February 21, 2002 — Last October, I praised an extraordinary book called Dot.Bomb, an entertaining chronicle of the rise and fall of Value America by J. David Kuo. At that time, I wished for more information about Value America’s technology, and a more detailed account of the pre-IPO days. Be careful what you wish for.

The rise and fall of Value America is again the subject of a new book, In the Company of Good and Evil, written and self-published by Ken Power and Craig Winn, two of the company’s co-founders. The book’s subtitle: “From Zero to Three Billion Dollars and Back Again – A True Story of Seduction and Betrayal.” This new book is awful.

This was the most hateful , angry book I’ve ever read. The authors despise almost everyone they encountered, and they are unforgiving and relentless as they vent their hatred through vindictive personal attacks, which are extreme but pale in comparison to the authors’ endless self-praise.

A dedicated reader might find some useful information in this book. In a few brief passages, the authors share genuine insight about the huge technical obstacles they faced, the incompetence of internet “experts,” and the absurdity of the fund-raising process. But it’s nearly impossible to separate those few useful passages from 580 pages of hateful distortions .

Oddly enough, the authors indict themselves with their own words. They viciously criticize the lies and schemes of the people they hired to run the company. Yet they actually admit that they lied and schemed themselves; “they started it,” if that counts.

The Color of Treason: The authors see only black and white; nothing is gray. The characters are all portrayed crisply as Good or Evil (literally). The company’s five “co-founders” are Good; almost everyone else is Evil. The founders were honest, honorable people; nearly everyone else was a lying, scheming hypocrite. The founders never had a bad idea, and their only mistake was in hiring and trusting the duplicitous Evil Ones, whom they actually compare (again and again) to Adolf Hitler. Value America has no corporate “shuffles” or “political infighting.” Instead, there are “mutinies” and “treachery.”

The authors have little respect, and much disdain, for women and minorities:

• Sometimes the cues are oblique: women “scheme” and have “catfights,” while men strategize and have disagreements. Women “drive fast cars” while men just happen to travel in Jaguars. Women are identified more often by first name than men.
• Several characters are introduced as “African-American” or “Jew,” as if this matters (clearly, it matters to the authors).
• Of course, after conspiciously noting the race and gender of several individuals, the authors dutifully recite that “Gender made no difference, nor did faith, color or orientation. If a qualified black Jewish lesbian had applied, she’d have been on the team.” (p. 109)

When the authors introduce a new character, they leave no doubt about whether the person was good or evil. Any mention of a character’s race or gender was usually a clue that the authors will soon portray that person as incompetent, dishonest, or immoral.

Another clue: the “Good Guys” are rarely described in detail, but the appearance and clothing of the Evil Ones are often described in detail:

• “Thin as a rail, hair shorter than most men’s, Glenda wore expensive clothes and drove fast cars.” (p. 407).
• “Starnes was tall, good looking, pleasant, and professional, but incapable of getting anything done.” (p. 268).

Any time Winn reports a hesitation before hiring someone, we immediately know that he was wrong to ignore his intuition: his trust will be rewarded by betrayal.

As I read passages in which the authors criticized others, I sometimes found that their words were equally applicable to the authors themselves:

• “It wasn’t that Golden was evil. He was just over-optimistic – completely, almost criminally, over-optimistic. He couldn’t help it.” (p. 64)
• “Sid was really good at counting unhatched chickens.” (p. 76)
• “Golden had a bad case of selective memory . . . . he often had trouble remembering the commitments he had made the day before.” (p. 80).

Saint Craig: According to Ken Power and Craig Winn, Craig Winn is nothing less than a saint. It is only the Triumph of Evil that keeps the honest and incorruptible businessman from his rightful place, on a pedestal far above lesser fools like Bill Gates and Jeff Bezos.

It is impossible to reconcile the fawning self-praise with the reckless and vicious conduct described in the same book.

Craig Winn is fair and generous to a fault (selling a $7 million stake in an early business for just $3.5 million “to make absolutely sure [the buyer] was getting a fair shake,” page 36). Winn is omniscient; he forsees every twist and turn. The humble leader “stands tall even when the rug is pulled out from under him.” His downfalls only occur because others break their word. Winn writes that his greatest weakness is that “Sometimes I trust the wrong people.”

