Fall of a Dot-Com
Blinded by Net fever,
big-name investors poured millions into Craig Winn's chaotic Value America
On a balmy day last
April, Craig A. Winn, a onetime housewares salesman, momentarily became a dot-com
billionaire. As the stock in his e-tailing startup, Value America Inc. (VUSA),
ascended from its initial public offering price of $23 a share to a giddy high
of $74.25 on Apr. 8, 1999, it became clear that the charismatic entrepreneur had
tapped into the mind-set of the New Economy. Investors flocked to his idea of
a ''Wal-Mart of the Internet'' where shoppers could order jars of caviar along
with their gas barbecues or desktop computers. And why not? Winn had already signed
up some big-time investors, including Microsoft co-founder Paul Allen, financier
Sam Belzberg, and FedEx Chairman Fred Smith, whose names added cachet to the venture.
When the stock settled down that day at $55 a share, the three-year-old, profitless
company was valued at $2.4 billion. Yet the 45-year-old Winn maintains that he
was overcome with melancholy as he watched shares trade that first day. ''I felt
fear and anguish,'' he said recently. ''I believe the company was genuinely worth
the IPO value. When the stock shot up to three times the IPO price, I recognized
that this was not reasonable. You are never closer to your greatest failure than
when you are at the moment of your greatest success. I was very humbled by it.''
Winn's unease was prescient. In the 12 months since the IPO, Value America has
gone from euphoria-inducing heights to a struggle for survival. In late March,
auditors expressed doubt that the company could survive as a going concern. Nearly
half of Value America's 600 employees have been fired. With the stock now trading
at $2 a share, investors have lost millions. The obligatory shareholder class
action has been filed. And Winn, founding CEO and entrepreneur extraordinaire,
has been ousted by an all-star board that includes Fred Smith, former Newell Rubbermaid
CEO Wolfgang Schmitt, and celebrated headhunter Gerard R. Roche. ''A year ago,''
bemoans one insider, ''we were infallible. Now, it's a complete crash and burn.''
''NOT OVER YET.'' The company says it is in ''advanced discussions'' with
potential investors and expects to gain sorely needed cash within a few months.
''Rumors of its demise might be a little premature,'' says William D. Savoy, a
Value America director who manages Paul Allen's personal finances. ''It's not
Value America's rise and fall is emblematic of an era of unbridled optimism and
outright greed. Possibly only during a period of unprecedented valuations and
a seeming suspension of the rules of finance could someone of Winn's background
amass the following and the finances to get a company off the ground as quickly
as Value America took flight. For most of his stint at the company, Winn, who
collected a salary of $295,000 a year, had little of his own money at risk. His
business experience consisted mainly of leading another public company into bankruptcy.
His technology experience: nil. Winn and his company practiced New Economy values
with a vengeance. A massive ad budget was spent well in advance of any profits.
Yawning losses were excused as a necessary evil in the pursuit of market share.
There was a rush to take an untried company public at the height of the investor
frenzy for new dot-com stocks.
But the Value America saga goes beyond the excesses of the Internet era. Serious
questions are also being raised about alleged gross mismanagement, abuse of corporate
funds, and the sometimes erratic and bizarre behavior of Winn, who asked that
the money-losing company finance his personal jet and who dreamed out loud of
running for President. ''There have been a fair amount of decisions and expenditure
of funds that were questionable,'' says director Schmitt. (Winn counters that
the plane was needed because of the company's location in Charlottesville and
that the board approved of it.) ''Everyone figured he was more a genius than crazy,''
says a former senior executive at Value America. ''As time went on, everybody
got more concerned.''
One thing Craig Winn, a salesman at heart, could do is spin a good tale. His story
of a ''frictionless'' business model was perfectly attuned to the times. Winn's
cyberstore was supposed to harness every efficiency promised by the Web to create
a new paradigm in retailing. His breakthrough idea? The store would carry no inventory
and ship no products. Instead, it would pick up orders from consumers and immediately
transmit them to manufacturers who would ship IBM computers and Knorr soups, Panasonic
televisions and Vicks Vapo Rub, direct to customers. It featured more than 1,000
brand names, many in multimedia presentations online.
