THE EBB AND FLOW OF
THE EBB AND FLOW OF
THE “DOT-COM” INDUSTRY
By Raymond Edmonds
MBA 611
St Martin’s College
Advisor: John Price
April 29, 2002
TABLE OF CONTENTS
TABLE OF CONTENTS 2
OUTLINE 4
RESEARCH PAPER PROPOSAL 5
INTRODUCTION 6
PROBLEM STATEMENT 8
PURPOSE OF RESEARCH 8
METHOD 9
SCOPE 9
PROCEDURES 10
POTENTIAL USE OF RESULTS 10
DEFINITION OF TERMS 10
CHAPTER 1: “VENTURE CAPITAL” 11
AN OVERVIEW 11
Private Equity Investing 12
What Is A Venture Capitalist? 13
Investment Focus 14
Length of Investment 16
Types of Firms 16
Corporate Venturing 18
Commitments and Fund Raising 19
Capital Calls 20
Illiquidity 20
Other Types of Funds 20
Advisors and Fund of Funds 21
Disbursements 22
Exits 22
IPO 23
Mergers and Acquisitions 23
Valuations 23
Management Fees 24
Carried Interest 25
VENTURE CAPITALIST MEMBERSHIP 25
NVCA Research Program 25
NVCA's Research Objectives 26
Press Releases and Research Related Studies 26
CHAPTER 2: STARTUP COMPANIES 28
CRITICAL SUCCESS FACTORS OF START-UPS 28
“DOT-COMS” INDUSTRY EXAMPLES 29
Atlas Venture 30
IDG Ventures 30
Internet Capital Group 31
Crossport Systems Inc. 31
DanceScape Corp. 32
INTERNET “DOT-COM” CASE STUDIES 32
Mike Mathieu 33
Shirish Nadkarni 33
Jeff Reifman 34
Other Examples 34
“BABY BILLS” SUMMARY LIST: 37
CHAPTER 3: FREEINTERNET 40
THE BEGINNING 40
THE BREAKTHROUGH 41
TROUBLED TIMES 42
THE DEMISE 44
WHAT WENT WRONG 45
CHAPTER 4: FAILED VENTURES 47
INTRODUCTION 47
COMPANIES 48
INDIVIDUALS 50
Shelly Rossi 51
Stacy Drake 52
Ken Weins 54
Kacey Hawker 55
Jeff Coe 56
J.P. Miller 58
Peter Richards 59
CHAPTER 5: VENTURE ECONOMICS 61
QUARTERLY INVESTMENTS 61
FOURTH QUARTER, YEAR 2000 62
FIRST QUARTER YEAR 2001 64
SECOND QUARTER YEAR 2001 67
THIRD QUARTER YEAR 2001 70
CHAPTER 6: THE FUTURE OF “DOT-COM”S 74
CONCLUSION 79
REFERENCE 80
GLOSSARY 81
ENDNOTES 82
THE EBB AND FLOW OF THE “DOT-COM” INDUSTRY
OUTLINE
1. Proposal
2. Chapter 1: Venture Capital
a. Overview
b. Members
3. Chapter 2: Startup Companies
a. Company Names
b. Individuals
4. Chapter 3: Free I Net
5. Chapter 4: Failed Ventures
a. Companies that Filed Chapter 11
b. Individuals Who Lost it
6. Chapter 5: Venture Economics
7. Chapter 6: Future of the Industry
8. Conclusion
9. Glossary
10. References
RESEARCH PAPER PROPOSAL
INTRODUCTION
In December 1997, the currency of the Thai went crashing down to almost nonexistence. Fifty-six of fifty-eight Banking houses in Thai had closed and many businessmen were left unemployed. In August 1998, the Russian economy finally came crashing down.[i] Both bad economics and Asian oil prices triggered this event. These two events did not necessarily contribute to the fall of the “DOT-COM” industry, but they show an economic domino effect. By all reason, it was just a matter of time before the United States would be hit.
In 1997, at least one in every nine homes had a computer, and one in every five of those computers was connected to the Internet. The World Wide Web was the new gateway to the world and like a snowball rolling down a hill; it was getting bigger and moving faster than ever. Now, many things that previously took days to be completed were now done in hours or minutes. This new internet resource was similar to the gold rush in the 1800’s.
One significant group, investors, figured out early on how to best channel this new "star" product. They were the ‘Venture Capitalists,’ and they had the money to help harness this new ‘product.’ The effect of venture capital has been especially dramatic in Washington State, where companies such as , Microsoft Corp. and Starbucks Coffee Co. benefited from early venture investments.[ii] Venture Capital is not a new concept or program; and it has existed, in modern form, at least since the 1970’s.
“Venture Capital” is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.
Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.[iii]
Since 1970, venture-backed companies were responsible for creating 7.6 million U.S. jobs, about 5.9 percent of the U.S. work force and $1.3 trillion in revenue, 13.1 percent of the gross domestic product. Washington was reported to be ranked eighth in the nation in terms of jobs created by venture-backed companies with 263,585 and third in revenues with $75.3 billion. It was also the 12th fastest growing state for venture capital investments between 1996 and 2001, more than doubling the amount of capital invested over the five-year period from $351.9 million to an estimated $907.7 million.[iv]
Venture Capitalists backed the 10 or 15 year veterans of Microsoft, AT&T and other notable companies, who had ideas for a new product or concept that used the Internet to harness its power. These young entrepreneurs, and their rise and fall of fame, are the focus of this paper. Most notable, the focus is on Washington-based business and the Freeinternet, once headquartered in Federal Way, Washington, and called “Free I Net”. Why did these businesses fail? Was it based on the globalization process and the domino theory? Or, on the other hand, was it possible that new and inexperienced managers were at the helm? Or, did the money simply dry up?
Privately held Washington companies pulled in $1.2 billion in 1999, more than a 200 percent increase over the prior year. Only New York, where companies attracted $1.8 billion, had a faster growth rate. With so much new money, Seattle was paced to surpass New York that year as the fastest growth region in the country for venture investments, said Kirk Walden, national director of venture capital research at PricewaterhouseCoopers.[v]
The National Venture Capital Association, a trade group that represents more than 430 venture capital and private equity firms, released a study in October 2001 with this upbeat headline: "Three Decades of Venture Capital Investments Yields 7.6 Million Jobs and $1.3 Trillion in Revenue."[vi] All told, more than 40 local technology companies have collapsed from the period of June 2000 to December 2001, creating a massive flush of capital down the drain.
PROBLEM STATEMENT
On October 2, 2000, word leaked out that the Free I Net had cut 90 of its 300 employees. The following day, it canceled a $172 million initial public offering. By October 9, was barely hanging by a thread as it sold off its assets to one-time competitor ‘Net Zero,’ filed for bankruptcy protection in Seattle, and then eliminated most of the remaining staff.[vii] was once a promising company, but as with many other “DOT-COM”'s, something went very wrong.
PURPOSE OF RESEARCH
The purpose of this paper is to identify how the “DOT-COM” Industry got its start. How the industry flourished, and who made it flourish. Also to identify the backers of such ventures, particularly the “Venture Capitalist.” Who provided the leadership for these new start-ups and where they came from? What happened to some of these companies, and what might the future hold for them?
METHOD
This paper will identify several things: Who are the “Venture Capitalists;” Where does the money come from; and, how the money was spent. What happened to the money? Moreover, speculation on what happens next. This paper will use examples of several “DOT-COM” successes and failures, most notably, Free I Net.
SCOPE
Information for this paper will be sourced from the current literature, including, newspapers and magazines. Additional information sources will be from websites, search engines, and both the National Venture Capital Association and Venture Economist.
The National Venture Capital Association (NVCA) collects and analyzes venture capital and private equity statistics in conjunction with its research partner, Venture Economics, (a division of Thompson Financial Securities Data). This data is collected through a quarterly survey of venture capital firms and is supplemented by other public and private data sources. The NVCA/Venture Economics data stream includes information regarding venture capital fundraising, venture capital investments, venture capital exits (IPO or M&A activity) and venture capital performance. NVCA/Venture Economics data also includes information regarding other segments within the private equity asset class, such as buyout and mezzanine investing.[viii]
PROCEDURES
This paper will reveal by charts, depicting demographics, and Quarterly Reports, how economic trends may have affected the fall of the “DOT-COM” Industry. It will also provide background information on several companies and “Venture Capital.”
POTENTIAL USE OF RESULTS
This paper provides a supporting document for future point and counterpoint discussions by both scholars and students. All references at the time of this writing, will be current or within two years of age.
DEFINITION OF TERMS
This document contains a glossary of terms for the reader’s convenience. Also included, is a list of references used for future research.
CHAPTER 1: “VENTURE CAPITAL”
AN OVERVIEW
“Venture Capital” is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. “Venture Capital” is often an important source of equity for many large start-ups.
Professionally managed “Venture Capital Firms,” generally, are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the Venture Capitalists themselves.
The role of Venture Capitalists generally extends to:
• Finance new and rapidly growing companies
• Purchase equity securities
• Assist in the development of new products or services
• Add value to the company through active participation
• Take higher risks with the expectation of higher rewards, and
• They have a long-term orientation
When considering a prospective investment, Venture Capitalists carefully screen both the technical and business merits of the proposed company. Venture Capitalists may only invest in a small percentage of the businesses they actually review and often prefer as candidates those companies, which have a long-term perspective. For those selected, they may actively work cooperatively with the company's management, perhaps by contributing their experience and business savvy gained from helping other companies with similar growth challenges.
Venture Capitalists mitigate the risk of ‘Venture Investing’ by developing a portfolio of young companies in a single Venture Fund. Many times they will co-invest with other professional “Venture Capital Firms.” In addition, many venture partnerships will manage multiple funds simultaneously. For decades, Venture Capitalists have nurtured the growth of America's high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are all famous examples of companies that have received “Venture Capital” early in their development.
Private Equity Investing
“Venture Capital” investing has grown from a small investment pool in the 1960s and early 1970s, to a mainstream asset class that is a viable and significant part of the institutional and corporate investment portfolio. Recently, some investors have referred to ‘Venture Investing’ and ‘Buyout Investing’ as "private equity investing." This term can be confusing, because some professionals in the investment industry use the term "private equity" to refer only to ‘buyout fund investing.’ In any case, an institutional investor will allocate 2% to 3% of their institutional portfolio. This is used for investment in alternative assets such as private equity or “Venture Capital” as part of their overall asset allocation. Currently, over 50% of investments in “Venture Capital”/private equity comes from institutional public and private pension funds, with the balance coming from endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class.
What Is A Venture Capitalist?
A common misperception of the Venture Capitalist is that of a wealthy financier who simply wants to fund start-up companies. This misperception of the Venture Capitalist, is of one who develops a brand new ‘Change-the-World’ invention and needs capital, which they can not get from a bank or from their own pockets. So, they enlist the help of a Venture Capitalist.
In truth, “Venture Capital” and private equity firms are actually pools of capital, typically organized as a limited partnership that invests in companies that represent the opportunity for a high rate of return, usually within five to seven years. The Venture Capitalist examines several hundred-investment opportunities before investing in only a few selected companies with favorable investment opportunities. Far from being simply passive financiers, Venture Capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of their invested companies. In fact, they are entrepreneurs first, and financiers second.
