May 13, 2002 4:00 AM PDT

Even Paul Allen hits investing headwinds

Billionaire technocrat Paul Allen wants to build companies that promote his vision of a "wired world," but the sour economy has pulled the plug on many of his investments.

Several of the Microsoft co-founder's high-profile ventures have folded or declared bankruptcy during the past two years, including Metricom and Mercata. Others, such as Charter Communications and Residential Communications Network (RCN), have cost Allen millions of dollars as the stock prices declined precipitously.

The failures have caused some investors to question the trend-spotting and moneymaking abilities of Allen, who started Seattle-based venture capital firm Vulcan Ventures and ranked as one of the four richest people in the world in the late 1990s. They say Allen's days as the de facto soothsayer of technology investing could be numbered.

"Investors follow Paul Allen the same way people might follow Bill Gates," said Tim McAdams, president of Pacific Online Trading in San Jose, Calif. "If Bill Gates walks into a Denny's restaurant and orders a Grand Slam (breakfast), everyone in the restaurant orders a Grand Slam. But it doesn't mean it's necessarily any good."

Granted, Vulcan Ventures' ability to fund sustainable businesses isn't necessarily any worse than those of many Silicon Valley venture firms, whose dot-com disasters range from Kleiner Perkins Caufield & Byers-backed Excite@Home to Hummer Winblad Venture Partners-backed Pets.com.

In addition, Allen has continued to bring in money on many investments, although it's difficult to calculate a precise profit for any of the privately held venture firm's holdings. Last week, Allen sold nearly 20 million shares in USA Networks for $568.6 million, or $28.50 each--substantially more than the average price he paid for his stake.

Two years of trouble
But the past two years have been unarguably difficult, with no end to the struggles for Allen's investments. Vulcan-owned TechTV announced last month that it cut 50 people in the privately held company's latest round of layoffs.

Other recent blemishes include:

• Cable TV operator Charter Communications, Allen's largest investment, which has received at least $12 billion, has burned cash and assumed massive amounts of debt. Allen's 55.2 percent stake in Charter is worth about $2.9 billion.

• Allen's $1.65 billion investment in RCN in early 2000 is worth roughly $56.2 million--a 97 percent decline.

• Drugstore.com received a $40 million investment from Vulcan, but today that investment would be worth about $6.2 million.

• Online group buying site Mercata, which received a $27.4 million investment from Allen, closed its doors in January 2001.

• Wireless Internet service provider Metricom, which received more than $60 million in investments from Vulcan, filed for bankruptcy last July.

• Interval Research, which in 1992 received more than $100 million in funding from Allen's Vulcan Ventures, announced plans to close its doors in April 2000, two years before the 10-year deal officially expired.

• Value America filed for bankruptcy three months after Vulcan and other investors plowed $30 million into it in 2000. Allen and other investors had originally invested $60 million in the e-commerce company.

• Online bookstore Fatbrain.com, which received $20 million from Vulcan, saw its stock price sink from $20 to $5 during the spring 2000 meltdown, forcing executives to unload the company to Barnes & Noble in September 2000.

Allen and Vulcan declined to comment about recent investments through a Vulcan representative.

But in an interview with CNET News.com in 2000, Bill Savoy, president of Vulcan, noted his portfolio couldn't possibly be immune to the market's malaise. He also said that Allen's motivations were not necessarily pegged to a company's financial success or to whether it beat market indexes, but relied rather on whether it fit Allen's dream of a wired world.

"The market doesn't impact my investment decisions in any shape or form," Savoy said at the time.

I invest, therefore I am?
Allen has said repeatedly over the past several years that he favors companies that help people link their computers through broadband connections. As part of that goal, he has dabbled since Vulcan's founding in 1986 in trends such as microprocessors, e-commerce and the notion of a personalized Web experience.

"There's no reason personalized information can't arrive at your TV, cellular telephone, or microwave oven for that matter," Allen says on his Web site. "Microprocessors embedded in objects and connected to networks open up a world of new opportunities--a world where information is easily customized for each user's needs."

Some people say that Allen's philosophical and social values--and his dream of a wired world--have long outweighed his financial concerns. They say piggyback investors would have been foolish to blindly follow his investments if they didn't share or at least understand his changing outlook.

"Paul has always been focused on doing neat things for consumers once they were all connected and, after a decade, you'd expect there would be some shifts," said a former executive who has worked with Allen. "There was the focus on Interactive TV, then the Internet, and then a combo of both."

But the growing number of albatrosses may be starting to strike notes of caution among individual investors. Investment experts warn that few tech gurus consistently make money on their investments.

James Cloonan, chairman of the American Association of Individual Investors, said investors should be particularly wary of companies founded by noteworthy people with star power--including Allen.

"Information from experts is a good starting point, but it's not a finishing point," Cloonan said.

 

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