BIG SPENDING LEADS TO BIG TROUBLE
Free spending on private jets, race-car sponsorships and a Hollywood cocktail party
leaves the company with an uncertain future
Of the Post-Dispatch
November 19, 2000
Edited by Virginia Baldwin Gilbert
When Timothy Roberts launched his latest Internet company in February, he charted a path for it to soar quickly to the top of the Internet economy.
He soon announced ambitious plans for the company, Broadband Infrastructure Group Corp., to build a nationwide fiber-optic network and to hire 1,500 employees in a year. He claimed he was on the verge of signing deals worth hundreds of millions of dollars.
The ostentatious 30-year-old called his company by the acronym "BIG." He even dubbed himself the "chief visionary officer," and company news releases routinely called him an "Internet pioneer."
Roberts' vision attracted dozens of investors -- Hollywood actor Tom Arnold and St. Louis banker Drew Baur among them. He eventually announced that investors had put up $18 million to fuel the enterprise.
It turns out that Roberts didn't just talk big. He spent big, too. There were leased private jets, race-car sponsorships, a Hollywood cocktail party and a deal to buy a landmark office building for $35 million.
Nine months after the startup's launch, Broadband's worsening financial condition forced the company to lay off 40 percent of its work force. On Nov. 3, Broadband also shut four of its subsidiaries and said it would no longer build Internet infrastructure -- instead focusing on Web-hosting and Web-site development. Roberts resigned the next week. It was a sudden fall for an entrepreneur who previously started two other high-tech companies and was one of St. Louis' Internet stars.
With Broadband's future now uncertain, former employees and others contend that Roberts wasted money on building the image and atmosphere of an Internet powerhouse rather than focusing on making a product and selling it.
Reached on his cell phone on the beach in Florida, Roberts said early last week that he could not comment immediately. He could not be reached for further comment, and messages left at his house in the resort town of Longboat Key were not returned. Company co-founder Patrick Smith,who remains at Broadband, did not return calls for comment.
Rob Rose, the former Fleishman-Hillard Inc. public-relations specialist who is an executive vice president at Broadband, said the company's expenditures were appropriate in light of its objectives.
"BIG made appropriate expenditures in line with the company's business plan and business opportunities," Rose said.
But were the company's business plan and opportunities realistic?
Norman Steinman, who was laid off as a vice president at one of Broadband's subsidiaries, said the company's philosophy was "fake it 'til you make it." In other words, the company would spend money to give the impression it was a viable enterprise even while it was not, hoping that clients eventually would come, he said.
Considering the company's financial reality, the spending veered out of control, Steinman said.
Cars, jets and Hollywood
In May, Broadband announced it had hired Edelman Public Relations, a major publicity firm. Its fee was $50,000 a month, former Broadband employees said.
Broadband sponsored race cars in the Indy 500 and other races. In May, Roberts led a group of about 25 Broadband employees - some of whom traveled on a corporate jet - to watch the Indy 500 and to tour race facilities.
Perhaps most notably, Broadband agreed to buy an office building for $35 million from WorldCom Inc. The building, a striking edifice off Highway 40 in Town & Country, included a gym, which Broadband updated with new equipment. The company also put a personal trainer on staff full-time and brought a massage therapist in once a week.
Rose said the company spent money appropriately to support "employee morale."
Broadband bought $65,000 worth of furniture for the new building.
In August, Broadband hosted a cocktail party at a movie studio in Hollywood, and put actor Tom Arnold on the company board of advisers. When Arnold came to town last summer, Broadband rented a jet to fly him to Iowa, a former company employee said.
Broadband also had a special-events budget of nearly $775,000 for the last four months of this year, including a planned expenditure of nearly $450,000 for the Comdex trade show last week in Las Vegas, company records show.
Broadband also rented corporate jets for executive travel, held an executive meeting near Roberts' home in Florida and planned to spend $18,000 for an employee barbecue, former employees said.
The expenses planned for Comdex and some other events, such as an open house at the company, were canceled abruptly in recent weeks as the company came to terms with the fact that it was running out of money.
Of course, most businesses require spending some amount of capital to start up. And it can be easy for critics to charge that expenditures are too focused on public relations and not enough on revenue-generating operations.
An Internet track record
Few investors are willing to talk about Broadband publicly or even acknowledge their investments in the company.
Drew Baur, the chief executive of Southwest Bank and a part-owner of the St. Louis Cardinals baseball team, was reticent about the company and its troubles.
"I'm a small investor in it," said Baur, father of Broadband Executive Vice President Todd Baur. Asked about the company's troubles, he said, "I don't know anything about it."
Arnold, who announced at the Hollywood cocktail party that he was investing in Broadband, did not return messages seeking comment.