Nevertheless, individuals may be Venture Capitalists. In the early days of “Venture Capital” investment, in the 1950s and 1960s, individual investors were the archetypal venture investors. While this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle. However, in the last few years, individuals have again become a potent and increasingly larger part of the early stage of ‘start-up venture life cycle.’ These "angel investors" may mentor a company and provide essential capital and expertise. They help develop companies to ensure a Rate of Return from their investment. Such angel investors may be wealthy people, with management expertise, or, retired businessmen and women who seek opportunity from successful first-hand business development.
Investment Focus
‘Venture Capitalists’ may find enterprise individuals or organizations that may need some focus or direction. Venture Capitalists may be “generalist” or “specialist investors” depending on their investment strategy. They may be generalists, investing in various industries sectors, various geographic locations, or, various stages of a company’s life cycle. Alternatively, they may be specialists, in one or two industry sectors, or, they may seek to invest in only a localized geographic area.
Surprisingly, not all Venture Capitalists invest in "start-ups." While venture firms may invest in companies that are in their initial ‘start-up’ modes, Venture Capitalists will also invest in companies at various stages of the business life cycle. For example, a Venture Capitalist may invest before there is a real product or organized company (called, "seed investing"), or they may provide the necessary capital to start up a company in its first or second stage of development, (known as "early stage investing"). Also, the Venture Capitalist may provide needed financing to help a company grow beyond ‘critical mass’ to facilitate operational success, (or, "expansion stage financing").
Sometimes the strategic Venture Capitalist may invest in a company throughout the company’s life cycle and some funds may focus on ‘later stage investing.’ This provides financing to help the company reach a “business critical mass” and to attract public financing through stock offerings. Alternatively, the Venture Capitalist may help a company attract potential mergers or acquisitions with other companies by providing ‘liquidity’ and ‘exit’ for the company’s founders.
At the other end of the spectrum, Venture Funds may specialize in the ‘acquisition,’ ‘turnaround,’ or, ‘re-capitalization’ of public and private companies that may represent favorable investment opportunities. Often, there are Venture Funds that will be broadly diversified, to invest in companies of various industry sectors. For example, these may be as diverse as semiconductor, software, retail, or restaurant businesses that may specialize in only one technology.
While ‘high technology’ investments comprise most of the U.S. venture investing activity, and perhaps the most visible, Venture Capitalists also invest in many other mainstream companies, such as construction, industrial products, business services, and others. Several firms have even specialized in retail company investment, or, perhaps those with a focus in investing only for "socially responsible" start-up endeavors.
Venture firms come in various sizes, from small ‘local’ or ‘domestic’ seed specialist firms of only a few million management dollars, to firms with well over a billion dollars in invested capital around the world. The common denominator for all these variants of venture investing is that the Venture Capitalist has an active, not passive role, and vested interest in guiding, leading and nurturing the growth of the companies they have invested in. They actively seek to add value through their prior practical experience in investing in several other companies.
Some venture firms are most successful when creating ‘synergies’ between the various company investments. For example, a company that has great software, but does not have adequate distribution technology, may be strategically paired with another company in the venture portfolio that has better distribution technology.
Length of Investment
Although Venture Capitalists seek to help companies grow, they will typically seek to exit the investment in three to seven years. Early stage investments may take seven to ten years to mature, while later stage investments may only require a few years. So, the appetite for the ‘investment life cycle’ must be congruent with the limited partnerships’ eventual appetite for liquidity. Whether venture investment is short or long term the investment must be made with careful diligence, expertise, and carry a substantial promise of returns.
Types of Firms
There are several types of “Venture Capital” firms, but most mainstream firms invest their capital through funds organized as limited partnerships. In these, the “Venture Capital Firm” serves as general partner. However, the most common type of venture firm is an ‘independent venture firm’ that has no affiliations with any other financial institution. These are called "private independent firms." Alternatively, Venture Firms may be affiliates or subsidiaries of a commercial bank, investment bank or insurance company making investments on behalf of outside investors or the parent firm’s clients. Or, firms may be subsidiaries of non-financial industrial corporations, making investments on behalf of the parent itself. These latter firms are typically called, "direct investors," or, "corporate venture investors."
Other organizations may include government affiliated investment programs which help start up companies through state, local, or, federal programs. One such program is the Small Business Investment Company, or SBIC program, administered by the Small Business Administration. Here, a “Venture Capital” firm may augment its own funds with federal funds, and thereby leverage its investment in qualified investee companies.
While the predominant organizational form is the limited partnership, recent tax codes have allowed the formation of the Limited Liability Partnerships, ("LLPs"), or the Limited Liability Companies ("LLCs"), as alternatives. Nevertheless, the limited partnership remains the predominant form. The relative advantages and disadvantages of each have to do with liability, taxation issues, and management responsibility.
Another format for a “Venture Capital” firm may be one organized as a ‘partnership’ or ‘pooled fund.’ That is essentially a fund made up of the general partner, investors, or limited partners. These funds are typically organized as fixed life partnerships, usually having a life of ten years. Each fund is then capitalized by commitments of capital from the limited partners. Once the partnership has reached its target size, the partnership is closed to further investment from new investors or even existing investors. So the fund has a fixed capital pool from which to make its investments.
Like a mutual fund company, a “Venture Capital” firm may have more than one fund in existence. A venture firm may raise another fund a few years after closing the first fund in order to continue to invest in companies and to provide more opportunities for existing and new investors. It is not uncommon to see a successful firm raise six or seven funds consecutively over the span of ten to fifteen years. Each fund is managed separately and has its own investors or limited partners, and its own general partner. These funds’ investment strategy may be similar to other funds in the firm. However, the firm may have one fund with a specific focus, yet, others with different focuses, and perhaps even a broadly diversified portfolio. Which method is used, depends on the strategy and focus of the venture firm itself.
Corporate Venturing
‘Corporate Venturing,’ a form of investing popularized in the 1980s, is again surfacing. Called, "direct investing,” by portfolio companies of “Venture Capital” programs or subsidiaries of non-financial corporations, these investment vehicles seek to find qualified investment opportunities congruent with the parent company’s strategic technology, or, those that provide synergy or cost savings.
These corporate venturing programs may be loosely organized programs affiliated with existing business development programs, or, they may be self-contained entities with a strategic charter and mission to make investments congruent with the parent’s strategic mission. Some venture firms actually specialize in advising, consulting and managing a corporation’s venturing program.
The typical distinction between corporate venturing and other types of venture investment vehicles is that corporate venturing is usually performed with corporate strategic objectives in mind, while other venture investment vehicles typically have investment return or financial objectives as their primary goal. Nevertheless, all corporate venture programs are not immune to financial considerations. Also, another basic distinction of corporate venture programs is that they usually invest their parent’s capital while other venture investment vehicles invest outside investors’ capital.
Commitments and Fund Raising
All venture firms go through a basic “Fund Raising” process in which they seek investment commitments from investors. Yet, this should not be confused with the actual investment in investee or "portfolio" companies by the “Venture Capital” firms, which may also be referred to as "fund raising" in some circles. Basically, the commitments of capital are raised from the investors during the formation of the fund. A venture firm will then set out prospecting for investors with a target fund size. It distributes a prospectus to potential investors, and the process may take from several weeks to several months simply to raise the requisite capital. The fund then seeks commitments of capital from institutional investors, endowments, foundations and individuals who in turn, seek to invest part of their portfolios in ‘promising’ opportunities with a higher risk factor and commensurate opportunity for higher returns.
In view of the risk factor, the length of investment, the illiquidity involved in venture investing, and also as the minimum commitment requirements are so high, venture capital fund investing is generally out of reach for the average individual. The venture fund may have only a few, or as many as 100, limited partners depending on the target size of the fund. Once the firm has raised enough commitments, it will start making its investments in portfolio companies.
Capital Calls
Making investments in portfolio companies requires that venture firms start "calling" its limited partner’s ‘commitments.’ The firm will collect, or "call," the needed investment capital from the limited partner often in a series of traces commonly known as "capital calls." Capital calls from limited partners to the venture fund are sometimes called "takedowns," or, "paid-in capital." In the past, the venture firm would "call" this capital down in three equal installments, over a three-year period. More recently, venture firms have synchronized their funding cycles and prefer to call their capital on an “as-needed” basis for investment.
Illiquidity
Most often, limited partners make investments in venture funds knowing at the onset that the investment will be long-term. It may take years before the first investments begin to return substantial proceeds. In fact, in many cases the invested capital may be tied up in an investment for as long as seven to ten years. Limited partners must understand that this illiquidity should be factored into their investment decision.
Other Types of Funds
Of course, since venture firms are private firms, there is typically no way to ‘exit’ before a partnership totally matures or expires. However, in recent years, a new form of venture firm has evolved which is called a "secondary" partnership. These firms specialize in purchasing the portfolios of other investor company investments. This type of partnership provides options for liquidity by the original investors. Such ‘secondary’ partnerships, usually expect a very large return, and they invest in those they consider to be ‘undervalued’ companies.
Advisors and Fund of Funds
Evaluating which funds in which to invest is not unlike choosing a good stock manager or mutual fund, except the decision to invest is a long-term commitment. Such investment decisions can take considerable investment knowledge and time on the part of the limited partner investor. Larger institutions, for example, may have investments in excess of 100 different venture capital and buyout funds, and may continually invest in new funds as they are formed.
Other limited partner investors may have neither the resources nor the expertise to manage and invest concurrently in many funds, and thus may seek to delegate their decisions to an investment advisor, or, "gatekeeper." This advisor pools the assets of its various clients and invests these proceeds as a limited partner of a ‘venture’ or ‘buyout fund’ currently raising capital. Alternatively, an investor may invest in a "fund of funds," which is a partnership organized to invest in other partnerships, thus providing the limited partner investor with added diversification and the ability to invest smaller amounts into a variety of funds.
Disbursements
Once all of the previous items and areas have been considered, the next logical step is the disbursements of funds. The investment by venture funds into investee portfolio companies is simply called, "disbursements.” Here, a company will receive capital in one or more rounds of periodic financing. For example, a venture firm may make these disbursements by itself, or, in many cases will ‘co-invest’ in a company with other venture firms, (called, "co-investment" or "syndication"). Syndication then provides more capital resources for the Investor Company. Often, firms co-invest because the company investment is congruent with the investment strategies of various venture firms, and each firm will bring some basic competitive advantage to the investment.
So, the venture firm provides both capital and management expertise, and usually takes a seat on the board of the company to ensure the investment has the best chance of being successful. Portfolio companies may receive one round, or, in many cases, several rounds of periodic venture financing in its life, on ‘as needed’ bases. Venture Firms may not invest all of their committed capital, but may opt instead to reserve some capital for later investments in successful companies with additional capital needs.
Exits
Depending on its investment focus and strategy, a venture firm may seek to “exit” the investment in the Portfolio Company within three to five years of the initial investment. While the ‘initial public offering,’ (or, “IPO”), may be the most glamorous and heralded type of exit sought by Venture Capitalists and owners of a company, most successful exits occur through a ‘merger’ or ‘acquisition’ of a company. This may be by the original founders, or, perhaps another company. The expertise of the venture firm in successfully exiting its investment will often dictate the success of their exit and the exit of the owners of the company.
