The Madness of King George

"Listen to the technology," Carver Mead had counseled his disciple. And fiber optics seemed the perfect subject matter for the fervently ascetic Gilder. Photons and light waves, of course, are weightless and ephemeral, the very embodiment of a nonmaterial world. There's a cosmic perfection in a technology that can move libraries' worth of information around the globe at the speed of light.

"Listen to the technology" — it had proved an invaluable mantra as Gilder delved more deeply into the science of light and electromagnetic particles. By the mid—1990s, however, it was hard not to listen also to the sound of money.

The Gilder Technology Report wasn't Gilder's idea so much as it was a notion planted in his head by two money managers overseeing some of his financial planning. Late in 1995, Chuck Frank and David Minor proposed that the three go into business together. By that point Gilder was writing regularly for Forbes and its technology supplement, Forbes ASAP. (He also did occasional pieces for this magazine and is still a contributing writer.) Frank and Minor proposed that Gilder's writing be repackaged as research, which they in turn would sell to investment banks, but that idea proved a bust when almost no banks expressed interest. As an alternative, Gilder suggested a monthly newsletter. He contacted his friend Steve Forbes, and a deal was struck between Forbes Publishing and the newly formed Gilder Technology Group: Gilder would write the report; Forbes would handle the publishing, marketing, and distribution; and the two companies would split the proceeds.

The newsletter was launched in mid—1996 with an initial run of 8,000. The primary audience was networking techies drawn to its data—rich charts and, of course, to Gilder's unique and passionate take on new technologies. In the fall of 1997, about 350 people paid $4,000 apiece to attend his first Telecosm conference, a two—day affair at the Ritz—Carlton near Palm Springs, California. For Gilder that would've been enough. Even with a modest circulation of 10,000, the newsletter, which cost subscribers $295 a year, was netting millions of dollars in revenue, and the conference contributed hundreds of thousands more to the company coffers. He was also taking in around $50,000 per speech, a few times a month. He had more than enough to keep himself busy: columns, articles, and another book that was several years overdue. A modestly successful business, however, wasn't good enough, especially given the overheated times and the ambitions of at least one of his partners.

Inside Gilder's circle, people refer to it simply as "the list" — the companies Gilder has singled out as worthy of an investor's interest. Gilder says he can't recall exactly how it was decided that they'd include fewer charts so the list could run on the report's final page, but the impact of that decision is plain to him. "Ultimately, I was now publishing an investment newsletter," he says. In 1997, Rich Karlgaard, then the publisher of Forbes ASAP, wrote the first of several columns praising Gilder for his stock—picking prowess. "Nobody ... can spot a gigadollar sure thing in a queue of photons" like Gilder, wrote Karlgaard, who is now the publisher of Forbes. He included a toll—free number for potential subscribers but failed to reveal the magazine's stake in the enterprise he was touting.

Gilder hardly played the hapless bystander. He began slipping stock tips into his articles. In one for Forbes in 1999, for instance, he advised those wanting to "make a killing over the next five years" to buy shares in either Globalstar ("a supreme telecosmic play") or the Loral Corp. (Globalstar declared bankruptcy this past February, and shares in Loral are down 88 percent since Gilder's recommendation.) In another piece, published in 1997, Gilder suggested that readers short Microsoft. (An investor who took Gilder's advice and shorted $10,000 of Microsoft stock would have lost as much as $25,000, depending on when he or she decided to sell.) Gilder also gushed over the stock market potential of a litany of companies that have either gone bankrupt or are trading at a fraction of their 1999 share price.

Gilder's list performed well in 1998, but his portfolio's 1999 performance was unreal. "I had six of the top nine stocks on the S&P, and four of the top eight on the Nasdaq," he boasts. A Karlgaard column, written just as the Nasdaq was in the early paroxysms of its great fall, noted that Gilder's basket of stock picks had racked up ("Is your blood pressure in check?") a 247 percent return in the prior 10 months. "Grow rich on the coming technology revolution," blared the promotional materials Forbes Publishing mailed out soliciting subscriptions to Gilder's newsletter. At its apogee, at the end of 2000, it had more than 70,000 paying subscribers, representing $20 million in revenue.