Investors could hardly be blamed for taking an interest in Roberts, who had already achieved success in the Internet economy.
He was a co-founder of Savvis Communications Corp., which was bought by Bridge Information Systems Inc. and then partially spun off to the public in February. Under Roberts' guidance, Savvis had developed a network system aimed at improving Internet service by reducing the number of different networks over which data travels.
After leaving Savvis, Roberts founded Intira Corp., a Web-hosting company now based in California. Intira recently reported receiving $140 million in financing.
Yet Roberts has been dogged by criticism that he does not have the management skills to run a big company.
Broadband's launch set the stage for Roberts to disprove his detractors. With his abrupt departure from the company 10 days ago, his critics have more to talk about.
The market shifts
Roberts conceived Broadband at the frothy height of the Internet craze, when money flooded into many Internet startups. But in March, a month after Roberts unveiled Broadband, the tech-heavy Nasdaq Stock Market slumped. Investors have continued to pull their money out of Internet companies ever since.
Rob Shambro, a former colleague of Roberts' at Savvis, said the market is partly to blame for Broadband's woes.
"I think part of their problem was that they tried to raise money in what is probably the hardest market in history to raise cash in," said Shambro, who founded his own Internet startup last year.
Roberts scrambled to respond to the sea change in the market. When he unveiled the company Feb. 16, he described it as an incubator, a company that would nurture other young companies trying to enter the field of broadband - or high-speed - Internet products and services.
The company's original name, Broadband Investment Group Corp., reflected its original positioning as a developer of other companies.
"Today marks the first significant step in creating my vision to provide early-stage tech companies with capital, counseling, contacts and credibility," he said. The company would eventually provide that assistance to as many as 20 entrepreneurs, he said.
Incubators had been among Wall Street's darlings during the Internet boom, but they were among the first thrown overboard when the market downturn hit.
By June, Roberts no longer spoke of providing support to other companies. Instead, he said he had selected 10 "portfolio companies," wholly-owned subsidiaries that would each pursue a separate line of business.
By October, with investors running away from incubators that invested in the companies they helped, Roberts changed the name of the company to Broadband Infrastructure Group Corp. He also closed two of the subsidiaries.
As it turned out, however, the changes were not enough to entice investors to make the capital infusion the company needed.
Three weeks after it took its new name, the company shut down four more subsidiaries, laid off 75 employees, and announced its focus on Web-development services.
The company's financial straits have only deepened the puzzlement of observers who wondered how a startup company could purchase the WorldCom building.
At the time the deal was announced, on Aug. 8, WorldCom officials said they had agreed to take, as partial payment, stock worth $8 million, in addition to a promise that Broadband would purchase WorldCom services in the future.
John McCarthy, the managing general partner of Gateway Venture Partners LLC, a venture capital company based in Clayton, questioned the wisdom of trying to buy the building.
"That just doesn't seem to be the kind of thing a startup ought to be doing from our standpoint, but we're just little venture capitalists over here," he said wryly. "We don't have big ideas."
In the end, Broadband admitted Nov. 3 that it had in fact not purchased the building, but merely entered a letter of intent to buy it.
Gateway is among venture-capital firms that chose not to invest in Broadband.
They shied away at least partly because Roberts wanted so much money to carry out his projects, McCarthy and other venture capitalists said.
"From what his undertaking was, the amount of money we could provide was a drop in the bucket," McCarthy said.
Wanted: Lots of money
On Aug. 8, as Broadband employees were settling into their new building, Roberts spoke optimistically about the deals that he expected to complete in the future.
"We have commitments to over $1.5 billion in equity and financing," he said. All Broadband had to do was choose the deals it wanted, something it would do in the coming weeks, Roberts said.
And then he added, "We'll easily have $3 billion in the next 12 months."
Gary Martelli, a former Broadband employee, said that at one point several network-equipment manufacturers had offers totaling as much as $1 billion on the table. In such vendor-financing deals, manufacturers typically agree to make loans to or invest in a company that buys its equipment.
But Broadband's own executives repeatedly rejected offers of vendor financing - sometimes offers as large as $150 million, Martelli said. But Roberts and other Broadband executives rejected the offers because they wanted bigger deals, he said.
"They got caught up in their rhetoric of wanting to be the biggest and the best," Martelli said.
Rose retorted flatly: "We made decisions in the best interest of our shareholders."
The BIG spin
Broadband also churned out press release after press release trumpeting its plans for growth.
The company announced June 12 that it had signed an agreement with real estate firm Grubb & Ellis to buy or lease 2.5 million square feet of commercial space for data centers in 50 cities.
The next day, Broadband announced it had signed an agreement for C. Rallo Contracting Co. to build out its data centers for about $500 million.
