The resignation of internet tycoon Evan Thornley from the Victorian Parliament continues to mystify with the millionaire remaining ensconced in his French hideaway. But recent events are not Thornley’s first brush with controversy — with the near collapse of Looksmart, the company he founded, and his apparent source of his vast wealth remaining largely unexplained.
Thornley rode the crest of the dot.com boom with aplomb — when LookSmart shares hit $72 in early 2000, Thornley was worth more than $1 billion based on his (and wife Tracey Ellery’s) holding of slightly more than 15 million shares.
Sadly for Thornley, LookSmart was doomed against far more successful rivals, including Google and Yahoo. LookSmart was an internet search engine which relied on human editors to catalogue URLs (by contrast, Google and Yahoo utilied automated algorithms to rank millions of web pages). LookSmart earned revenue by charging advertisers for prominent commercial listings on its site and in search results (on Ninemsn, LookSmart clients previously received the top three search listings).
Since its formation in 1996, LookSmart moved quickly, floating on the NASDAQ in 1999 and listing on the ASX in 2000. Its prospectus trumpeted grand expansion plans, noting that the company sought to be:
The leading category-based Internet directory service for global and local information on the Internet and to derive multiple revenue streams by leveraging our directory asset [by leveraging] the LookSmart directory and the people and processes that create it — and monetise them by generating revenues through online advertising, syndication and licensing, Internet outsourcing and ecommerce.
Like many technology companies spawned during the internet boom, LookSmart’s financial performance never matched its lofty ambitions. Since 1996, LookSmart lost more than US$220 million of shareholders’ funds. LookSmart’s share price fell from $12.00 at its float to effectively $0.14 cents now (adjusted for a 5:1 consolidation in 2005). LookSmart’s current market capitalisation of around US$28 million is roughly equivalent to the company’s cash backing.
During Thornley’s tenure as CEO and chairman it was alleged that LookSmart spent “tens of millions of dollars…on activities later judged to be of little benefit, including multi-million dollar sponsorships of Sesame Street, the 2000 Olympics, several unsuccessful acquisitions including the purchase of late-night infomercial company Guthy-Renker’s ecommerce division which were later written off.”
The vast majority of LookSmart’s revenues came from an agreement with Microsoft in which the software giant effectively outsourced its search functions to LookSmart. In October 2003, Microsoft terminated its deal with LookSmart, largely due to LookSmart’s allegedly inferior product and Microsoft’s desire to create its own search engine. At the time, LookSmart was also involved in legal action with former customers after it was claimed to have switched customers from a ‘one-time’ fee basis to a ‘pay-per-click’ model.
After the euphoria of the dot.com boom evaporated, Thornley quickly departed LookSmart, resigning as CEO and Chairman in 2002. The company remains listed on the NASDAQ but is valued (in total) at around US$28 million (LookSmart was forced to consolidate its shares in 2005 after it faced suspension from the exchange).
One point that has escaped many, including Thornley’s political opponents, is the source of Thornley’s wealth (believed to be upwards of $54 million according to BRW). Some have questions where Thornley’s $54 million fortune came from given that he received minimal remuneration while serving as CEO of Looksmart (earning around US$200,000 annually) and worked only briefly as a management consultant at McKinsey. Further, given the implosion in LookSmart’s share price, Thornley’s residual stake in the company is believed to be worth around US$1 million, while he raised approximately US$2.6 million over a course of share sales between November 2004 and December 2005 after resigning from the LookSmart board. (No details are forthcoming as to whether Thornley sold any shares in LookSmart’s 1999 IPO, which also may explain his wealth).
In solving the quandary, Crikey reviewed hundreds of SEC filings and determined that while he was Chairman and CEO of LookSmart, it appears that Thornley was quietly offloading part of his stake in the company (LookSmart executives were subject to only a 180 day lockup after listing). However, at the same time as purportedly selling LookSmart shares it appears that Thornley was also promoting LookSmart’s bright future to investors.
In March 2000, Thornley noted that:
Partners choose [LookSmart] because our high-quality search solutions help their users find exactly what they are looking for on the Internet…the massive reach of our partner network validates our search infrastructure model. The size of our distribution network allows partners and advertisers to achieve broad exposure and to gain access to nearly 74% of online users in the United States.
Announcing LookSmart’s first quarter results in April 2000, Thornley was even more upbeat, claiming that:
We believe our clear leadership in the search infrastructure space showed very strong operating results this quarter. To drive strong organic revenue growth in a seasonally weak quarter and to halve losses as a result exceeded our own aggressive expectations for the business…With recently announced partnerships with Time Warner, Prodigy and Road Runner due to come on stream, continuing rises in advertising yields and rapid growth in our new directory listings business, we expect accelerated revenue growth for the remainder of the year.
Thornley’s optimism continued through 2000, even as the dot.com bubble burst, noting in September that:
By continuing to distribute LookSmart’s directories to leading sites — including MSN, AltaVista, [email protected] and, as of today, Infospace — LookSmart is on target to reaching total ubiquity on the Web…Partners like Infospace continue to validate both the quality of LookSmart’s directory products, as well as the power of LookSmart’s model which brings additional revenue potential through eCommerce and advertising opportunities in and around the directory.
However, despite his public optimism, SEC filings (specifically, two Schedule 13G documents outlining share interests) indicate that between 31 December 1999 and 31 December 2000 Thornley and Ellery’s total shareholding in LookSmart actually fell from 15.07 million to 14.29 million shares.
The most logical explanation for the decrease in holding was that Thornley and Ellery were selling LookSmart shares. Interestingly, while the Schedule 13G filings indicate that their holding reduced by 778,000 shares, no Form 4 was produced, so the price received for those shares is not known. During 2000 LookSmart shares traded in a broad range, between $72 (in March), before finishing the year at $2.50 per share.
If Thornley and Ellery sold 778,000 shares during 2000, they would have raised between $US2 million and US$54 million (with The Age speculating back in 2006 that “Thornley cashed out about $30 million as the stock started to plunge”). It is therefore possible that the foundation of Thornley’s multi-million dollar fortune (which includes properties in Melbourne’s leafy Kew, as well as “grazing property in western Victoria and four investment properties in Melbourne, Queensland and New South Wales”) is based upon alleged sales of LookSmart shares during 2000 — all the while Thornley appeared outwardly optimistic about the company’s prospects.
Crikey contacted Thornley’s office seeking an explanation as to the apparent share sales and the source of Thornley’s vast wealth, but neither Thornley, not any of his advisers were available for comment. A Thornley staffer told Crikey that neither “the office has been packed up.”
Thornley himself did not provide a specific answer when interviewed in 2006 by Terry Lane, with Thornley noting that:
The first practical thing you understand as a founder of a company is that the founders are usually the last people that will be in a position to turn their stock into actual cash…
The rules [regarding vendor share sales] in the US are less restrictive than they are here, so that was not so much of an issue, it’s more a question of what’s the right thing to do, and it brings me to my major point which is that primarily as the CEO of a public company, you have a massive sense of responsibility, and with the stock price moving around wildly, you’ve got a whole lot of challenges to try and meet the responsibilities you have to all of those shareholders, many of whom have bought with a whole range of different aspirations, realistic or otherwise.
Thornley’s comments in 2006 do little to solve the mystery as to whether his alleged $54 million fortune originated.
If Thornley did sell a large package of LookSmart shares during 2000, it is not suggested that his actions amounted to a breach of Corporations laws. It is not illegal for an executive to sell their holding in a company unless such a sale is with inside information. However, some may question whether an executive, turned politician, turned executive should be profiting from millions of dollars worth of boom-time share sales while actively promoting a company’s future prospects.