Indeed, Saint Craig is protected by a guardian angel: “I’ve flown all over the world, traveled in over 120 countries, been in scores of airports, and caught thousands of flights. In all that time, I’ve only missed one. That one crashed.” (Winn missed the flight, “the first victim of aviation terrorists,” in Ethiopia, after “chasing down rumors about the twelfth tribe of Israel. They claimed to have the Ark of the Covenant there.” Pages 91- 92.)

The Business Plan: The book reveres Winn’s business plan for Value America, which apparently accurately included every detail of the business, with a far-reaching omniscience that astonished everyone who read it. “This can’t miss,” says Power. “He’s thought of everything” (p. 83).

“It’s the best business plan ever written,” according to countless prominent business leaders (including two of the company’s key investors, Microsoft co-founder Paul Allen and FedEx founder Fred Smith).

If only the company had followed the Plan, everything would have worked out, but instead the Evil Ones (whom, we are told, did not read the Plan) destroyed the company.

I expected the extraordinary Perfect Business Plan would be reproduced in full in the book, as an example for future generations of entrepreneurs. But inexplicably, only a few passages are quoted from the business plan, and from other “perfect” documents.

Apparently, access to the full text of these sacred scrolls is only granted to True Believers.

Craig Winn is a classic entrepreneur, who takes big chances. Winn takes credit for every risk that brings success — but when he takes big chances and loses, he blames others. The book is riddled with blame for everyone except Saint Craig and his loyal co-founders; the only mistake that Craig Winn ever made was when he was deceived into hiring the Evil Ones.

Time and again, Winn blames others for not honoring “handshake” deals, yet the law-school dropout never seems to get signed contracts. Indeed, it appears quite clear that Winn often announces that a deal is done long before negotiations have begun. (Count those chickens.) Most of his “announced” (proposed) deals were implausible, yet the authors argue for hundreds of pages that these ridiculous schemes would have saved the company.

After Winn’s hype and excesses are exposed, and after his Plan fails, his “house of cards” collapses. As the company falls into anarchy, the authors tag anyone who abandons Winn as a “Benedict Arnold” or simply as Evil. It is their fault, not Winn’s, that the company fails and jobs are lost.

Ken Power and Craig Winn convinced me with this book: When I read “Dot.Bomb,” I concluded that Value America’s founders and executives were greedy, but mostly incompetent fools. But the authors of ” In the Company of Good and Evil” have convinced me that I was wrong. I’ve now concluded that Craig Winn always knew that Value America would fail. This explains why he hired (and didn’t fire) “the Evil Ones.” He selected them as inept scapegoats to blame, when his pockets were filled with tens of millions of dollars of investors’ money after the company collapsed.

Winn and his co-founders aren’t upset that the Evil Ones destroyed the company — they are upset that their scam was cut short. The “scapegoats” may have simply stole Winn’s clever idea, co-opting the stock-fraud company briefly for their own personal gain.

Everyone Else is Incompetent : Anyone who questioned the Plan, or didn’t “drink the Kool-Aid” (that’s the phrase the authors use) and agree that Value America was a perfect business idea, is quickly dismissed as ignorant and clueless. Except for Value America’s five co-founders, almost nobody is competent, and nobody “gets it.” The superhuman co-founders could do anything, and others could do nothing right:

• “The job was simple, but they managed to screw it up. I bailed them out with some timely technical assistance….” (p. 59).
• “His new company would do this better than any ad agency.” (p. 65)
• Netscape’s e-commerce engineers “knew nothing about logistics, distribution, credit card processing, the integration of financial applications, or EDI. They knew even less about the product return process, what would motivate a consumer to buy, or what consumer brands needed or wanted.” When Saint Craig presented his “flow chart,” the Netscape engineers begged to copy it.
• According to the authors, the results were no better at BroadVision and Open Market. “Ironically, three years later, the founder of Open Market would come to us when he needed a robust e-commerce engine,” and eventually “would trust the solution we eventually built even more than their own.” (p. 106)
• Oracle offered their software for free if only Saint Craig would give them insight: “Winn’s unique qualifications were a gold mine whose riches they might tap.” (p. 106)
• When Value America’s programmers sought to learn about Microsoft’s new e-commerce software: “NobleStar’s certified experts were to tutor us on Merchant Server. However, [we] had learned so much . . . the teachers had become the students.” (p. 124)

The Business Model: Winn’s stated vision was that Value America would be a retailer with no inventory; manufacturers will ship their goods directly to the consumers. This won’t be a difficult transition for manufacturers, he says, because “The average retail [store] order is tiny,” with individual stores ordering small quantities of products every week to replenish stores; Winn claimed that the average wholesale order was already under $200.