IPO
The ‘Initial Public Offering’ is the most visible type of exit for a venture investment. Recently, technology IPO’s have been in the limelight, particularly during the IPO boom of the late 1990’s. Upon public offering, the venture firm is considered an ‘insider,’ and will receive stock in the company, though the firm is regulated and restricted in how that stock can be sold or liquidated for several years. Once this stock is freely tradable, usually after about two years, the venture fund will distribute this stock or cash to its limited partner investor. These may then manage the ‘public stock’ as a ‘regular stock holding,’ or, they may choose to liquidate it upon receipt. Over the last twenty-five years, almost 3000 companies financed by venture funds have gone public.
Mergers and Acquisitions
‘Mergers’ and ‘Acquisitions’ represent the most common types of successful ‘exit’ for venture investments. In the case of a merger or acquisition, the venture firm will simply receive stock or cash from the acquiring company and the venture investor will distribute the proceeds from the sale to its limited partners.
Valuations
Like a mutual fund, each venture fund has a ‘net asset value’ or the value of an investor’s holdings in that fund at any given time. However, unlike a mutual fund, this value is not determined through a public market transaction, but through a estimated valuation of the underlying portfolio. Remember that the investment is illiquid and at any point, the partnership may have both private companies and the stock of public companies in its portfolio. The public stocks are also usually subject to restrictions for a holding period and are thus subject to a ‘liquidity discount’ in the portfolio valuation.
Each company is valued at an agreed-upon amount, established between venture firms when invested in by venture funds. In subsequent quarters, the venture investor will usually keep this valuation intact until a material event occurs to change the value. Venture investors try to conservatively value their investments using guidelines or standard industry practices and by terms outlined in the prospectus of the fund. While venture investors are usually conservative in the valuation of companies, it is common to find that early stage funds may have an even more conservative valuation of their companies due to the long lives of their investments, as compared to other funds with shorter investment cycles.
Management Fees
As an investment manager, the general partner will typically charge a ‘management fee’ to cover the costs of managing committed capital. For example, the management fee may be paid quarterly for the life of the fund or it may be ‘tapered’ or ‘curtailed’ in the later stages of a fund’s life. This curtailment is most often negotiated at the onset of the funds formation, and documented in the ‘Terms and Conditions’ of the investment.
Carried Interest
"Carried Interest" is the term used to denote the profit split of proceeds to the general partner. Basically, this is the general partners’ fee for carrying the management responsibility and liability, while providing the needed expertise to successfully manage the investment. There are many variations of profit split, both in size and how it is calculated and accrued.
VENTURE CAPITALIST MEMBERSHIP
NVCA Research Program
The National “Venture Capital” Association (NVCA) collects and analyzes “Venture Capital” and private equity statistics in conjunction with its research partner, Venture Economics, (a division of Thompson Financial Securities Data). This data is collected through a quarterly survey of “Venture Capital” firms and is supplemented by other public and private data sources.
The NVCA/Venture Economics data stream includes valuable information regarding “Venture Capital” fundraising, “Venture Capital” investments, “Venture Capital” exits (IPO or M&A activity) and “Venture Capital” performance. However, the NVCA/Venture Economics data also includes information regarding other segments within the private equity asset class, such as ‘buyout’ and ‘mezzanine’ investing.
NVCA's Research Objectives
The NVCA has several objectives when conducting its business and research. They are as follows:
• To create the most comprehensive and accurate source for all “Venture Capital” and private equity data.
• To offer NVCA members a free basic research package and significant discounts;
• To provide timely updates on industry statistics to the NVCA membership and press;
• To reduce survey fatigue among the “Venture Capital” community, and,
• To enhance research capabilities that will enable NVCA to better represent the public policy interests of the “Venture Capital” and private equity communities.
The National “Venture Capital” Association has endorsed ‘VentureXpert,’ Venture Economics' online “Venture Capital” and private equity database. This acts as its official industry database. The VentureXpert database is an extremely robust research tool that includes data on the full “Venture Capital” process. Any NVCA members that respond to the NVCA/Venture Economics quarterly survey may receive preferential access to VentureXpert.
Press Releases and Research Related Studies
On a quarterly basis, NVCA and Venture Economics issues joint press releases on the results of the quarterly survey. They encourage the press and general public to check their site often for new and updated statistics. In addition to quarterly press releases, NVCA issues its Annual Yearbook each spring with detailed accounting and analysis of “Venture Capital” industry activity. The Yearbook includes historical data from as far back as the early 1980's. It details fundraising activity, investment activity, (including industry and stage breakouts), exits and performance data. In addition, the Yearbook provides comparisons of U.S. “Venture Capital” activity to key international markets. The Yearbook can be purchased and acquired online by clicking the NVCA Publications link, (see link in reference chapter), or, by calling NVCA, (at 703-524-2549.)
Highly Safeguarded Information
Finally, it is important to note that Venture Economics has agreed to comply with NVCA mandated rules of "appropriate use." Surveys are processed by specialized teams of ‘VE’ researchers to ensure that data denoted as "do not disclose" is not used in publications or released to unauthorized users, including NVCA personnel and officers. These mandated rules of "appropriate use" help enable VentureXpert to be among the first databases in the industry to accurately portray a comprehensive, cumulative picture of venture investment.
CHAPTER 2: STARTUP COMPANIES
CRITICAL SUCCESS FACTORS OF START-UPS
After successfully obtaining capital for a “DOT-COM” business, one must implement a plan in such a manner that helps ensure success. A review of the literature has suggested there are nine critical factors of success. The following list was referenced from an article posted on CIO WebPages, called, “Successful E-Business: Integrating Business Fundamentals with “DOT-COM” Savvy.”
“Nine Factors for Success[ix]”
1. Visionary leadership. A clear direction for the e-Business initiative.
2. Strategy formulation. The road map to your success.
3. Business integration. The level to which one will integrate to business processes.
4. E-Business infrastructure. The systems and technical infrastructure set in place to support the e-Business vision, strategy, and plan, as well as business integration.
5. Measurement. Established measurements and new web-metrics to evaluate the progress of your company's e-Business initiatives.
6. Integration. The effective use of web-enabled data and business intelligence to direct future business direction, promotional efforts, or product development.
7. Adaptiveness. A Company's ability to modify or overhaul the e-Business strategy or technical infrastructure to quickly respond to changing market demands.
8. Reinvention. Establishing a culture, business process, and planning approach that anticipates and encourages reinvention "on the fly."
9. Innovation. The continuous innovative use of Internet-based technology and emerging business models to achieve business goals and provide true customer value.
“DOT-COMS” INDUSTRY EXAMPLES
Many East Coast and California Company revenues are migrating to the Pacific Northwest in the last few years, due to the “DOT-COM” boom. Below are a few representative samples of new “DOT-COM,” and formally ‘Brick and Mortar,’ Stores that have moved in part or whole to the Internet. Essentially, the Internet has changed the rules of today’s economy. Many Microsoft executives, for example, hired for their aggressiveness and ability to spot technological trends, believed they could not sit on the sidelines while the Internet revolution passed them by. The companies referenced below stand testament to this industrial shift.
Outside money is not a new phenomenon in Seattle. For years, California, New York and Boston firms have been pumping cash into local Seattle start-ups. In the past quarter, 34 outside venture firms participated in 51 local ‘deals,’ according to information provided by PricewaterhouseCoopers. That compares with 15 Seattle firms that did 37 deals. A principle goal of venture capitalists was to establish branch offices and to have outside firms to ‘take a bite’ out of what could be an under-served market. They also wanted an answer to one of the entrepreneur's most pressing questions when considering investors: Why take money from one who has to commute to a board meeting from Palo Alto or New York?
In an Internet-based industry where “geography” is said to be “transparent,” there still remains value in regional Venture Capitalist Firms. One obvious reason for the ‘on-the-street’ mentality is competition-based. With the rise of several mid-size Seattle Venture Capitals Firms, the Silicon Valley and New York money managers are finding it tougher to get into the right deals at the right time. Simply to remain competitive, they often need to hire people with ties to the local technology community.
Atlas Venture
The first company is Atlas Venture, which in September 2000, announced plans to set up a Seattle office under the direction of former Microsoft Vice President Laura Jennings. Their capital was $1.6 billion under management and operations in five countries. This 20-year-old Boston firm is four times larger than the biggest Seattle venture capital firm, excluding Paul Allen's Vulcan Ventures. Jennings, who spent 12 years at Microsoft, says she will not use Atlas' muscle to bully Seattle's smaller venture firms.[x]
IDG Ventures
The second example is that of San Francisco-based, IDG Ventures. This was an early investor in F5 Networks and . A branch office was set up in Seattle in August 2000, simply because partner Kimberly Davis King believed that the city is the next frontier on the West (Coast) for a large expansion of start-up companies.[xi]
Internet Capital Group
A third example is that of Internet Capital Group, which is a publicly traded holding company based in Wayne, Penn. They set up operations in Seattle in June 2000, while Mohr and Davidow Ventures became one of the first Silicon Valley venture capital firms to establish a branch office in the Northwest in March that year. The previous mentioned big firms, Chicago-based Arch Venture Partners and Boston-based Polaris Venture Partners, have been established in the Northwest since the mid-1990s.[xii]
Crossport Systems Inc.
A fourth solid example of a “DOT-COM” start up was Crossport Systems Inc. which acquired $3.3 million in a second round of funding. The 6-month-old Bellevue Company started in March 2000 and used the funds to complete development on a hardware product that securely connected telecommuters to their companies' computer networks. Their product was the size of a hardback book called “Crossport's Pivio.” It was a hardware system that plugged into a computer in the home of a telecommuter. It would then manage data transmissions between the telecommuter and corporate network by encrypting the data using a security standard known as, “IPSec”. Executives from Attachmate, ST Labs and founded the company. The expectation was to release the product by the end of April 2000. They did not discuss pricing, saying only it would cost less than competing technology from Seattle-based ‘WatchGuard’ and Sunnyvale, California based SonicWall Inc. Investors in Crossport include Camelot Funds and Aspira Capital Management. Crossport, which raised $2.2 million in its first round, employed about 20 people and was attempting to take advantage of an increase in telecommuting, (according to published reports, the number of telecommuters is expected to jump from 23 million this year to 30 million in 2003[xiii]).
DanceScape Corp.
A fifth example of a “DOT-COM” was sponsored by Timberline Ventures of Seattle which made a $650,000 investment in DanceScape Corp., operator of the oldest online community for competitive ballroom dancing. Led by former North American Amateur Ballroom DanceSport champion, Robert Tang, features a calendar of upcoming events, an online store and a photo gallery of Australian, German and North American champions. But it also features a three-dimensional chat room in the shape of a ballroom. Surprisingly, Tang believed that ballroom dance was perfect for the Internet, citing the success of , which is webcasting the Summer Olympics in 2000, and also acquired Seattle-based , (a previous boost came when ballroom dance was featured during the closing ceremonies of the Sydney 2000 Olympic Games[xiv]).