"To our knowledge, no other company has formed a relationship of this magnitude to build out broadband infrastructure to BIG's size and scope on a timeline this fast paced," Roberts said in the release.
But both agreements were non-binding,. The companies never announced any work actually taking place. And Broadband's real estate development subsidiary, EcoPlex Corp., which was to carry out that work, was one of the four shuttered recently.
Beginning in March, when Broadband announced it had opened a Chicago office, the company's news releases began saying routinely that Broadband could handle projects "starting at $25,000 per month or as large as $30 million per month . . . or greater."
On June 15, it announced it planned to hire 1,500 new employees within a year.
The company, in fact, did hire rapidly once it moved into its new headquarters, rising to 201 employees by October.
Yet its hiring practices also raised concerns.
As recently as four weeks before the layoffs, Broadband officials gave the green light to hiring new workers, said Clark Thomas, who was laid off from Broadband's marketing department. But Thomas said he was so concerned about the company's prospects that he refused to hire anyone out of fear they would be let go soon.
"I didn't feel it would be appropriate to make any more hires until we had shown some more stability," he said.
Former executive Steinman said that before he agreed to take a job with Broadband, he was told the company was financially solid.
"I was told that they had about $400 million or $500 million in cash that had been raised. And I was told that companies like Nortel and Hewlett Packard were ready to sign on some major deals. And based on all that, I was willing to take the risk," he said.
To take the job as vice president of EcoPlex, he closed his own real-estate consulting company, which he had operated for six years.
Some employees also say that Broadband gave no warning of its financial difficulties, making it impossible for them to make plans to support themselves after the layoffs.
On Oct. 19, Roberts told the Post-Dispatch that Broadband had closed two of its original 10 subsidiaries, but he said the company had recently pulled in $18 million from investors and had plenty of money to operate through the first quarter of 2001, or another five months.
The layoffs hit two weeks later.
Venture capitalist McCarthy said he hopes the tumult at Broadband doesn't have a negative impact on St. Louis' growing high-technology industry.
Young people "full of enthusiasm and excitement" went to work at Broadba nd, he said. "I'd hate to see them be disillusioned."
Fast times at Broadband Infrastructure Group
* Feb. 15, 2000: Tim Roberts, who earlier founded Savvis Communications Corp. and Intira Corp., announces the launch of Broadband Investment Group Corp. as an incubator for Internet companies.
* May 12: Broadband announces it has entered a contract to buy the WorldCom Inc. building in Town & Country for $37.35 million.
* May 28: Rookie Jason Leffler, driving a Broadband-sponsored race car, finishes 17th in the Indy 500. Broadband executives are there to watch. BIG also sponsored Robbie McGehee in the Midas 500 in Atlanta in April (left photo).
* June 12: Broadband says it has entered a non-binding letter of intent with real estate firm Grubb & Ellis to lease and purchase 2.5 million square feet of commercial space for data centers in 50 cities for $900 million.
* June 13: Broadband announces it has entered a non-binding letter of intent to pay up to $500 million for C. Rallo Contracting Co. to build its data centers in 50 cities.
* June 15: Broadband announces that it plans to add 1,500 employees within a year and that 30,000 job candidates have expressed interest in working for the company.
* Aug. 1: Broadband sponsors Hollywood cocktail party in connection with an industry trade show.
* Aug. 8: Broadband says it has acquired the WorldCom Inc. building for $35 million, with part of the purchase being paid for with $8 million worth of stock.
* Oct. 12: BIG announces it has changed its name to Broadband Infrastructure Group.
* Oct. 19: Roberts says the company has received $18 million in equity funding so far and has plenty of cash to operate through the first quarter of 2001. He confirms that the company has closed two subsidiaries.
* Oct. 31: Company abruptly announces postponement of two-day open house and analyst conference set to start two days later at its new building.
* Nov. 3: Broadband lays off 75 employees, or about 40 percent of its staff of 190, and closes four more subsidiaries. Company says it will now concentrate on Web-hosting services and Web-site development services.
* Nov. 9: Broadband says Roberts has resigned as chief executive.
* GlobalStreams Corp., publisher of a guide to movies and music on the Internet
* iClast Corp.,Web-site development
* mach5netsourcing Corp.,Web-hosting services
* ProNox Corp., network management services
* EcoPlex Corp., managing facilities and offering co-location nationwide
* Excelica Corp., distributing content and data from mirrored servers
* Fiberian Corp., developing a high-bandwidth telecommunications network
* Lumas, building a long-distance fiber network
* Veloce, maintaining equipment on telecommunications netwrks nationwide
* Whipcord Corp., offering high-speed Internet access to businesses
Photos and graphics
(1) Color photo - BIG's headquarters
(2) Color Photo - Tim Roberts, founder
(3) Color Photo - BIG sponsored race car
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