The story was mesmerizing, the execution somewhat less so. Insiders say Winn tried
to do too much, too soon. Computers crashed. Customers waited and waited to get
orders filled. Discounting and advertising drained cash and wiped out any chance
of profitability. Returned merchandise piled up in the halls of the company's
offices. ''They got going too fast,'' says Smith. ''They got unfocused.'' Winn
disagrees. ''In the Internet world, no one is willing to invest in a company that
grows slowly,'' he argues. ''Go find an Internet company that said it was going
to be methodical.'' In retrospect, the story's most surprising aspect is how long
the public--and the board members--continued to believe in Winn.
POLISHED PITCH. For the boyish-looking entrepreneur, with his sandy hair
and perpetual smile, the world of the Net seemed a natural fit. He was always
a man, say friends and colleagues, who looked to the future, and he certainly
had a way with words. Associates say that Winn would drive to work with the radio
off, practicing the slogans that would give his sales pitches a New Economy resonance,
even if the precise meaning was unclear. He grandly called his e-tailing venture
''the marketplace of the millennium.'' He described his concept as ''alliances
of consumption with alliances of production.'' Above all, he intoned, Value America
permitted ''friction-free capitalism.'' A colleague said Winn called his practiced
pitches ''the Art of Emphasis.''
Winn quickly embraced the worst excesses of the New Economy, particularly the
notion of building a business empire where sales--not profits--came first. He
spent money lavishly, running through the company's cash as if it were unlimited.
In an era when not-yet-profitable dot-coms burned through giant ad budgets, Value
America spent even more, second only to E*Trade Group in the size of its marketing
budget in the first nine months of 1999. For the year, its ad spending hit $69.6
million. Taking a page from the Lee Iacocca playbook, Winn filmed a series of
commercials last June starring himself--at a time when Value America could hardly
afford the cost of TV airtime. Winn says the idea to do the spots came from outside
Other expenditures were even harder to understand. Winn agreed to purchase a 34.4-acre
expanse of land for $5 million where he planned to build a multimillion dollar
headquarters. The property was later appraised at less than $2 million. It cost
the company $400,000 to get out of the contract. Winn disputes that valuation
and says the building was needed. After a newly recruited CEO discouraged Winn's
purchase of a corporate plane, Winn and co-founder Rex Scatena spent $650,000
for a down-payment on a Hawker 800 anyway. With board approval, they began expensing
their trips to the company and put two pilots on the payroll at a cost of $250,000
a year. In 1999 alone, the cost of the plane to Value America was $800,000. Winn
now claims the company still owes him and Scatena the $650,000 down-payment, which
he says the board agreed to cover. Scatena could not be reached for comment.
Meanwhile, as investors anted up more cash to keep Value America going, Winn began
taking money out. During one investment round, in the summer of 1998, when Microsoft
founder Paul Allen put in $15 million, Winn sold some of his own holdings, pocketing
some $5.7 million. Allen, who declined comment, knew of the sales at the time.
''There were extenuating circumstances,'' says Savoy, declining to go into further
The splashy expenditures hid some fundamental problems with Winn's business model.
In signing up as many vendors as possible, there was little regard to whether
their products were suited for sale via the Web. Many manufacturers simply weren't
capable of shipping a single box of Tide or a bottle of Advil. They had no experience
in dealing directly with consumers. Glenda M. Dorchak, a 24-year veteran of IBM
who is now CEO of Value America, says she tried ordering a pair of toothbrushes.
It took weeks for the package to arrive, and when it did, it was one toothbrush
short. Indeed, Winn's basic premise of eliminating the middleman never happened.
Most orders were handled by the ultimate middlemen: old-fashioned distributors.