“With computers, it ought to be just as easy to sell and ship to a person as it is to sell and ship to a store.” (pages 50-51). But “ought” is not the same as “is.” Hindsight shows:

• Shipping individual items to consumers is different from shipping case lots to retailers.
• Manufacturers who rely on sales to distributors and retail stores worry that they will lose that business if they also ship goods directly to compete with those stores (“channel conflict”).
• Manufacturers were also not prepared to accept and process individual product returns from consumers; retailers normally can return only defective or unopened goods.
• Most manufacturers were unable to electronically exchange data about orders, invoices, shipping records, and returns.
• Some manufacturers hold very little inventory, but instead ship case lots of imported goods directly from shipping docks to retailers and distributors.
• If the manufacturer-direct shipment model succeeds, the manufacturer simply won’t need an intermediary like Value America, but will switch to direct sales instead.
• Even if manufacturers don’t sell direct, if they implement the direct-shipment model, they can all work with hundreds of other online resellers, making Value America a tiny fish in the commerce ocean.

Winn’s business model demanded that Value America only sell the best products from the best brands. The emphasis would be on presenting the information consumers needed about high-quality brand-name products, at reasonable prices. The model called for low prices, not deep-discounting.

But Value America’s very first advertising campaign abandoned these ideals: the ads promoted an “end-of-life” computer from IBM — a computer that was “relatively slow, with an outdated chip,” at a bargain price ($699). (p. 238).

The “quality” mission appeared later: one ad touted the better quality and longer life of a high-end Weber grill. Value America sold so many grills, the authors claim, that “Weber had to put on another shift” to meet the need. (p. 241, 261)

Unfortunately, these descriptions of the early “offline advertising” don’t provide any measurement of profitability. How much did the IBM or Weber ad cost, and how many computers or grills were sold, at what gross profit margin? The authors only disclose select numbers for later time periods, when they blame others for the resulting huge losses.

At times, Winn states that telephone orders are a key part of Value America’s plan, but when dot-com stock prices soar, the telephone isn’t mentioned. The company’s Chief Financial Officer is quoted saying: “This is pure e-commerce. We sell products on the web and earn a margin .” (p. 370).

But most orders apparently came through the company’s toll-free number, to human operators in the company’s call center, driven by expensive newspaper ads. How many buyers ever visited the Value America web site? Did the newspaper ads drive long-term customers, or just one-time buyers? How much did it cost to operate the call center? Many chapters later, after Winn hires the Evil Ones, he blames them for the expensive telephone call center created long before they were hired.

Focus and Transformation: Every so often, Craig Winn abruptly announced new initiatives that would take the company in dramatic new directions. The original focus of the business plan should give way or share resources with entirely new projects:

• While seeking venture funds from a union pension fund, Winn announced that Value America’s “authoring tool” could be used not only to promote products, but also to communicate information about union benefits, show speeches by labor leaders, and “recount the history of the American Labor Movement.” (p. 181)
• Later, Winn wanted Value America to “manage the communications, logistics, and order fulfillment between Whirlpool and their nearly 5,000 authorized dealers” (p. 420).
• Still later, Winn unveiled something he called the “Path to Profitability,” including proposals to reduce advertising and shift the company’s focus to new “Demand Alliances.” His management team didn’t agree, but Winn worked around them to pursue these new deals, then acted surprised when his proposals were rejected.
• Then there was a special promotion in which “large” discount coupons were distributed to Visa cardholders. Oddly, the book doesn’t disclose the amount of the coupons, but acknowledges that the actual effect was that the coupon promotion cost about 50% of sales. The promotion was soon generating $400,000 per day in sales. While Winn doesn’t take credit for the promotion, he and Powers defend it as “more moderate” than the 60% of sales spent on advertising. (p. 424-425)
• At the very end, Winn proposed to “transform” the company into an e-commerce service provider for other retailers (this same face-saving move has been attempted after the collapse of Beyond.com, another dot-bomb IPO).

Confusing Incident #1: Promotion or Resignation: The authors’ account of one of the book’s most significant incidents left me confused. It happened while Craig Winn and Glenda Dorchak were driving to the first “road show” presentation for the company’s planned IPO, two weeks after Dorchak was hired as Vice President for Sales and Marketing.

“Glenda dropped her bomb. . . . ‘Either you name me President and Chief Operating Officer so I can do my job the way I think it needs to be done, or I’m going to resign.” (p. 293).