INTERNET “DOT-COM” CASE STUDIES
Local venture capitalists call them "Baby Bills," named for Microsoft founder Gates. Recently, dozens of previous Microsoft millionaires have gone their own way. The exiting Microsoft lineup of executives is impressive. The birth of the Internet, coupled with the fact that Microsoft is no longer the nimble entrepreneurial organization of 15 years, ago are the two major factors driving the prominent executive departures. Below are several examples. In fact, recently Microsoft has experienced a major exodus of managerial talent.
Mike Mathieu
At 30, Mike Mathieu was the youngest general manager at Microsoft. He oversaw 175 people and was partly responsible for building into the third-most visited web portal site on the Internet. In February 2000, he joined the Internet gold rush and said ‘goodbye’ to Microsoft, and ‘hello’ to the world of high-tech startups.
Mathieu left his cushy office in Redmond and a healthy pile of stock options behind. He formed a company in the spare bedroom of his Ravenna home, tentatively called “The Mysterious E-Commerce Startup,” (see: ).
Mathieu no longer worried about Microsoft's recruiting and retention efforts. He is too busy trying to build his own team of programmers and Web designers. He recruited professionals from both Visio and Cambridge Technology Partners. At the Northwest High-Tech Job Fair in September 1999, he collected 450 resumes. He met with diverse lawyers, bankers and real estate agents, because he realized creating a new company is a complex and strategic endeavor. He anticipated that Seattle may follow the pattern of Silicon Valley in the '50s and '60s when Hewlett-Packard and Fairchild Semiconductor began venture spin-offs that propelled much of what even conservative federal bankers refer to as, "The New Economy". [xv]
Shirish Nadkarni
A second enterprising person to start their own company was Shirish Nadkarni, a 38-year-old with a Harvard MBA. He most recently served as director of product planning at MSN, then formed in February, 2000. After an 11-year career at Microsoft, he considered retiring, but soon after leaving Microsoft, he was bitten by the entrepreneurial bug. It wasn't long before the previous native of Bombay, India, was staying up late writing new business plans in the den of his Woodinville home.
Jeff Reifman
The next entrepreneur is Jeff Reifman, who is a 29-year-old former program manager at MSNBC. He reportedly left behind $700,000 in stock options in April 2000, to co-found “,” a 24-person Seattle based Internet Company that delivers gift certificates over the World Wide Web. Remarkably, had he stayed at Microsoft just two more months, he would have been able to cash in on his stock options. Yet for Reifman, who owns two non-profit coffeehouses on Capitol Hill in Seattle, it seems never to have been about the money. Rather, it was about creating a company that makes a difference. Reifman also said of Microsoft, which has grown to 30,200 employees, that it is a more bureaucratic company than the one he joined eight years ago, and that was part of his reason for leaving.
Other Examples
Other previous Microsoft managers have followed suit. For example, Peter Neupert, who oversaw MSNBC and Slate magazine, was lured away from Microsoft in June 1999 to head Bellevue-based ‘.’ Raghav Kher, former director of strategic business decisions at Microsoft, launched Redmond-based ‘’ in May 2000. Hadi Partovi, a former group manager for Microsoft’s Internet Explorer, recently joined a Palo Alto, California-based startup called, ‘Tellme Networks Inc.’ Sam Jadallah, a Microsoft vice president with 12 years under his belt, announced this month that he too, was leaving the company to join an as yet-to-be-named Seattle e-commerce startup.
Summarization
There are no exact figures on how many "Baby Bills" are located in the Puget Sound region. However, Tony Audino, a local venture capitalist who founded Microsoft Alumnet, which is a nonprofit organization that supports the entrepreneurial and philanthropic causes of Microsoft alumni, said the number is growing. Microsoft Alumnet, created in 1995, had a membership, which had swelled to more than 2,500. Audino, a former marketing manager at Microsoft, estimated that as many as about 30 percent to 40 percent of those members have created their own companies or consulting practices, or joined smaller startups.
With such an executive exodus, this growing trend was called the "lighthouse effect." Of course, in Silicon Valley, the "lighthouse effect" has been going on for decades. Giant companies such as Hewlett-Packard and Fairchild Semiconductor, which also recruited the best and brightest minds in science, spawned an entrepreneurial boom in the 1950s and 1960s that is still expanding.
While these departures from Microsoft may have been a natural ‘building block’ in Seattle's booming technology industry phase, the outflow of talented executives and developers from Microsoft helps to build a strong technology infrastructure in the Pacific Northwest. Of course, this ‘brain drain’ from Microsoft, if continued, could have posed a serious problem for the software giant. Since Microsoft relies on intellectual capital and fast-moving executive talent to stay ahead of competitors, the loss of executive talent must take its eventual toll on even Microsoft.
“BABY BILLS” SUMMARY LIST[xvi]:
RAGHAV KHER
Company:
Headquarters: Redmond
Business: E-commerce
Job at Microsoft: Director of strategic business decisions
JEFF LIL
Company:
Founded: March 1999
Headquarters: Seattle
Business: Internet portal
Job at Microsoft: Development manager The Microsoft Network
STEVE MURCH
Company: Rezworks
Founded: 1998
Headquarters: Seattle
Business: Internet travel services
Job at Microsoft: Manager of the Internet Gaming Zone
SHIRISH NADKARNI
Company:
Founded: February 1999
Headquarters: Woodinville
Business: Delivers software applications over the Internet
Job at Microsoft: Director of product planning at The Microsoft Network
PETER NEUPERT
Company:
Founded: Summer 1998
Headquarters: Bellevue
Business: Internet pharmacy
Job at Microsoft: Vice President News and Publishing for the Interactive Media Group
HADI PARTOVI
Company: Tellme Networks
Founded: February 1999
Headquarters: Palo Alto, Ca.
Business: Telecommunications and Internet technology
Job at Microsoft: Group program manager for Internet Explorer
JEFF REIFMAN
Company:
Founded: April 1999
Headquarters: Seattle
Business: Online gift certificates
Job at Microsoft: Program Manager at MSNBC
CHAPTER 3: FREEINTERNET
THE BEGINNING
FreeInternet, originally know as “Freei Networks,” was founded in September 1998 by Robert McCausland. The company was located at in Federal Way, Washington. McCausland, the founder, was a 39-year-old entrepreneur, who before his foray into the dot-com world ran Home Mortgage USA. McCausland held a 54 percent stake in , while a Menlo Park, California Venture Capital Firm, Sequoia Capital, contributed a 22 percent stake. Also InfoSpace founder, Naveen Jain, contributed a 1 percent stake.
The concept of FreeInternet was simple. Subscribers who use the FreeInternet service did not pay a monthly fee for their Internet connection. However, the users must view targeted banner advertisements while surfing the Web. The company used some inventive as well as some regular business tactics to gain subscribes and market ground. They used ads, created by the Sitanen/Keehn Advertising firm, which featured "Baby Bob," (which later became a TV show in March 2002) a genius baby that encourages viewers to get free internet access through . "Baby Bob" was named after Bob McCausland, founder and chief executive of . The national ad campaign aired commercials during network prime time and on cable sports, including the Napa 300 and Daytona 500 automobile races. The company also entered agreements with basketball star Shaquille O'Neal and supermodel Claudia Schiffer to promote the new companies brand.
When FreeInternet open its services in October 1998, it opened with 400,000 subscribers. At that time, internet fees averaged $9.95 to $21.95: no one roamed for free. But even more threatening to the stranglehold of the pay-for-service providers was the early success of a new rival with free dial up. The company faced fierce competition from America Online, Microsoft, Earthlink, NetZero and Juno Online Services. New York-based Juno, with more than 2 million subscribers, sued Freeinternet in March 2000, for allegedly infringing on its trademarked slogan; "E-mail was meant to be free."
In 1998, Freeinternet didn’t publicly report revenue. However, the company had a stated cash position of $20.3 million towards the end of 1999. By December 1999, raised $25 million which helped to fuel their new advertising campaign. In January 2000, The Federal Way-based free Internet service provider was on the fast track for an initial public offering after raising $35 million in venture capital. Freeinternet raised a $53 million round of capital in March 2000. Its backers included; American Express, InfoSpace Inc., Sequoia Capital and . FreeInternet claimed greater than 1.5 million subscribers in nearly 1,300 cities, and it was the seventh largest Internet service provider and the largest privately held free ISP in the country.
THE BREAKTHROUGH
In April 2000, Freeinternet, Freei Networks Inc., the country's largest privately held free Internet service provider, was going to lose its distinction. The company filed documents with the Securities and Exchange Commission for an initial public offering that could bring the 242-person company as much as $172 million. The company had experienced rapid subscriber growth in the prior two years. The company’s strength grew from 242 to 300 in the following months.
Soon, the flurry of IPO filings in Seattle started to attract some financial and legal heavyweights. Investment banking powerhouse Goldman Sachs announced plans to open a branch office in Seattle as did San Francisco corporate law firm Orrick, Herrington & Sutcliffe. Investors were asking themselves, “Why didn't we open an office in the area at least two or three years earlier?”
Since the beginning of the service in October 1998, the company attracted 2.2 million subscribers. In a six-month period, the company added 1.7 million subscribers and set up an operation in Singapore. They also inked a $70 million deal with the internet Infrastructure Company, Cable & Wireless, which would give them the capacity to add 10 million more users. The company, which planed to trade on the NASDAQ exchange under the ticker symbol FREI, lost $18.7 million in the previous year. The investment bank Bear Stearns & Co. and Banc of America Securities were to be the lead manager on the deal. Many thought the FreeInternet would seize the market.
TROUBLED TIMES
In the months that followed, Freeinternet popularity continued to grow and the company continued to expand. However, banner ads and lack of consumer confidence in the economy continued to climb. ‘Choppy’ market conditions had prevented FreeInternet from selling shares. Publicly traded competitors, such as New York-based Juno Online Services and Westlake Village, California-based NetZero were struggling to gain investors' confidence during this period. Meanwhile, shares of both companies had fallen about 90 percent.
By early summer 2000, things at FreeInternet were in growing disarray. It was said that some customer-service employees were not paid for overtime work and time sheets were "mysteriously lost." Office supplies weren’t allowed to be ordered, and employees were told to bring paper, pens and other materials from home. The company continued to tell employees that 'Nothing is wrong’ and that they were ‘financially sound.’ The company even suggested that everything was ‘OK,’ just before things really unraveled.
In August 2000, FreeInternet had almost 3.2 million subscribers. Instead of paying for Internet connections, subscribers agreed to receive targeted advertisements while they ‘surfed’ the Internet. This was one of FreeInternet’s ‘last ditch’ efforts. It was the third Seattle-area Company to cancel a proposed IPO that year. Also, in August, the Kirkland online party supplies retailer,’ ,’ canceled its $40 million offering. In June 2000, the Bellevue-based Pointshare Corporation ‘pulled-the-plug’ on its $60 million dollar IPO. By April 2000, a total of 133 companies had withdrawn their IPO’s, according to IPO Monitor.