Still, at the height of the company's success last April, Winn seemed neither
humbled nor melancholy. He started voicing political ambitions, even a desire
to become President of the U.S. Winn told colleagues he planned to withdraw from
the company in order to run for lieutenant governor of Virginia. That, he said,
would give him a platform for a Presidential bid in 2008. Winn dismisses those
stories and says he had given up his Presidential aspirations ''a long time ago.''
He also began cultivating relationships with politically connected conservatives,
including former Education Secretary William S. Bennett, who joined his board
last summer, and Reverend Jerry Falwell, who was invited to buy shares in the
Value America IPO under the friends-of-the-company provision. While other dot-coms
might have a ''chief evangelist,'' Winn had a ''chief of staff,'' Mick Kicklighter,
a retired three-star general who traveled everywhere with his boss, taking notes.
WINNERS AND LOSERS. Although Value America is just months from running
out of cash, Winn is set for life. He lives just three minutes from the company's
Charlottesville headquarters on a 150-acre estate, where he has built a Greek
Revival mansion modeled on George Washington's Mount Vernon. Both Winn and Scatena,
who served as outside counsel to Winn's earlier bankrupt venture, have been feverishly
dumping their stock since being forced out of the company in November. Winn has
personally realized cash gains of about $53.7 million and still has an additional
$15.5 million worth of stock. Winn's backers have not fared so well. Allen has
lost roughly $50 million, according to public filings. The personal and company
losses of FedEx founder Smith approach $8 million.
So where were the directors during this debacle? Many of them were still being
recruited in the months following last April's IPO. Savoy and Smith came on soon
after the offering, but Schmitt, Roche, and Bennett joined during the summer.
When an executive-suite coup erupted in November, they had barely settled into
their roles. Directors contacted by Business Week say they acted appropriately
and still express confidence in the company.
Winn shows little regret about the fate of Value America or of the well-heeled
backers who believed in him. He cheerfully meets with a reporter in his ''carriage
house'' to recount his role in this New Economy cautionary tale. Seated in a brown
leather club chair before a massive stone fireplace and a crackling early-morning
fire, with his yellow lab, Crystal, at his side, he looks the picture of country
Life wasn't always so comfortable. Winn says that in his first year as a manufacturer's
rep, in 1978, after graduating from the University of Southern California, he
was painfully shy and worked 90-hour weeks to earn just $12,000 for the year.
He had joined his gregarious father in a housewares venture. The younger Winn
was raised on the business, which his father ran from a home office next to the
kitchen, in Sierra Madre, Calif. From the age of five, Winn says, he knew he wanted
to sell. He proved a quick study. Within a few years, he had bought out his father
and was pulling down a six-figure salary. His success brought him a house perched
on the edge of the Pacific Ocean, a sailboat, and a big bank account.
It also brought him greater ambition. In 1986, Winn founded Dynasty Classics Corp.,
a maker of lighting products. Four years later, with annual sales of nearly $100
million, he brought the company public. Within eight months, however, after revealing
a fourth-quarter loss, the stock fell from a high of $18.50, to under $4. In October,
1993, Dynasty filed for Chapter 11 bankruptcy. Russell Schreck, a turnaround consultant
who became president of Dynasty after the filing, blamed the problems on ''a lack
of structure and discipline. You had an entrepreneur who grew the company very
quickly, but he hit a brick wall. There was a lack of accounting.''
UNTRIED PRODUCT. Winn has a different view. He says the company was forced
to file for bankruptcy only after Wal-Mart Stores Inc. (WMT)
reneged on a deal to help fund the production of $25 million worth of lamps and
other products. Wal-Mart says it doesn't comment on vendor relations. ''I was
not without blame,'' recalls Winn, who grows misty-eyed as he tells the story.