Winn considers this “blackmail,” since Dorchak’s sudden resignation would create a “cloud” which would prevent Value America from going public that month.

Considering the significance of this demand, it is bizarre that there is no mention of Winn’s actual response, nor of the actual decision to promote Dorchak. It’s as if an entire section was omitted from the book.

The authors never actually say what happened, but several pages later we realize that Dorchak now holds the title of President and Chief Operating Officer. But readers learn that when Winn promoted Dorchak, he secretly planned to fire her immediately after the IPO (p. 309).

I was confused: the “honorable” and “honest” Craig Winn lied to prospective investors, about the company’s transition to a new management team. He had to lie, because investors were skittish about the bankruptcy of another public company Winn founded; he blamed that company’s failure, in part, on his own reluctance to hire outside managers. He lied to defraud investors. He lied to Dorchak, he lied to his employees, and he lied to the investors. Saint Craig, indeed.

But then the market turned ugly, and the IPO was cancelled. I expected to read that Dorchak was promptly fired, but it didn’t happen. The company still needed private investment, and Winn and Scatena didn’t want to rock that boat, either. A short time later, Scatena and Winn hire a new CEO, whom they instruct to fire Dorchak as quickly as possible (he doesn’t do it, p. 359).

The authors believe that lying and scheming are only evil when other people do it.

Confusing Incident #2: The Advertising Budget Dispute: The authors repeatedly insist that after Value America’s IPO was withdrawn in September 1998, Glenda Dorchak’s advertising budget was cut to just $1 million per month (p. 314), because the company was running out of money. (The authors don’t disclose how many millions of dollars were spent on advertising to drive $15 million in revenues during the preceding quarter, before Dorchak was hired.)

A few pages later, one of the company’s investment bankers tells Winn that Value America can’t yet go public: “You need to have another strong quarter or two.” (p. 325). But without huge advertising, there won’t be any more strong quarters. The only hope, it appears, would be to spend huge sums on advertising to drive more revenue.

Next, something awful happens, according to the authors. Instead of spending just the $3 million budgeted for advertising during the fourth quarter, Value America actually spent $13 million. The result: $19 million in sales, beating the prior quarter. According to the authors, company president Glenda Dorchak simply ignored the budget, and spent $13 million without anyone knowing — not even the company’s Chief Financial Officer.

Winn claims to have been shocked : “She just ignored the constraints? We were sinking, and she spent money like a drunken sailor?” (p. 353).

Once again, I was confused. Without that revenue increase, the company would have failed. With it, the company’s revenue growth would justify further investment and perhaps even an IPO. And that’s exactly what happened: the market has turned favorable, and the investment bankers now urge Value America to go public.

Clearly, the authors weren’t angry that the company was saved — they were upset that someone else had done it.

Next, the authors report that the “overspend,” if disclosed, would kill the IPO. If investors learned the evil truth, all hope was lost.

“You can’t cover up a ten million dollar mistake,” says Winn, who then proceeds to do just that. The honest, honorable Saint Craig decides to “tweak the model” in order to hide the “mistake.” He will claim that the “unplanned” ad spending was actually planned. He will lie, in order to raise more money from investors. To cover up the “overspend,” the authors say, Winn reduced future revenue projections, and increased expense projections. “This would serve to make the pitiful performance of Q4 blend into a logical, believable scenario.” (p. 355). I couldn’t believe it: the authors were admitting to securities fraud !

A few pages later, my jaw dropped when I read, about another incident: “Doing the right thing was important to Craig, even if it was out of step with the rest of the business world” (p. 361).

What It’s All About? Profitability: Early in the book, the authors write: “Winn had a knack for making the difficult sound easy and making the impossible merely appear to be an interesting challenge. He was so darn reasonable, how could you argue with him?” (p. 27). I don’t doubt it: a lot of folks drank his Kool-Aid.

After reading both “Dot.Bomb” and ” In the Company of Good and Evil,” I am quite certain that it was always impossible for Value America to earn a profit. The company was always just a pyramid scheme , and the authors were upset that their chosen scapegoats co-opted the scheme during its waning months for their own profit.

To be honest, I never quite understood Winn’s “vision” of profitability. (My investment portfolio proves my broad skepticism: I have never owned stock in any dot-com, including Value America.)