Employees soon quit caring about their service. FreeInternet’s E-mail was ‘down’ in as many as 25 states at a time, and no one would ‘fix’ the situation. It seemed as if they simply ‘didn't care’ that people couldn't access their e-mail. Employees seemed to believe that there was a growing combination of greed, poor management, exorbitant spending, costly lawsuits, bad timing and a poor business model that just didn't make sense at the time. The situation had definitely changed for the worst.
THE DEMISE
By September, 2000, the largest free Internet Service Provider in the country had cut 90 employees and 30 percent of its work force in a move to “focus on profitability.” By month’s end, the company wrote in a statement: "The layoffs occurred to streamline company operations and to ensure a quicker path to profitability."[xvii] FreeInternet was the latest Seattle “DOT-COM” to trim its work force amid renewed interest in fundamental, (back to basics), business concepts. However, the reduction in the company's work force shocked employees.
The next business day, after FreeInternet announced that it was chopping its work force by nearly a third, another piece of bad news was released. The service canceled its proposed $172 million initial public offering, leaving some to speculate about the future of what had now become the fifth-largest free ISP. Company spokeswoman, Kari Acosta, reported, "As of Tuesday October 3 our S-1 registration is no longer on file,"[xviii] (with the Securities Exchange Commission). There were growing questions about the company's ability to ‘stay afloat’ for the rest of the year, with reports of future layoffs or reports that the company will cut its staff because of its inability to meet payroll.
Finally, on October 6, 2000, the Federal Way-based free Internet service provider, , filed for Chapter 11 bankruptcy-court protection. The company canceled a proposed $172 million initial public offering, and then chopped its work force by nearly one-third. According to the court petition filed, the company had between 200 and 999 creditors and owed $28.4 million to its top 20 creditors alone. These included the international telecom Cable & Wireless ($4.8 million), data network Splitrock Services ($4.3 million), and long-distance provider MCI WorldCom ($2.9 million).[xix] The company had used $89 million in venture capital financing and had a board of directors that included Infospace founder, Naveen Jain.
WHAT WENT WRONG
In hindsight, FreeInternet had burned through its cash by engaging in unwise investments. For example, it sponsored a costly hydroplane at SeaFair and a race car. They hired ‘high-priced’ experts from Andersen Consulting to assist in reorganize the company, but those attempts failed. Their dismal effort to energize the company through aggressive public relations, of at least 12 press releases issued in July and nine in August 2000 was clearly unsuccessful.
In a similar deal, in January 2000, Freeinternet agreed to pay telecommunications giant Cable & Wireless $70 million so it could add as many as 10 million new subscribers. The problem was that Freeinternet only had 1.5 million subscribers at the time, and many people were becoming dissatisfied with the service. Another blunder was the company's poor decision to buy about 200 expensive routers and servers rather than lease them. The decision was based on projected subscriber growth, rather than actual numbers and this also cost them dearly.
Additional errors included running radio and TV ads featuring their corporate spokesmen, "Baby Bob" and Shaquille O'Neal. It was even working on a prime time television show for CBS called "The Baby Bob Show," produced by Hugh Wilson of "WKRP in Cincinnati" fame and CEO McCausland and vice president of marketing, Lori Stutsman. There was a clear and continuing failure to focus on their basic business model, customer services, and a failure to anticipate the ‘market.’
When the company finally went bankrupt, excessive property was auctioned. Three hundred and fifty desktop computers and fifty Dell and Toshiba laptops were sold. A pool table, Foosball table, air hockey machine, stereo system, treadmill and exercise bike were among the odd list of 2,400 items. Some of the equipment hadn't even been taken out of the box. Additional items included office furniture, microwave ovens, televisions and other nonessential equipment.
Where programmers and marketing executives once hashed out aggressive plans, was now an empty space. This company made many mistakes along the way. What really killed ? Poor timing and a lackluster IPO market led to their demise. It started when the market crashed in April 2000, and just went downhill from there. In the end, their one-time competitor, NetZero, also filed for bankruptcy protection in Seattle and eliminated most of their remaining staff.
FreeInternet was not alone in this, another company which used the same questionable principals but not as widely known, was SafeHarbor which is now of growing public concern.
CHAPTER 4: FAILED VENTURES
INTRODUCTION
In 2001, entrepreneurs and venture capitalists tossed out bold terms, such as "disintermediate" and "paradigm shift" to describe how the business world was changing. Now, however, many Internet start-ups are failing and the economy is readjusting. The word of the day is, "runway," which is a company's ‘burn rate,’ or the amount of time it has to survive on existing cash. It is when a “DOT-COM” reaches all of its benchmarks, and milestones, and has executed a normal business plan perfectly, yet doesn't ‘takeoff.’ It may be an apt description of current market conditions, but also may be an excuse for poor business decisions, planning or business models.
Such an event may happen because a “DOT-COM” was trying to compete against large market-controlled companies. This might have been mismanagement, or, the “DOT-COM”s were simply a ‘runway’ during one of the worst tech markets in history. It took time to prove their business models weren’t effective, and thus, they just ran out of ‘runway,’ then crashed.
Ultimately, this ‘runway’ concept is behind many of the problems in the Internet sector. Companies brought in huge amounts of money, they grew incredibly fast, and then their engines fired up for ‘takeoff.’ Then things changed, in April 2001, when the NASDAQ sank and the investment mood changed. Companies were left without the fuel to stay afloat. Others never made it out of the hangar.
Runway has perhaps become the most appropriate metaphor for the Internet industry. After all, during 1998 and 1999, thousands of Internet companies were ‘leaving the hangar’ loaded down with venture capital dollars, and warming their ‘engines’ for a smooth takeoff. There was so much activity. In fact, the runway became dangerously overcrowded. By the early part of 2000, hundreds of young companies were starting to take flight, banking on the promise of the Internet.
Many Venture Capitals losing Internet companies attempted to extend their survivability cash by layoffs and other extreme cost-cutting measures. Many of the entrepreneurs piloting these firms were getting dangerously close to the end of the ‘blacktop.’ This explains why the crash-and-burn scenario continued for such a long time. As forecasted in Fortune magazine in April 2001, as many as 18 publicly traded Internet companies would run out of cash in the next three months. Yet another 25 could skid off the ‘runway’ by August that same year.
COMPANIES
After investing in venture capital funds in Russia, Israel and the United Kingdom, the Boeing Corporation placed some of its financial muscle to work at home. It made a $5 million investment in Seattle's Alexander Hutton Venture Partners, and another $5 million contribution to an undisclosed Pacific Northwest venture capital fund. Since June 1998, Boeing has invested more than $100 million in 14 separate venture capital funds. Prior to this, no investments had been located in the region.
This showed a commitment from the Boeing Corporation and implied that there were a lot of great technology opportunities in the Pacific Northwest that could help enhance Boeing processes. Investing in venture capital funds was one way to get a ‘window’ onto new technologies. Some of Boeing's early venture capital investments were bearing fruit and Boeing's financial involvement was invigorating.
The “DOT-COM” marketplace has indeed changed; Internet users are beginning to discover there's no ‘free’ lunch. Giving something away for free is no longer a good business model and it never has been. And so, companies began to cut back on offerings of unlimited, ‘free’ Internet access.
For example, announced a layoff of 1,300 people in Mid April 2001, and many tiny start-ups such as , cut 67 percent of its staff on that same week. Unprofitable companies attempted to extend their cash positions, to outlast their competition and ‘weather the storm.’ What is interesting, is that the ‘runway’ for many such companies got even shorter in a relatively short period of time. This equates to many layoffs while trying to extend their runway through costs cutting methods.
What may be most surprising, however, isn't the end of, or growing number of restrictions on free services, but rather free services were even offered in the first place. Consider there was four really ‘big’ “DOT-COM” s for free e-mail. They were Microsoft Corp.'s Hotmail, Juno, Excite and Yahoo. Together, these e-mail providers had more than 100 million e-mail accounts.
The best-known and most widely used free Internet service provider, Juno, now displays advertising banners and limits user access during peak periods for its heavy-usage, non-paying users, but not for customers who pay about $9.95 per month for access. Kmart's ‘BlueLight’ ISP, free since 1999, now limits its free access to 12 hours per month or 100 hours for $9.95. AltaVista and closed their free ISP services in 2000. , which was merged in March 2001 with , has announced it will no longer waive its e-mail service management fee for many Web sites.
Today, businessmen are trying different ideas to increase market shares, exploring several ways to gain new revenue streams from a ‘free’ service. Examples include Taglines and Banners. Taglines are advertising content appended to e-mail messages, and they are used by all but a few of the more than 600 free e-mail services. The second, banners, are advertising content which is now present on Web sites offering purportedly ‘free’ e-mail.
All users checking their e-mail create "hits," and a lot of hits once meant more advertising revenue. But, online advertising revenue has fallen far short of lofty expectations. Advanced features, such as increased storage space, a unique domain name, or the ability to receive faxes, also can gain revenue.
INDIVIDUALS
“DOT-COM”ers came from all walks of life, and seeking varied rewards. Some were risk-takers hoping to be a part of a business revolution. Others simply wanted to try something new and bold. But almost all were looking to make ‘quick buck’ in a ‘hot’ industry. Of course, losing your job is never easy. But the way it is handled varied from person to person, as “DOT-COM”s fell.
Since May 2001, more than 7,200 people have lost their jobs in Washington’s technology sector. The following are examples of seven laid-off “DOT-COM”ers: a public relations director, software tester, salesman, office manager, technology guru, facilities manager and Web site editor. Each talks about ‘life after the Internet bubble has burst.’
Here are just a few examples of individuals who weren’t successful. Stacy Drake, a former and Bipath public relations director, rolled with the punches and enjoyed her time off while looking for the next opportunity. Ken Wiens, a 48-year-old father of two, began struggling to find work and considered going back to school. Shelley Rossi, 28-year-old, was a former Web site editor who turned down an offer at a second Internet company for a more stable job in real estate. Many have retreated from the technology world altogether.
Shelly Rossi
“”
Age: 28
Position: Web site editor
Laid off: June
After being laid off from the Internet appliance maker, ‘ePods’ last summer, Shelley Rossi was so distraught that she sat down at her personal computer and penned a 625-word essay about her experiences in the Internet industry. Called ", Easydot.go," it was her way of dealing with the pain of losing a job she loved.
"So here I am, an ex-dot-comer, laid off in a companywide downsizing due to financial cutbacks," she wrote. "Am I bitter? Absolutely not, do I regret it? Never.” “Even if it was for only a short time, I was an integral part of something new and exciting.” “Something that gave me as much, if not more, than what I was able to give it." Being laid off was like a "family being split apart," she says. More than 100 people lost their jobs when this developer of handheld Internet appliances shut down last year.
But the 28-year-old quickly bounced back. Even though ‘ePods’ did not provide a severance package, executives at the company helped her land a three-month contract assignment at a week after she was let go. She was offered a full-time position at the online retailer. But Rossi, having cleansed herself of the Internet bug, decided to turn down the offer.
"I feel great about what I did and that I took the risk," she says about her eight-month foray into the Internet world. "But you know how it is after you get burned. Even though I don't feel the experience was negative, I said, 'Do I really want to put myself in a position again where I could be laid off?'"
