have nevertheless descended from once-lofty
perches in remarkable ways.
"What is at trial here is the inevitability of success,"
said Rohit Shukla, CEO of the L.A. Regional Technology Alliance.
"There's really no such thing. Holding on to success is really
a story that happens more rarely than you would imagine."
For some, like Idealab’s Bill Gross and eToys Inc.’s
Toby Lenk, the fall is seen as simply a stumble along the inevitable
(albeit long) road to success. For others, like EarthLink Networks
co-founder Reed Slatkin, it may just be the end of the road.
Slatkin, the one-time investors’ darling, was accused this
month by the Securities and Exchange Commission of having operated
a fraudulent investment scheme since 1985. Investors have filed
lawsuits that accuse him of fraud for failing to return $35 million
of their money, and FBI and IRS agents raided his Goleta, Calif.
office.
Slatkin helped finance Sky Dayton in his creation of EarthLink,
now the second largest Internet service provider in the country,
building a stake in the company that at one time was worth more
than $122 million.
It is alleged that Slatkin was managing $230 million for more than
500 investors through purported securities-trading accounts in Switzerland,
according to SEC filings. The SEC has also alleged that Slatkin
misappropriated investors money, "in a Ponzi-like fashion."
Slatkin resigned from EarthLink's board in late April and filed
for Chapter 11 bankruptcy protection, listing debts exceeding $100
million. The SEC said it found less than $30 million in Slatkin’s
brokerage accounts.
While it is perhaps not surprising that a fortune based on an Internet
business has disappeared in the last year, these circumstances were
extraordinary even by dot-com accounting.
More typical of the lost fortunes was the implosion of Lenk's eToys
and the retrenchment of Gross' Idealab.
On the comeback trail
"It happens in every single economic era," Shukla said.
"You have people like Gross and Lenk who were out there earlier
than everybody else, and who fall harder than anybody else. It's
not necessarily a reflection of the individual."
Lenk and Gross, neither of whom was available for comment last week,
aren't being counted out for good.
Lenk, a former Walt Disney Co. executive, founded eToys in 1997,
grew the pioneering e-commerce site rapidly and was worth about
$325 million less than a year ago. By the time he shut down the
Web site this spring, he had lost it all. The company, which filed
for Chapter 11 bankruptcy protection in March, once bragged a market
valuation of $10 billion. Now it hasn’t been able to liquidate
enough assets to pay off its $285 million in debts.
Lenk, who is just 41, has been keeping a low profile since shutting
down eToys a few months ago.
Frank Han, eToys' first employee and its former senior vice president
for product development, was mum on Lenk's whereabouts and plans,
but said his former colleague is no longer dealing with creditors
or asset sales and is working on a new project.
At least some investors are bullish on Lenk's future.
"People like Lenk come back with a passion, a skill set, a
Rolodex and intellectual capital gained through pain," said
Kevin Wall, a partner with Shelter Capital Partners. "That
helps build strong companies, and they become wealthy as a result.
You know they're going to come back. They've got a lot to prove."
Bill Gross helped hatch eToys through Idealab and was an even greater
dot-com celebrity than Lenk.
Widely credited with creating the e-commerce incubator concept,
Gross raised a whopping $1 billion in private financing in January
2000. The paper billionaire even lured General Electric Co.'s uber-CEO
Jack Welch to the Idealab board.
"Gross is - no question - a visionary and a pioneer,"
Shukla said. "To some extent, he was a victim of the times."
Like Lenk, Gross made the mistake of expanding Idealab too quickly.
He blew through $800 million in eight months on some dubious ventures,
many of which have already shut down.
Gross remains undeterred. His company has slashed its monthly cash-burn
rate from $10 million to $2.5 million and has cut its bloated staff
from 250 to about 100, focusing on a new batch of companies.
Achieving persistent wealth
Whether Lenk and Gross ultimately end up on the list of richest
Angelenos is dependent largely on the commercial viability of their
ideas, of which there is apparently no shortage.
"It depends on the extent to which they can reinvent themselves
and learn from their failures," Shukla said. "It certainly
isn't clear that they will join the ranks of the forever-rich, like
(Eli) Broad, (Ron) Burkle or (Alfred) Mann, who have been able to
endure twists and turns and at each turn adapt and redirect."
If Lenk and Gross - and even Slatkin - are looking for role models
in recovery, they need not look further than Santa Monica.
That's where former Wall Street financier and convicted felon Michael
Milken has set up shop.
Once worth more than $1 billion, which he made off the high-yield
junk bonds he pioneered, Milken was convicted of securities fraud
in 1990 and served 22 months of a 10-year prison sentence. He was
banned for life from the securities business and paid close to $1
billion in fines, penalties, restitution to investors and civil
settlements.
Today, Milken rubs shoulders with august titans like Rupert Murdoch,
Ted Turner and Yahoo's Timothy Koogle. He has been honored by a
jury of his wealthiest peers.
His wealth is substantial, clocking in at about $800 million, and
his philanthropy, which predates his conviction, is acclaimed, especially
for its support of cancer research. While he failed in his recent
bid for a pardon from President Clinton, Milken is well on his way
to making a billion-dollar comeback.
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