The Gilder Technology Report represented only one, albeit large, piece of the growing empire. Gilder started hiring people to write additional newsletters on niche topics such as online storage, and the annual Telecosm conference gave birth to several regional Telecosms. The company also added a series of investment conferences to the calendar — six in 2000. Each brought in another million dollars, according to Gilder. He moved his burgeoning company into an 8,000—square—foot office in Great Barrington that had taken the better part of a year to refurbish in order to accommodate a staff of two dozen.

Meanwhile, Gilder's partners were anything but satisfied. When Frank proposed a hedge fund, Gilder said no, despite the enormous fees such an enterprise would have earned investing money on behalf of rich individuals; he felt it would ensnare them in too many conflicts of interest. Similarly, he said no to a Telecosm venture fund and other lucrative—sounding schemes. "Because the company was started with the expectations of doing these things, my repulsion was seen, understandably, as a betrayal," says Gilder. (Minor generally confirmed Gilder's recollections; Frank did not respond to several messages left on his cell phone.)

So in March of 2000, at the market's peak, he bought out his partners and started over as Gilder Publishing LLC. "I thought we'd go public," he says. "Merrill Lynch and Hambrecht were competing to be underwriters. There was talk of a $200 million valuation. I thought we were rich. What was $8.5 million for me to buy out my partners?" At around that time, he also decided to spend $2.5 million on The American Spectator, a money—losing conservative political journal. "Effectively we let $11 million walk out the door at precisely the worst time, just as we were about to go off a cliff."

All the while, Gilder was feeling haunted by the immense responsibility. "In retrospect, it's obvious that I should've subtly said, 'Hey, things have gotten out of hand at JDS Uniphase, and it's not worth what you'd have to pay for it,'" he says. Each month, he thought about providing a warning to his subscribers, and he decided against it every time. He had witnessed firsthand what others had dubbed the "Gilder effect": the steep spike in a stock after he added that company to his list. It wasn't unheard of for the price of a stock to jump by more than 50 percent within an hour of a newsletter's release.

"If I had said, 'Hey, this is a top, you should all sell,' it would've been a cataclysmic event," he says. "I'd think about telling people that they should sell half their holdings, and each time I'd conclude that my subscribers would be enraged. I also wondered what I'd precipitate if I did it." Fully 50 percent of his readers had signed up for the report at what Gilder now calls the "hysterical peak" of the market. "Half of my subscribers would have been eternally grateful [for a warning], but the other half —†the new ones — would've been enraged because they had just come in," he says.

"It was quite terrifying. I really didn't know what to do."

In the end he did nothing. And soon enough, he had an entirely new set of distractions to fret over. "In the past, we'd sell out our investor conferences within two weeks," Gilder says. "But in 2001, we sent out the same literature and the same invitations, and five or seven people signed up." He lost the deposits that were placed to reserve hotel space for the gatherings. Newsletter renewal rates plummeted. A huge tax bill came due. By spring 2002, he'd laid off nearly half of his staff.

"You can be just fabulously flush one moment, and then the next, you can't make that last million—dollar payment to your partners, and there's suddenly a lien on your house," he says. Gilder, who had always cast the entrepreneur in the most flattering of light, had been granted a far more intimate, less appealing glimpse of life inside a startup.

Tags: gary rivlin, george gilder, technology, telecosm, wired magazine

    • Gary Rivlin
    • Long-time journalist Gary Rivlin is an Investigative Fund Fellow at The Nation Institute. A former New York Times reporter, he is the author of five books, including Fire on the Prairie: Chicago's Harold Washington and the Politics of Race. That book that prompted the late Studs Terkel to compare him to I.F. S...

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