So, in September, one month after getting married, she decided to find a job that was a little more "stable" and "structured." After several job offers, she settled on a public relations position at John L. Scott Real Estate in Bellevue. Rossi, who filled out four W2 forms this tax season, says she is happy not to be working for a DOT-COM. "I guess you could say I was ready to join the ‘real world’ again."
Stacy Drake
“”
Age: 32
Position: Public relations director
Laid off: Dec. 15
Stacy Drake has the unique distinction of being laid off from two “DOT-COM”s in 49 days. "I think I might have some honor here," admits Drake, who was let go from ‘’ in December 2000, and then online auction start-up ‘Bidpath’ in early February 2001.
Despite what many would see as bad luck, Drake doesn't seem too worried about the strange turn of events. She has spent recent days completing her tax forms, reading books, sewing and weeding the garden. But she has cut back on at least one favorite pastime: "My first instinct was to go shopping. But then I thought I better conserve my severance," Drake says. She is trying to remain upbeat, distancing her personal situation from what she reads in the newspaper.
"(Being laid off) is not the worst thing that has ever happened to me," she says. "Do I feel good enough to join another start-up? Maybe not”. But I am not so burned that I would never again look at an Internet start-up." Anyway, there are benefits to being laid off by two companies in less than two months. Unlike many “DOT-COM”ers, Drake is comfortably sitting on two severance packages. She now jokes with friends that it would be a great time to be nine months' pregnant. Drake says the layoffs were handled well at both firms. But being let go from ‘’ was harder because most people knew the cuts were coming six months in advance. "It was hard to be in that limbo. That was kind of frustrating," says Drake, who was one of hundreds of employees laid off after ‘Webvan’ purchased the company in June.
At ‘Bidpath’, where she was one of about a dozen people to lose their jobs, there was no warning of the impending ax. When Drake arrived on a Monday afternoon in March 2001 to clean out her desk, she says she was treated well by executives. "There wasn't anyone standing over me as I boxed up my stuff. I was able to log on to my computer. It wasn't an icky feeling, let's just put it that way," she says. Now that Drake is moving on, she is cautiously optimistic about the future. "Check back with me in three months," Drake says. "If I don't have a job, this won't be a good thing."
Ken Weins
“Sierra Online”
Age: 48
Position: Software tester
Laid off: December
Finding work has not been easy for Ken Wiens, who lost his job at Bellevue computer game maker ‘Sierra Online’ a week before Christmas in a company-wide restructuring that affected 54 people. The father of two grown children, whose wife works in medical records at Overlake Hospital in Bellevue, has interviewed with half a dozen firms during the past four months with little luck. Things seemed to be picking up in March 2001 when he received two calls from job placement agencies and had one lengthy interview with a local company. But he says, “Nothing concrete has come through yet."
"I turn 49 next month, and I am beginning to wonder if it makes a difference when (the employers) see the gray hairs," says Wiens, who is collecting unemployment and is coming to the end of his severance pay. Getting laid off has brought out mixed emotions. At times, the self-described poet says he feels like his 20-year-old son who works at Trader Joe's and is struggling to figure out his career path. "You kind of feel useless, but then you think of all the different opportunities out there, too," he says.
While Wiens is a Microsoft Certified Professional and has spent more than 10 years in high-tech, he says he needs more skills to make it in the ever-changing technology world. He is especially interested in learning more about Visual Basic, one of the programming languages used in creating Windows applications.
So, on March 12, Wiens planned on going back to school through a government-supported program that pays for tuition, textbooks and certification tests. The five-month program at Bellevue Community College will retrain Wiens to become a network administrator with skills to maintain and oversee personal computer networks. It was not his first choice. But it is better than letting technology pass you by, he says. Still, if Wiens was offered a job before the first class there is no question what he would do. "If something came up in the next two weeks, I would go for it," he says.
Kacey Hawker
“”
Age: 38
Position: Office manager
Laid off: May
Undergoing back surgery is bad enough. Not having your company pay for it is downright frightening. Kacey Hawker only spent three months working in the Internet field; and those 90 days have caused her tremendous pain, emotional stress and financial setbacks. Hawker's dot-com nightmare started a couple of months after joining Bellevue online automobile parts retailer . After being hired in March 2001, Hawker was stricken with back pain and told by her doctors that surgery was necessary to repair a slipped disk.
A week before the back surgery, ‘’ managers notified Hawker that she would be laid off for four weeks and recalled later in the summer. What managers failed to tell her, was that they had stopped paying her health insurance. After a successful surgery, Hawker was planning to return to ‘’ in August, when on July 18, she received a letter from Premera/Blue Cross, her health insurance company, saying she was not covered at the time of the surgery. Facing a $25,000 medical bill and "financial devastation," Hawker panicked. "That is when my world was rocked. I had to sit down. It was like the wind had been knocked out of me," she says.
Hawker later discovered that ‘’ had not made health-care payments since April for her or her fellow employees. She also learned that Premera/Blue Cross pre-authorized the back surgery even though ‘’ was past due on payments. Hawker, who was never brought back to work at the struggling company, contacted a couple of lawyers but each wanted a significant retainer, something the unemployed single woman could not afford. She then turned to the Washington State Insurance Commissioner's office, which helped her sort out the mess and negotiates a deal with Premera/Blue Cross to pay part of the bill. Although she still owed $7,000 in medical fees, she is glad the ordeal is behind her. Hawker returned to her original employer, Bothell fitness equipment manufacturer, Precor, in August. She now says her short hop into the Internet world will be her "first and last" and the entire experience has left her feeling "kind of numb."
Jeff Coe
“Docutouch”
Age: 34
Position: Sales
Laid off: Feb. 5
Just a couple of months into his job at ‘DocuTouch’, salesman Jeff Coe knew the Seattle start-up was in trouble. In December 2001, the 3-year-old Internet Company cut salaries by 10 percent, eliminated free parking and told staffers that the main service, a digital signature technology, was not gaining ground with customers. "They were spending stupidly, spending $30,000 a month on airline advertisements before the (in-flight) movie," recalls Coe.
But, it wasn't until the company shut its doors for two weeks around Christmas and asked employees not to show up for work that Coe, who just bought a house in Issaquah, saw the writing on the wall. He casually began searching for new work, spending hours on Internet job sites such as . The job hunting process, however, took on added pressure in early February when Coe and 23 others were given pink slips and two-week severance packages.
The former salesman at ‘RealNetworks’ and Xerox Corp. is stressed. Most of Coe's personal savings went into remodeling his newly purchased house, including a $6,000 carpet. In addition to house payments, other bills are adding up. His wife's salary as a teacher helps. But Coe quickly points out, "You know what teachers make." The couple also has a young child to support. "What you have here is a highly motivated person who needs to find something, now!" Coe says.
The job-hunting process is somewhat clouded by thoughts of his past experiences at ‘DocuTouch’, his first time working at an Internet start-up. "Here I am, a cocky, arrogant sales guy who is the eternal optimist," says Coe. "Being laid off does make you question your abilities." Coe is not letting ego get in the way, however, and says that life goes on. He has met with several companies and has been called back for second and third interviews with a couple of firms. Still, he says, "Until you get that job, it is certainly stressful."
J.P. Miller
“Kindred”
Age: 31
Position: Facilities purchasing manager
Laid off: Dec. 7
Dec. 7, 2000, is a day that will ‘live in infamy’ for J.P. Miller. The 31-year-old purchasing manager is still reeling from the bomb that was dropped on him and 11 other workers at Kindred Communications that day. Called into one of the Internet consulting company's conference rooms, Miller was notified that his services were no longer needed at the Bellevue Company. He was paid for 2 1/2 weeks of vacation, given a last paycheck, and promised one week of severance pay.
Then, after a cordial meeting with the owners and a brief instruction session with the information systems director the following week, Miller packed up his gear and left. Two and a half months later, the Queen Anne resident was still waiting for the severance check to arrive. "Last time I spoke to them, they said they were hoping to pay it before May," says Miller, who is collecting unemployment but says, “Money is starting to run a little low." He is cutting back on expenses, going only to matinee movies and skipping restaurants. "I am not going out to eat anymore. I am not buying any luxury items, and I pretty much walk everywhere," he says.
The job-search process has been slow with only one call from an employment agency in the past month and a half. That job, he says, was filled by the time he called back. A trip to last month's Pink Slip party at the I-Spy nightclub turned up few leads. "It is kind of like nothing is safe," he says. But, in one respect, Miller is lucky. About a half dozen of his buddies have been laid off from companies like ‘’, ‘’ and ‘’ in the past six months, so he says, "At least I have a lot of company."
Peter Richards
“Infospace”
Age: 31
Position: Director of advertising technology
Laid off: Feb. 5
At 2:15 on Monday, February 5, 2001, Peter Richards received an e-mail requesting his presence at the Bellevue DoubleTree Hotel fifteen minutes later. Walking to the parking garage in the ‘InfoSpace’ headquarters, Richards saw a group of security guards milling about. By the time he arrived at the hotel he knew he was losing his job. "It was kind of like the gas chamber," says Richards, describing the mood at the hotel. "You walked in and signed your name. You knew what was coming."
Richards, one of the first 20 employees hired at the company, couldn't believe he was being laid off. He says he had positive job performance evaluations and was one of the few employees who understood the intricacies of the company's online advertising system.
Like the 20 or so other employees in the room, Richards was handed a severance package by the human resources director then instructed to return to ‘InfoSpace’ the following Saturday to retrieve his personal items. A total of 250 people lost their jobs in the layoff. "It was a humbling experience. It was a slap in the face," says Richards, whose brother, also an executive at ‘InfoSpace,’ filed a lawsuit against the company over a disputed stock option package. Richards still believes his firing was retribution for his brother's lawsuit. He has hired a lawyer to explore his options.
At ‘InfoSpace,’ a spokesman said the company does not discuss individual layoffs. Meanwhile, the pink slip could not have come at a worse time. In addition to losing his salary, Richards forfeited stock options. His wife had a baby in April 2001 and a remodeling project at his home in southeast Bellevue was in jeopardy.
These are just a few examples of the ‘tried-and-failed’ entrepreneurs who succumbed to the ebb and flow of the “DOT-COM” industry. Their stories are short but for each story, there are at least 5 times as many stories. Even a “DOT-COM” called the ‘The Industry Standard,’ filed for bankruptcy in August 2001. More than 18,900 people lost jobs in Washington’s technology sector in the year 2001. The next question is how many more will fall?
CHAPTER 5: VENTURE ECONOMICS
Detail graphical analysis helps provide some perspective about where the investment funds were going and how the invested help shape the future. As an example, this chapter will only look at a one-year period from October 2000 to September 2001. This chapter also provides information about the ‘Ebb-and-Flow’ of the “DOT-COM”s, and where the industry is heading. All references to states mentioned in this chapter references Money invested by that state’s industries into the state of Washington.