''I was at the helm of the company and there were any one of a hundred things
that I could have done better.'' Remarkably, though, given Dynasty's fate, Winn
feels he was underappreciated. ''When things go south, there is an element in
society today that is very vile. You get to see the underbelly of people.'' Winn
says he met the payroll out of his own pocket for a time, but never received any
Over the next couple of years, as interest in the Internet began to heat up, Winn
dreamed of the ultimate sales company, one that would advertise, market, and take
orders but never handle the merchandise. Eventually, he cranked out a 250-page
business plan for Value America, and on July 4, 1996, he and a few friends and
partners moved their families to Charlottesville to launch it.
Winn and Scatena anted up about $150,000 each in the startup and began to furiously
hire the talent necessary to make a go of it. A big break occurred in December,
1997, when Winn persuaded the Union Labor Life Insurance Co. in Washington, to
invest $10 million in Value America. Winn quickly paid himself $150,000 from the
proceeds, saying that his initial cash outlay had been a loan. Six months later,
an even bigger break occurred. Through the insurer's contacts, Winn gained a meeting
with Paul Allen and William Savoy in Seattle and persuaded Allen to put $15 million
into the company, giving Winn's fledgling business a $300 million valuation--and
The IPO of last April took place well before Value America had begun to prove
its mettle. But Winn had tried to take it public even earlier. In September, 1998,
only three months after Allen's investment, Winn tried to cash in on the connection
with a $75 million offering. But the IPO market had temporarily dried up. When
his bankers told him he'd have to accept a lower price for the stock, Winn cancelled
It was a crushing blow, but Winn says he gained encouragement from Intel Corp.
founder Andrew S. Grove, whom he had met through a mutual friend. At a dinner
shortly after the failure, Winn says that he told Grove of his troubles. ''He
put his arm around me and said 'I believe in you. You're going to do well, and
you're going to live to see far brighter days.''' Grove says he was supportive
but doesn't recall the details of the dinner.
Few outside the company knew how badly things were going. Value America was struggling
to meet its growing payroll. It began delaying its payments to manufacturers.
''We played vendor bingo,'' says one former executive. ''Whenever they complained,
we paid.'' Dorchak confirms that, strapped for cash, the company was forced to
delay payments. Winn and Scatena loaned the company $550,000 in late September,
1998. Then Winn led what insiders termed a ''pass the hat'' round that raised
$7 million more. Winn didn't invest more money himself because, he says, SEC rules
prevented him from doing so. Winn says that what he did was far more selfless.
''We got no stock or anything for our loan,'' he says. ''That was genuine charity
there.'' Both he and Scatena took repayment of their loans before the end of the
Despite the scare, Winn and Value America won lots of publicity, partly a payoff
from the millions spent on ads in The New York Times and other newspapers.
In February, 1999, CEO magazine dubbed him ''the prince of e-commerce,''
just months after his company nearly went belly-up. ''Princes rise and fall,''
says J.P. Donlon, editor in chief. ''If this was bullshit, I thought, it was platinum.''
The buzz attracted more money and big names.
Fred Smith was one. Smith had often expressed skepticism about e-commerce, but
he believed that Winn had the ideal business model. ''I thought this was one of
the best things I've seen,'' recalls Smith. In January, 1999, Smith committed
$5 million of his own money and $5 million of FedEx's money to the venture. Allen,
meantime, put in $50 million more.
As the new money and the support of other big backers, like Gary Winnick of Global
Crossing Ltd. (GBLX)
and financier Sam Belzberg, rolled in, Value America began to operate less like
a business and more like a cult. ''When you're around him, you get caught in the
swirl,'' says one former manager. ''It's like drinking Kool-Aid.'' Winn would
gather his employees and speak for a full hour at a time, promising that everyone
standing before him would someday be a millionaire. At one session, recalls employees,
he stood on top of railroad ties on a chilly May morning in the parking lot and
spoke for an hour about his life and career. ''As he talked, the sun rose higher
in the sky and the air became warm and comfortable,'' remembers Tom Matthew, who
wrote product descriptions for the company's Web site. ''I wondered if Craig had
planned it that way.''