Some of Value America’s earnings would come from manufacturers who paid for multimedia “product presentations” that featured their products and brands. “They pay us to properly present their products in our store.” (p. 200). Apparently, this was highly profitable (assuming that the huge amounts mentioned in the book were actually paid by manufacturers). Once, the authors suggest that this revenue might even generate half of Value America’s profits. Certainly, nothing else the company did was profitable.

Without inventory and fulfillment responsibilities, Winn claimed, Value America’s overhead would be lower. Sure, the profit margin would be very thin, especially after overhead and advertising expenses, but the net profits on a huge volume of sales would be vast. But then there were unexpectedly high numbers of fraudulent transactions and product returns. And the company pledged one percent of all sales to charity, and another one percent were rebated as “Value Dollars,” to be applied to future purchases.

To complicate matters, long before any products were sold, the company started to give away the store. “As a reward for [union members] shopping in the union store, we’ll make a two percent donation to the member’s pension fund, plus give two percent of each sale back to the member in the form of Value Dollars.” (p. 185, emphasis added). Later, Winn “shared a strategy that would enable us to give a computer with Internet access to every union member out of the proceeds from the store.” (p. 216). Much later, a deal with Citibank shared three percent (p. 454). The book doesn’t disclose the cost or terms of any other “deals.”

Winn’s vision called for “offline advertising,” (newspapers, radio, and TV ) to drive online sales (p. 192). By hiring a clever ad agency, the company would pay only “a fraction of the published rates” for offline advertising. (I believe that offline advertising by dot-coms was always intended primarily to sell company stock to investors, and not to sell the company’s products to consumers.)

But advertising spending consistently exceeded profits by a huge margin. According to the authors:

• Q3 ’98: Spending was not disclosed for the “pre-Dorchak” advertising.
• Q4 ’98: VA spent $13 million on advertising, to generate $19 million revenues (64%)
• Q1 ’99: VA spent $21 million on advertising, to generate $36 million in sales (60 %)
• Q2 ’99: The book doesn’t recount any figures for Q2.
• Q3 ’99: VA spent $28 million on advertising, to generate $58 million in sales (48 %)

For the third quarter of 1999, Value America claimed a “gross profit” of $3.5 million on $58 million in sales, for a 6% gross margin (not counting overhead or advertising expenses). The authors were quite proud that operating expenses (other than marketing) were under 15% of sales, claiming that most companies “would give their right arm for anything under 25%” (p. 450).

There is a huge, probably impossible gap between that 6% gross margin and the 15% overhead figure — even ignoring marketing expenses. A company can never make money if its gross profit is less than its overhead. Value America never had a chance.

Value America never came close to the absurd numbers promised earlier in 1999, when the Chief Financial Officer said: “Over time we expect to achieve a 14% overall blended margin. Overhead at 4% of sales and net advertising, after co-op, at 5%, yields a five percent operating profit.” (p. 371).

If the authors are to be believed (when they wrote that most companies “would give their right arm for anything under 25%,” p. 450), it was absurd to expect the firm’s low 15% overhead to shrink to 4%. And if prices were increased to raise the gross margin from 6% to the 14% forecast, sales would plummet.

Value America was always doomed to fail and only “irrational exuberance” could justify the company’s billion-dollar IPO or its peak value of $3 billion.

It’s Not Our Fault : Despite the impossible math, the co-founders are absolutely convinced that if the imploding company had been turned over to them in early 2000, they could have fixed everything. More than a hundred pages of the book are devoted to Winn’s absurd last-minute fantasy proposals, which the authors claim were all certain to succeed. But the Evil Ones blocked each of Saint Craig’s valiant efforts to Do Good. The company ran out of money, and shut down.

“Rex leaned forward and spoke wistfully. ‘We were so close.’ Craig nodded. ‘We were a lousy six months away from pulling it off. . . . We would’ve been profitable.'” (p. 585.)

Yes, they were close: Rex Scatena had already sold all of his Value America stock, but Craig Winn had only pocketed about $58 million from his worthless stock; he still hadn’t sold his last five million shares when his house of cards collapsed (in bankruptcy). So close.

Conclusion: Authors Ken Power and Craig Winn have vented their hatred in this book, and it shows. Their vindictive, vicious attacks bounce back directly to highlight their own misdeeds. Ayn Rand’s books are more open-minded and fair, and contain fewer long speeches, than In the Company of Good and Evil.

Do not read this dreadful book.

Disclaimer: The book links to Amazon.com are affiliate links (paid advertising).

Comments are closed