QUARTERLY INVESTMENTS
A close look at investment in the Northwest shows that during the third and fourth quarters of 1999, Venture Capital made a 70% gain in just 3 short months and that later that year, it peaked (see Chart 5-1[xx]).
|Venture Investment By Quarter |
|Time Period |No. of |Avg Per |Sum Inv. |
| |Comp |Comp |($mil) |
|1999-1 |842 |$7.62 |$6,415.61 |
|1999-2 |1226 |8.92 |$10,934.28 |
|1999-3 |1364 |9.81 |$13,376.79 |
|1999-4 |1788 |13.3 |$23,773.25 |
|2000-1 |1806 |15.47 |$27,931.83 |
|2000-2 |1912 |13.98 |$26,730.14 |
|2000-3 |1746 |15.04 |$26,267.41 |
|2000-4 |1590 |13.45 |$21,378.95 |
|2001-1 |1155 |10.92 |$12,611.66 |
|2001-2 |1092 |9.46 |$10,325.66 |
|2001-3 |850 |8.73 |$7,417.25 |
|2001-4 |844 |8.67 |$7,317.92 |
Chart 5-1
FOURTH QUARTER, YEAR 2000
Things were starting to unravel at this time but several companies managed to stay afloat during this changing period. Venture Capitalist still invested over $2766.1 million dollars into 187 companies. These companies varied by sector, (see Chart 5-2[xxi]), but there were quite a few investments related to the Internet (see Chart 5-3[xxii]).
|Venture Capital Investment in Washington Companies |
|By Industry/Technology Sector |
|10/1/2000 to 12/31/2000 |
|No. |Sector |Companies |Investment($M) |
|1 |Internet Specific |29 |458.3 |
|2 |Biotechnology |5 |165.0 |
|3 |Computer Software and Services |10 |90.6 |
|4 |Communications and Media |7 |53.3 |
|5 |Medical/Health |5 |38.5 |
|6 |Other Products |3 |12.3 |
|7 |Computer Hardware |2 |3.3 |
|- |Total |61 |821.2 |
Chart 5-2
|Venture Capital Investment in Washington Companies |
|By Internet Related Technology |
|10/1/2000 to 12/31/2000 |
|No. |Industry |Companies |Investment($M) |
|1 |E-Commerce and Content |19 |239.0 |
|2 |Communications/Infrastructure |6 |163.6 |
|3 |Internet Software and Tools |7 |93.1 |
|4 |Internet Services |6 |46.0 |
|5 |Other Internet Related |2 |7.2 |
|- |Total |40 |548.9 |
Chart 5-3
Most of the Venture Capital Funding came from California who sponsored 23 different companies at 131.5 million dollars. But, New York only sponsored 12 companies but spent 287.1 million dollars. The State of Washington ranked third during this period, by investing in 22 companies but only at a cost of 87.3 million dollars. An examination of investments by states revealed top companies were sponsored in Washington State (see Chart 5-4[xxiii]). In this area, you can see that although New York led in amount of money invested, Washington had more investments by company, followed only by California.
|Venture Capital Investment by Washington Venture Funds |
|By State of Companies Receiving Money |
|10/1/2000 to 12/31/2000 |
|No. |Target State |Companies |Investment($M) |
|1 |New York |1 |100.0 |
|2 |Washington |32 |92.3 |
|3 |Maryland |2 |86.6 |
|4 |California |15 |66.1 |
|5 |Colorado |2 |38.0 |
|6 |New Jersey |2 |15.3 |
|7 |Texas |1 |9.6 |
|8 |Georgia |1 |5.4 |
|9 |Oregon |2 |3.0 |
|10 |Connecticut |1 |0.0 |
|- |Total |59 |416.3 |
Chart 5-4
FIRST QUARTER YEAR 2001
The first quarter showed a dramatic change with investment by Venture Capital down by 54 percent (see Chart 5-1). The number of companies invested in during this period took a 27 percent drop also. These factors implied that the country was indeed headed for a major downturn. A breakdown of the investment made by Venture Capital continues to show that the Internet was still a key venture. But, the Biotechnology field was not a favorite among investors during this period (see Chart 5-5[xxiv]).
|Venture Capital Investment in Washington Companies |
|By Industry/Technology Sector |
|01/01/2001 to 03/31/2001 |
|No. |Sector |Companies |Investment($M) |
|1 |Internet Specific |19 |120.9 |
|2 |Computer Software |7 |75.2 |
|3 |Semiconductors/Other Elect. |3 |72.0 |
|4 |Medical/Health |3 |32.1 |
|5 |Communications and Media |3 |15.2 |
|6 |Computer Hardware |1 |4.0 |
|7 |Consumer Related |1 |3.0 |
|8 |Biotechnology |1 |0.5 |
|- |Total |38 |323.0 |
Chart 5-5
Once again the market was leaning towards the E-Commerce area for investments (see Chart 5-6[xxv]). This maybe attributed to the belief that the “DOT-COM” industry had finally settled down and that business would continue to be done on the web. What was a surprise, Communications was not losing as much investments as other related fields. This can be attributing to the use of cell phones to access the World Wide Web.
|Venture Capital Investment in Washington Companies |
|By Internet Related Technology |
|01/01/2001 to 03/31/2001 |
|No. |Industry |Companies |Investment($M) |
|1 |Communications/Infrastructure |9 |116.1 |
|2 |Internet Software and Tools |7 |60.7 |
|3 |E-Commerce and Content |11 |48.8 |
|4 |Internet Related Hardware |1 |44.0 |
|5 |Internet Services |3 |4.7 |
|- |Total |31 |274.3 |
Chart 5-6
Once again Washington led the country in most invested funds by both number of companies and amount invested (see Chart 5-7[xxvi]). California, the once rich and powerful states for at least a century trailed as second. New York, during this period, where most of the money and transactions are done, did very poorly.
|Venture Capital Investment by Washington Venture Funds |
|By State of Companies Receiving Money |
|01/01/2001 to 03/31/2001 |
|No. |Target State |Companies |Investment($M) |
|1 |Washington |21 |56.4 |
|2 |California |8 |29.2 |
|3 |Virginia |2 |16.2 |
|4 |Oregon |5 |13.2 |
|5 |Massachusetts |1 |4.4 |
|6 |New York |1 |0.7 |
|7 |Texas |1 |0.2 |
|- |Total |39 |120.4 |
Chart 5-7
SECOND QUARTER YEAR 2001
With the second quarter of the year, the decline continued but the leap was not as great as the previous year. It was thought that the economy may have hit bottom, which was slightly above recession. Unemployment was on the rise and the “DOT-COM” industry and slowed to a crawl. Very few online retailers were still in business and Brick-and-Mortar Stores were backing to almost usual. Yet, some unusual facts did prevail during this quarter. Internet-Specific items did not suffer as the amounts of investment shrink (see Chart 5-8[xxvii]), and Biotechnology grew once again during this period. The Government changing events with regard to receiving over the counter medication may have caused this.
|Venture Capital Investment in Washington Companies |
|By Industry/Technology Sector |
|4/01/2001 to 06/30/2001 |
|No. |Sector |Companies |Investment($M) |
|1 |Internet Specific |13 |121.6 |
|2 |Computer Software |7 |36.5 |
|3 |Biotechnology |2 |35.8 |
|4 |Communications and Media |5 |35.5 |
|5 |Medical/Health |1 |18.5 |
|6 |Computer Hardware |2 |5.8 |
|- |Total |30 |253.7 |
Chart 5-8
During this quarter, once again, a number of E-Commerce companies were formed, although the amount invested wasn’t the greatest during that quarter (see Chart 5-9[xxviii]). An additional note, the substantial increase of the amount of money invested in E-Commerce. The amount invested during this quarter increased by 25 percent while communication decreases by 70 percent.
|Venture Capital Investment in Washington Companies |
|By Internet Related Technology |
|4/01/2001 to 06/30/2001 |
|No. |Industry |Companies |Investment($M) |
|1 |Communications/Infrastructure |4 |70.0 |
|2 |Ecommerce and Content |13 |60.9 |
|3 |Internet Services |1 |38.0 |
|4 |Internet Software and Tools |5 |13.1 |
|- |Total |23 |182.1 |
Chart 5-9
For the first time in the recorded period of the year, California was the leading state in the number of firms receiving invested funds (see Chart 5-10[xxix]). Although California did not have the largest amount invested, it did exceed both the number of firms invested in and amount of funds invested in the country. Surprisingly, New York received the largest number of funds, and event that wasn’t very common in the last few quarters.
|Venture Capital Investment in Washington |
|By State of Funding Source |
|4/01/2001 to 06/30/2001 |
|No. |Source State |Firms |Investment($M) |
|1 |New York |11 |62.8 |
|2 |California |21 |52.7 |
|3 |Washington |11 |36.1 |
|4 |Non-US |3 |15.6 |
|5 |Massachusetts |5 |9.9 |
|6 |Nevada |1 |9.5 |
|7 |Connecticut |3 |6.0 |
|8 |British Columbia,(CA) |2 |3.9 |
|9 |North Carolina |1 |3.1 |
|10 |Illinois |2 |2.9 |
|11 |Texas |1 |1.7 |
|12 |South Dakota |1 |0.9 |
|13 |New Jersey |1 |0.2 |
|14 |Utah |1 |0.1 |
|- |Total |64 |205.4 |
Chart 5-10
THIRD QUARTER YEAR 2001
This quarter marked what could be termed as the ‘end-of-an-error,’ as proposed to an ‘end-of-an-era.’ The country was already in a major downturn and the coup-de-gras was a Terrorist Attack on the United States, (September 11). This attack almost devastated a weakened economy and caused the New York Stock Exchange to close business for several days. With the major loss of one of the world’s primary monetary capital flow bases, the world came to a screeching halt. Estimates during this period were slightly lower than the pervious quarter by 25 percent.
During this quarter it should not be any surprise that Internet Specific Investment were at the top of investors list (see Chart 5-11[xxx]). This can be attributed to the last days in September when information flow was key piece of a puzzle in the United States. The second area was Computer Software with emphasis on possible Terrorist Attacks on the Computer and Financial Areas.
|Venture Capital Investment in Washington Companies |
|By Industry/Technology Sector |
|07/01/2001 to 09/30/2001 |
|No. |Sector |Companies |Investment($M) |
|1 |Internet Specific |16 |128.2 |
|2 |Computer Software |12 |82.6 |
|3 |Medical/Health |3 |32.7 |
|4 |Communications and Media |4 |28.6 |
|5 |Computer Hardware |1 |9.1 |
|6 |Biotechnology |1 |0.9 |
|- |Total |37 |282.2 |
Chart 5-11
Amazing enough in Washington, online communication was key to investors because of the vast distance from New York and it’s time zone to here (see Chart 5-12[xxxi]). Investments in the Online Communications gained about 150 % from the previous quarter and E-Commerce dropped by 10 percent.
|Venture Capital Investment in Washington Companies |
|By Internet Related Technology |
|07/01/2001 to 09/30/2001 |
|No. |Industry |Companies |Investment($M) |
|1 |Online Communications, Infrastructure and Hardware |5 |132.8 |
|2 |Internet Software, Services and Tools |11 |55.7 |
|3 |Ecommerce Goods, Services and Content |14 |55.6 |
|- |Total |30 |244.1 |
Chart 5-12
For the third quarter of 2001, Washington still had a larger than the rest investors but the amounted invested was down by 25% from the previous quarter and 50% from the first quarter of the year (see Chart 5-13[xxxii]). Even California suffered during this period and New York received the second highest amount of investment fund but was superceded by Connecticut, a states who has received very little investments during the period of this paper.