It was an exciting place to work, even if the hours were horrendous and the inconveniences
many. ''People were stacked on people,'' recalled Melissa M. Monk, vice-president
for sales. ''It looked like an anthill.'' Sales soared from $134,000 in 1997,
and to $42.3 million in 1998. But the losses rose just as fast. After losing $425,000
in its startup year of 1996, the company lost $2 million in 1997, $64.8 million
in 1998. Few investors worried about the red ink: Net companies were supposed
to lose money to gain scale and clout in a frenzied marketplace.
''A HIGH.'' Winn decided he needed help in managing the torrid growth.
Before going public on Apr. 8 last year, he recruited the head of U.S. Office
Products Co., Thomas Morgan, to become chief executive. Morgan, 46, a mild-mannered
man, had met Winn on a golf course and was hoping to sell him his line of office
products. Instead, Winn persuaded him to leave his job as CEO of a $4 billion
company and take a flyer with a Net startup. Winn remained chairman, but Morgan
was supposed to be the professional manager who would run Value America's day-to-day
The IPO was a huge success, creating dozens of paper multimillionaires, including
Morgan. ''It was phenomenal,'' he remembers. ''It was a high for everyone in the
organization.'' That evening, Winn celebrated by arriving in a limo with his wife,
Katherine, for a celebratory dinner at the local country club.
The celebration proved short-lived. Winn, say insiders, had trouble giving up
control to his new CEO. Although Winn denies it, several present and former executives
say he frequently undermined Morgan and continued to micromanage nearly everything.
''There was never a major decision he was not involved with,'' says Morgan. ''Craig
would just do what he wanted to do and informed me after the fact.'' Winn disputes
this, maintaining that he largely focused on developing outside alliances. Winn
promised to give more authority to Morgan over the next three months, but the
shift never materialized.
Meantime, in its zeal to meet the unrealistic expectations of Wall Street, the
company was making ever more desperate and wasteful marketing deals. The company
paid Yahoo! Inc. (YHOO)
$4.5 million for a year's worth of Web site ads that several insiders say brought
in less than $100,000 of revenue. The company spent $1 million for a booth at
Comdex, the computer show, hoping to sign up 100,000 potential Value America customers.
Instead, the event brought in only 16,000. Winn argues that most of the decisions
were made by Morgan and Dorchak, who as president was responsible for marketing
and sales. He said he was against another deal to pay $750,000 to sponsor Dennis
Conner's America's Cup yacht. ''We kept spending money like it was going out of
style,'' says one former top executive.
Investments in more fundamental areas were more scarce. ''The Web site was perpetually
slow, outdated, and uncommonly difficult to navigate,'' recalls ex-employee Matthew.
Instead of fixing the problem, Matthew said, the company focused on meeting its
financial numbers. ''We needed to do X amount of business this quarter and add
X number of products to the site so the stock price would stay high and we would
all be millionaires. Who cared that the store ran like molasses or that order
tracking was virtually unmanageable.'' Through the end of last year, Value America
still got over half its revenues from customers dialing in by phone. Winn maintains
that the computer systems worked well and that appropriate investments were made
in them. Adds CEO Dorchak: ''It's like icing a cake that hasn't been baked. We
had someone here who was just icing an unbaked cake.''
To drive revenue and keep the stock inflated, the company introduced ValueDollars,
which consumers could use for 50% off the cost of purchases. The discounts virtually
assured that the company would lose money on every sale it made. By last summer,
Value America was handing out 1,000 ValueDollars with the purchase of a $1,000
color TV. ''It was uncontrollable,'' says Nick Hoffer, senior vice-president for
marketing. ''It was crazy.''
Inside the company, chaos was rampant. Winn, insiders say, ran the place on daily
whims. He spent $1.8 million on a Christmas catalog that didn't get into the mail
until late November. ''That was one of the projects of the day,'' says Hoffer.
