A LOOK AT. . . The Gyrating Markets

By Jeff Osborn

Sunday, December 10, 2000; Page B03

Major declines in the stock market since March have had an appalling impact on the nearly 50 percent of U.S. households that own stocks. The market is going to have an even worse impact on the other 50 percent. Those people just don't realize it yet.

The past eight years have convinced most Americans that economic boom and rising stock prices are the natural state of affairs and that life will always be this way. I've certainly been happy riding the wave. As a vice president at a Northern Virginia start-up--UUNet, now the world's largest Internet service provider--I made a fortune when it went public in 1995, and another fortune when it was bought by an even larger company in 1996. Since then, I've spent my time as an "angel" investor--a sort of venture capitalist--putting up money to finance new companies run by people trying to do the same thing I did.

So don't get me wrong. I'm a big fan of booms. But this one is over.

Since March, I've lost tens of millions of dollars--on paper. Don't feel sorry for me; I have enough left. But I'm not keeping it in the stock market. Whenever one of my companies goes public or is purchased, I put my profit in bonds and real estate. It's not exactly hip, but at least I still have the money.

A year ago the Internet was better than oxygen, sliced bread or cheese. Investors were throwing money at any company that claimed to have a clue about an Internet anything. Now, even though prices are down, a lot of these people aren't selling; they're telling themselves, "This is all the damage we'll have to take. Tomorrow, or soon, the whole carnival ride will start up again." But the NASDAQ--where most of the high-flying Internet stocks are traded--has fallen much further than most analysts were forecasting even a month ago. I'm betting it still has a long way to drop.

Based on history, a financial bubble isn't done collapsing until all of the participants are terrified--until they've pulled out what little is left of their money and buried it in coffee cans in the backyard. I don't see terror yet, so stock prices are probably going to come down a lot more.

Why is this important to people who never got into the market at all? Because when Wall Street trashes the hotel room, the whole country pays the bill. When stock prices fall this much, it means companies can't raise cash by selling stock. And nobody wants their corporate bonds either; those are selling for a fraction of their original prices. Instead, companies have to borrow money from banks--and bankers are having a tough time, too, and getting more strict about loans.

When businesses can't afford to expand, they can't buy equipment. They can't hire more people. The people they would have bought equipment from can't hire more people. That means that there aren't as many new jobs to go around. America created millions of jobs in the past 10 years in a financial climate that allowed people to raise money to expand and buy. Those days are over, at least for a while.

I know they're over because of what just happened at Crosspoint Venture Partners. This is a huge venture capital firm in California; it raises money from institutional investors, looks for private companies to invest in, then tries to get them sold at a profit or go public in an initial public offering. Well, two weeks ago Crosspoint gave back a billion dollars it had raised from potential investors. Why? Because the people at Crosspoint don't think they can make a profit on it right now.

This is a really big deal in the venture capital world. It's unprecedented. It's like a crack addict saying "No, thank you" to another rock. Crosspoint's decision is a scary indicator of how little confidence smart investors have in the economy these days.

So the stock market is down, and the venture capitalists are gun-shy. The next thing I expect to see is rising unemployment as corporations downsize to try to reduce their costs and increase their profits. I know what this can mean because I'm 41 years old and I graduated from college in 1982, smack in the middle of a really nasty recession. Armed with a BA in economics from a great school, I had to move furniture for $4 an hour for almost a year while trying to get a job doing what I was trained for.

Anyone much younger than me has never had to look for work in a real recession. I know of a lot of recent college graduates getting $50K entry-level jobs at Internet-related companies. I find it amusing that people in their twenties think of employees at 7-Eleven as barely speaking English and unable to count change. When I was in my twenties, I knew a cashier at a 7-Eleven who had a PhD. That's what happens in a recession: The guy with an MBA ends up cleaning the Slurpee machine or driving a cab.

This is a very possible scenario in our near future. A lot of people don't see it coming. When it gets here, it's going to knock them out. Even if you didn't take advantage of all these NASDAQ ups and downs and dot-com millions, just by living in the United States you have had the good fortune to participate in a boom, a general increase in employment and wages and happiness and all that other great stuff that the Clinton-Gore-Greenspan administration has brought you. You are going to find that the economy is going to slow down all around you and this is going to have an effect on you and everyone you know.

Listen: I'm sitting here in my very nice house in the Florida Keys. Outside my window I can see a gardener, a recent immigrant from Mexico. I'm pretty sure he doesn't own a single share of stock. But when enough people like me lose enough money, we stop hiring gardeners. And as the stock market nosedives, people like me may just end up with smaller nest eggs--but that gardener will have four kids and no job. As usual, the little guys who benefited least from the boom will suffer most from the bust.

So don't feel smug or secure just because you didn't take a ride on the economic bubble. And if you did go to work in some New Economy dot com and you've lost your job, or if you made millions on the NASDAQ and you no longer have them--well, consider it an education. I had to go through a personal bankruptcy on my first start-up before I made millions on UUNet. I think that the first experience was necessary for me to have the second. So to you, congratulations: You're halfway there. It should be an interesting couple of years.

Jeff Osborn is the owner of Osborn Capital, a venture capital firm with offices in Virginia, Massachusetts and Florida.