Overall, the amounted invested in Washington during this period was higher than the first quarter of 2001 and the trend would continues to lead to Washington business to continue to flourish for at least another year.
|Venture Capital Investment in Washington |
|By State of Funding Source |
|07/01/2001 to 09/30/2001 |
|No. |Source State |Firms |Investment($M) |
|1 |Connecticut |1 |47.3 |
|2 |New York |6 |40.8 |
|3 |California |15 |33.6 |
|4 |Washington |12 |27.2 |
|5 |Quebec,(CA) |2 |11.8 |
|6 |Massachusetts |10 |10.8 |
|7 |Non-US |2 |4.3 |
|8 |Illinois |1 |4.1 |
|9 |Michigan |1 |4.1 |
|10 |Texas |1 |2.4 |
|11 |D. of Columbia |2 |2.2 |
|12 |Maryland |1 |1.8 |
|13 |Colorado |1 |0.8 |
|14 |New Jersey |1 |0.6 |
|15 |Georgia |1 |0.5 |
|- |Total |57 |192.1 |
Chart 5-13
In conclusion, Washington State had allotted of investors posting large capital into small companies like “DOT-COM”s. It is for this reason that E-Commerce will continue to grow and that the DOT-COM Industry may never die.
CHAPTER 6: THE FUTURE OF “DOT-COM”S
The last three years, from June 1999 to Apr 2001, have brought much sound and fury to the “DOT-COM” industry. The New Economy or the rise of the “DOT-COM” domain is undeniable the business today. It is a New World of information, enabled by information technology, and most of us know it as the Web.
The New World Economy writes its own new rules that everything previously known about business will now be obsolete. The New Economy entrepreneurs seem to put customers in the back seat of a vehicle designed for a more important race. For years, dot-com CEO’s blithely argued that profitability and sometimes-even revenues were irrelevant as compared with building traffic and growing their users’ numbers. The New World czars are now downplayed quaint Old Economy notions such as service quality. In the race to a near-mythic liquidity event, concerns about customer satisfaction and loyalty are falling by the wayside.
The changes in the NASDAQ of recent months were a wake-up call. “DOT-COM” survival requires “DOT-COM” profitability that appeases Wall Street. As a result, on-line companies are laying-off staffs in droves to realize improved gross margins, but it won’t play on Main Street. Main Street is where dot-com customers live, and, increasingly, they are demanding well, if not great, customer experiences. “DOT-COM” companies will not generate good experiences without recognizing that building customer satisfaction and loyalty requires not short-term cost cutting but aggressive, long-term investment. What the “DOT-COM” economy needs are investors who provide not just capital, but patient capital, who believe that ‘staying-the-course’ on good experience is the only way to ensure survival!
Remember that there is no business on the Web that cannot be characterized as a service business. Web businesses create value through interactions with customers based on flows of intangibles made of media and information. If physical products flow up and down supply chains as a result of Web interactions, that’s fine, but Web businesses are not product or industrial businesses any more than Wal-Mart is a maker of consumer packaged goods or an industrial distributor.
A sample of U.S. adults who reported that they were trying to start new businesses concludes the following. They were asked them about their start-up activities, such as writing a business plan, installing a separate phone line, getting financing, and the like. Six to nine months later they were interviewed again. There were more than 20 activities on their list. When each activity was measured, the popularity of each occurrence was in the start-up process. Some of those that were interviewed reported that they'd given "serious thought" to the new business by the time they'd completed the first activity
In summary, there are several keys to success for the “DOT-COM” Industry. First, they must select customers with whom they can do business profitably. Every credit issuer or retail bank and every distributor or industrial supplier does business with customer accounts on which they lose money. This is doubly true among Web businesses, where familiar brands such as and CDNow routinely sell goods like music CD’s at negative gross margins, resulting in the painful reality that every customer relationship is unprofitable.
Second, you must find customers who value their services offered sufficiently, not simply to browse, but to purchase. Then, you want them to return frequently to purchase again over time. This requires registering not just any users but those users who exhibit high yields to purchase when they visit a site and high repeat rates after the first purchase. On the Web, serving customers who browse and those who buy costs roughly the same in fixed resources, maximizing a company’s servers with hits from people who merely look and leave does not drive attractive economics.
Finally, you must find customers who will maintain a relationship with a business over a long period of time. It is a known fact, that longer relationships generate higher customer lifetime values than shorter ones. This must be factored into business decisions and plans in real time.
The ultimate key, intrinsic customer relationship profitability, high rates of conversion of customer visits to purchase and repeat purchase, and extended duration of relationships over multiple visits. Great companies of the Old Economy’s service sector focus on customer satisfaction as a way to drive customer loyalty. Companies do not create vast populations of returning customers unless they can create great customer experiences. Prime examples of true competencies are Nordstrom in retail or Southwest Airlines in air travel. These are leading service companies which generate loyal customers by delivering experiences, each and every time, that meet or exceed customer expectations. You must find ways to satisfy or even delight customers. When you do, the benefits are enormous. Scores of academic studies suggest loyal customers become less price-sensitive over time, will refer their friends, and spread positive word-of-mouth (or word-of-mouse), and incur lower costs of relationship management than demanding prospects that have never done business with a company before.
Thus, in order to survive in a “DOT-COM” world, the answer is clear. You may have to cut back somewhere in today’s climate, but you can’t cut back on good experience. Indeed, entrepreneurs should be investing more aggressively than ever before. Get the “experience” right with your customers, assuming they are the right customers you are targeting, and the financial results will follow. Get the experience wrong, and you may as well stop raising money, because you may have to file Chapter 11.
There are several sins to avoid in today’s business world. One sin is omission, it occurs when companies do not consider their whole relationship with the customer and all of the points where they can use the online channel. This may happen with B2B sites and B2C sites built by distributors or manufacturers. In many cases, these companies and their consultants suffer from ‘Post-ERP Syndrome.’ As the successor to Enterprise Resource Planning (ERP), practitioners of e-Business tend to turn companies inward. They design and build systems that automate internal processes or the needs of functional silos. This process omits the customer or makes him a secondary consideration. Companies that practice this often create sites that map product lines rather than customer needs. The result is a system can actually be less functional than a paper catalog.
Of course, opportunities to improve the consumer experience can be found from one end of the purchase process to the other, but they are not being fully exploited. The order fulfillment process is especially ripe for improvement. Pure plays and store-based retailers can learn from their catalog-based counterparts, which, on average, have the lowest fulfillment costs, the fastest out-the-door performance, and the highest on-time shipping rates of all online retailers.
Brick-and-mortar marketers have always known that reducing prices attract the price conscious buyer, and they similarly understand that increasing the convenience of the shopping experience attracts the convenience-conscious buyer. The additional benefit to the business is for those who value convenience, for whom time is a premium, also with lower prices, sensitive than average customers. The unique challenge for e-marketers is to understand the value online prospects place on convenience, and then deliver it.
If this sounds suspiciously like a plan, a “Customer Experience Management Plan,” it should. It also ought to be as complete as your marketing plan, your product plan, or brand management plan. Writing a ‘customer experience management plan’ will help ensure that you can deliver the convenience your customers’ value and expect, enabling your business to successfully achieve its sales objectives.
Additional keys to success, and to stay afloat in this industry, are the following: Addressing another person can give ‘misleading impressions.’ Be sure the board has a clear and accurate view of the company situation. Stay focused on the ‘core value’ you deliver to customers. Put in place processes for continual improvement. So, as problems surface, they are seen ‘in-context’ and can be managed through to resolution. Above all, maintain the team environment as a winning key strategy.
The New Economy is really just the Old Economy, setting up business on a new street. Online retailers are still just retailers. Sure it’s a little different, but they have to follow the same business and economic rules as their brick and mortar peers. You still have to research, plan, manage and finance carefully no matter if you are online or on Main Street.
CONCLUSION
The future of the “DOT-COM” industry will rely on both information-base and customer-base services and lighting speed. If market and business plans are followed like traditional Brick-and-mortar operations, then success will follow. “DOT-COM”s will continue to fail if they continue to write new business plans and or new concepts as shown in the previous chapters. The computer and information technology age is a revolution, but it must be tamed for proper us. They are powerful tools and will lend success to the industry once it is controlled.
The starting of any business is a dynamic process, with constant shifting as new people enter the industry. Some “DOT-COM”ers are successfully and negotiate during the tough times. Others bailout, long after they are in over their head. Clearly, some that leave this industry arena, whether they're successful or unsuccessful, will return for ‘another try.’ To be successful, they should avoid mistakes of the past, anticipate their best opportunities for the future, and remain both alert and responsive to customer demand.
REFERENCE
|COPYWRITER LOGOS |WEB ADDRESS |NOTES |
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|[pic] | | |
|[pic] | | |
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GLOSSARY
|B2B |Business to Business |
|B2P |Bid to Proposal |
|ERP |Enterprise Resource Planning |
|IPO |Initial Public Offering |
|LLC |Limited Liability Companies |
|LLP |Limited Liability Partnerships |
|SBIC |Small Business Investment Company |
ENDNOTES
-----------------------
[i] The Lexus And The Olive Tree, Thomas L. Friedman, p xi
[ii] SEATTLE POST-INTELLIGENCER REPORTER, “Close look at venture capitalists shows they've done much good “, Tuesday, October 23, 2001
[iii]
[iv] ibid
[v] SEATTLE POST-INTELLIGENCER REPORTER, “Seattle feeds the frenzy for venture capital Monday”, March 20, 2000
[vi] SEATTLE POST-INTELLIGENCER REPORTER, “Venture Capital: $955 million dot-gone in a flash”, Friday, October 26, 2001
[vii] SEATTLE POST-INTELLIGENCER REPORTER, “High-flying crashes and burns”, Friday, October 13, 2000
[viii] .
[ix] Successful e-Business: Integrating Business Fundamentals with Savvy Hurwitz Group, Inc. ; .
[x] SEATTLE POST-INTELLIGENCER REPORTER, “Outside money finding way to Seattle” Sept 2000
[xi] ibid
[xii] ibid
[xiii] ibid
[xiv] ibid
[xv] SEATTLE POST-INTELLIGENCER REPORTER, “'Baby Bills' off to the Internet gold rush:, July 1999
[xvi] ibid
[xvii] SEATTLE POST-INTELLIGENCER REPORTER, “90 workers lose jobs at ”, Oct 3, 2000
[xviii] SEATTLE POST-INTELLIGENCER REPORTER, “First the layoffs, now IPO canceled at ”, Oct 4, 2000
[xix] SEATTLE POST-INTELLIGENCER REPORTER, “ files for bankruptcy after nixing IPO”, Oct 7, 00, John Cook
[xx] statisticis
[xxi] ventureeconomics/statistics/2000/Q4
[xxii] ibid
[xxiii] ibid
[xxiv] ventureeconomics/statistics/2001/Q1
[xxv] ibid
[xxvi] ibid
[xxvii] ventureeconomics/statistics/2001/Q2
[xxviii] ibid
[xxix] ibid
[xxx] ventureeconomics/statistics/2001/Q3
[xxxi] ibid
[xxxii] ibid
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