At its peak, Naveen Jain's InfoSpace was one of the most successful and profitable web-based businesses in the nationor so it would appear. But the rise and fall of InfoSpace represents an archetypal picture of the late 90s dot-com pandemonium, which saw record-setting profits followed by devastating collapse. The story of Naveen Jain & InfoSpace contains all of the intrigue, melodrama and betrayal that you would find on any nerve-wracking soap opera, but in this
case, it actually happened.
InfoSpace was founded in March 1996, by former Microsoft prodigy Naveen Jain. Beginning its journey with a mere 6 employees, the company built one of the earliest successful online yellow pages services, funded entirely through advertising. Web startups were still very much in their infancy at this point, exploring new revenue streams and experimenting with ways to succeed outside the brick-and-mortar business world. [continued below]....
Around this time, many startup companies were taking their businesses public, following a model set by Netscape Communications. On August 9, 1995, Netscape began selling its stock to the public, and by the end of the first day, the company was worth $2.2 billion. Despite having no profit margin, Netscape had figured out a way to procure obscene amounts of revenue over the course of a single trading day, and immediately, all of Cyberspace wanted a piece of the action. The Rise of InfoSpace
Following the example of Netscape and other savvy online businesses, Naveen Jain's InfoSpace
went public on December 15, 1998, less than three years after its formation. The company had raised $75 million in its initial offering, and was heralded as a new Microsoft by Wall Street analysts. Naveen Jain was referred to as a visionary, and the hype surrounding InfoSpace was so strong that even Microsoft co-founder Paul Allen invested hundreds of millions of dollars into the company.
By 2000, InfoSpace was the biggest online business in the Northwest, worth more than $31 billion dollars. Naveen Jain, the charismatic CEO, was himself worth more than $8 billion. InfoSpace was poised to become one of the worlds leading web businesses, or at least thats what we were meant to believe. As it turns out, much of what we thought we knew about InfoSpace was all just smoke and mirrors. InfoSpace Behind the Scenes
What was the secret behind the unprecedented success of InfoSpace? Wall Street is unique in that you need not be successful or profitable to make money in stocks. You just need to get the public on your side. For the publicly traded business, Wall Street success is about keeping up appearances, and InfoSpace did just that.
In 2000, InfoSpace reported $46 million in profits, and appeared to be on top of the world. But in fact, the company had lost $282 million. The Seattle Times conducted an in-depth investigation and discovered that InfoSpace had systematically deceived the public by engaging in dubious accounting practices and promoting artificially high revenues. Investigators combed through company emails, countless interviews and confidential court documents to uncover facts that would forever damage the reputation of one of Wall Streets favorite web properties. Seattle Times Findings
Among other things, the Seattle Times investigation found that InfoSpace officials knowingly concealed the fact that revenues were falling dramatically short of expectations. The company was able to deceive the public by reporting revenue from so-called lazy Susan deals, whereby officials invested in other firms which then gave back the same money. So technically, money was coming in, but it was their own money being recycled for accounting purposes.
Whats perhaps even more unsettling is how Wall Street analysts reportedly played along with the charade. According to the Seattle Times, top stock analysts praised the stock publicly while expressing grave concerns in private. And while investors continued to buy up as much stock as possible, company executives couldnt sell off their shares quickly enough, even skirting SEC trading restrictions to unload large blocks of personal stock. Naveen Jain's Aftermath
It didnt take long for word to spread about the unsavory antics of InfoSpace. In March of 2000, stock was worth $1,000 a share, but by June of 2002, it was worth a paltry $2.67. And the collapse of InfoSpace left a lot of victims in its wake. Paul Allen, the enthusiastic Microsoft co-founder, lost an estimated $400 million, while some smaller investors lost their entire fortunes.
For instance, the Times chronicled one investor named Bev Hess, a real estate agent who poured her entire $40,000 retirement savings into InfoSpace. After the companys collapse, her investment was worth only $1,450. "I
scrimped and saved for 42 years, and I feel that I have been duped out of my hard-earned money," she told the Times. Countless other investors were also impacted. Naveen Jain walked with billions of dollars. Where Did Naveen Jain's InfoSpace Go Wrong?
The question remains: Who is to blame for one of the biggest online con-jobs of all time? The Times investigation shows that many trails lead right back to the companys founder and former CEO, Naveen Jain
. Jain was reportedly obsessed with being more successful than Bill Gates, his former mentor, and relished a highly luxurious lifestyle that involved two yachts and an enormous waterfront home in affluent Medina, Washington. He even bought a piece of the Seattle Seahawks.
Jain has been described as charismatic, energetic, visionary, and driven, but his detractorsmany of them former employeeshave also described him as dishonest and ruthless. Two men have even come forward and accused Jain of threatening them with bodily harm, charges which Jain doesnt deny. At one point, he told reporters that he would have put a bullet in his own head if InfoSpace had not become a successful, publicly-traded company.
Did this obsession contribute to the corruption and ultimate demise of InfoSpace? Jain has gone on record as denying any wrongdoing and accusing other high-level officials of being responsible for misleading shareholders, which they achieved by insider trading and quietly unloading their stock. In December 2002, Jain was ousted as chairman and CEO by the board of directors.
InfoSpace after the Collapse
After being unceremoniously removed from InfoSpace, Naveen Jain went on to found Intelius, a background check and public records service, right across the street from the InfoSpace headquarters in Bellevue. InfoSpace continued under new leadership, and began acquiring new businesses in 2003.
InfoSpace, Inc. now operates under the name Blucora, with the NASDAQ ticker symbol BCOR. Over the past decade, the company has undergone many dramatic changes, and now functions as two separate Internet businesses. The InfoSpace brand continues to provide online search solutions, while the TaxACT brand provides online tax preparation services.
If there is one thing that we can take away from the InfoSpace journey, its that numbers do lie, and in the world of investing, hype does not equal assurance. So next time you see a stock that seems too good to be true, remember to buy in moderation. You never know whats happening behind the scenes.