Winn says the delay resulted because the marketing department failed to follow
his May directive to work on the catalog, which he says, was largely paid for
by the brands. Toward the Christmas holiday season, the company advertised a Sega
Genesis game at $199. At that price, with ValueDollars added, every sale was below
cost. Even more troublesome, Value America secured only 1,200 units. Orders the
first day reached 1,500 units and eventually topped out at 6,000. To meet demand,
the company sent employees to Toys 'R' Us (TOY)
and other stores to buy the product off the shelf. ''We fulfilled every order,
at a huge cost,'' recalls Dorchak.
SOAP OPERA. Although Winn spoke grandly of his inventoryless model, in
the third quarter of 1999 alone Value America recorded an inventory writedown
of $350,000. How was that possible? To secure the supply of some goods, Winn had
to agree to purchase such products as Compaq and Toshiba computers that later
were sold below cost, resulting in a writedown. Meanwhile, many orders, insiders
say, were transmitted to vendors by fax or e-mail, a far cry from the instantaneous
computer-to-computer model Value America had promised.
Meanwhile, Morgan was growing ever more frustrated waiting for Winn to resign
as promised. Winn still occupied his corner office, triple the size of Morgan's.
On Nov. 1, Morgan walked into Winn's office and resigned, but the entrepreneur
persuaded him to stay by promising to come up with a plan to leave. Just 10 days
later, after a four-hour meeting in which Morgan aired a list of grievances, the
founder finally agreed to give up the chairman's job immediately. At least that's
how Morgan remembers it. Winn says he only agreed to think about the issues. That
Sunday, Nov. 14, Winn asked a colleague at Value America to go to his log cabin
on his estate and get a two-page, handwritten document he had drafted. The memo,
left on a table in the cabin, stated that Winn was stepping back into the CEO's
When Morgan saw the document that night, he was dumbfounded. He confronted Winn
the next morning, then contacted a director before taking a holiday to give the
board time to act. Finally, Smith, Roche, and other directors began interviewing
senior managers in the company. On Nov. 23, the Tuesday before Thanksgiving, the
board voted to fire Winn. Schmitt was named chairman, while Dorchak, 45, was named
CEO when Morgan quit for good.
Dorchak now finds herself trying to pick up the pieces. The promotions helped
to increase revenues last year fourfold, to $182.6 million. But losses of $175.5
million nearly equaled its sales and have led to a liquidity crisis. The market
capitalization of the company is now less than $100 million--below its valuation
during the first round of venture financing, in 1997. Meanwhile a shareholder
lawsuit alleging that the company made misrepresentations to inflate the stock
is pending in U.S. District Court. The company says the claims are without merit.
Since taking over in November, Dorchak has restructured to focus on electronics,
technology, and home-office supplies and has laid off nearly half of the payroll.
But Dorchak has her own critics who point out that the day after announcing the
layoffs, she chartered a private plane at a cost to Value America of $25,000 to
spend New Year's in Arizona. She says she did so after working 26 hours straight
and missing the last flight out of Charlottesville.
Dorchak's hopes for survival hinge on her ability to sell investors a new game
plan. She plans to market Value America's technology to other companies eager
to sell products over the Net. ''The business model the company has today is the
model it should have had all along,'' says director Savoy. ''Attempting to deal
directly with consumers probably wasn't the smartest idea on their part.''
At a time when lots of Net bubbles are bursting, the humbling of Value America
is a fitting postscript to an age fast fading. While such failures may be a price
the market must pay to break new ground, the lesson here is simpler: In a period
of near mania, almost anyone can find buyers for a house of cards if he has a
good enough pitch.
Sitting in his very sturdy mansion, which he calls Windom Hall, with majestic
views of the Blue Ridge Mountains, Winn wants his millions and the last word.
''Not only is the company nearly bankrupt,'' he says, ''it's current management
is morally bankrupt. They have chosen to recreate history.''
By JOHN A. BYRNE