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Brad Stone (Newsweek)
Investors have become more discerning and are no longer willing to throw their hats into just any online company.
Investors have become more discerning and are no longer willing to throw their hats into just any online company.
Just recently, the company, founded by Darby Williams, a former Microsoft employee, showed all the outward signs of prosperity, and there was no sign of trouble. In 1996, Williams came up with the idea of founding the world's first company that would accept online orders for the delivery of gourmet gourmet dishes. He quit Microsoft and persuaded Ray Lane, the president of another giant corporation, Oracle, to finance the first stage of creating a new company. Thus Cook Express was born.
And last month, Cook Express became a pioneer in an area in which Williams had never expected to distinguish himself - his company was forced to declare bankruptcy. The total claims from creditors, which include product suppliers and business partners, amount to more than two million dollars. Of these, 78 thousand is a debt to the PR agency that served Cook Express. Williams had to resort to bankruptcy proceedings after four long months of trying to persuade representatives of 15 venture funds to continue financing his brainchild. Representatives soberly assessed the potential of the clientele (10 thousand gourmet clients), comparing it with an expensive development plan and expected financial losses. Then they did what few venture funds have dared to do in recent years - they said no.
The ominous specter of Cook Express hovers over many other Internet companies. Of course, the Internet has been the source of one of the biggest booms in the history of capitalism - but, nevertheless, many online projects are clearly running out of steam. Don't look at the Nasdaq (stock exchange) aggregate numbers - they are good, but the prosperity is mainly based on the already established new blue chip giants like Yahoo! or Cisco. Wall Street businessmen are starting to get tired of network companies that are rapidly eating up investments and loans and not making a profit. Apparently, many companies were too hasty in changing the status of private enterprises to the position of an open joint stock company and were not ready for strict public control. As soon as a company offering its shares for public trading shakes a little, masses of small and medium-sized investors immediately begin to “shoot the wounded,” quickly getting rid of the shares of former market leaders (like eToys or CDnow). “There are simply too many of them,” says Henry Blodgett, an employee of the large consulting agency Merrill Lynch. He is confident that 75 percent of Internet companies will never make any profit at all.
Some, of course, will bring it, and some more! However, for many others who need a constant flow of capital like air to attract visitors and clients, to establish infrastructure and a number of other business tasks, a sharp drop in the price of their shares can be a fatal blow. At this point, valuable employees begin to leave; investors get angry and, most importantly, the company is practically deprived of the opportunity to collect additional loans. According to Ipo.Com data, shares in more than a quarter of the seventy companies that went public last year are now worth less than their original price. According to Jim Breuer of venture capital firm Accel Partners, this is just the beginning.
In late March, pioneering online grocery retailer Peapod.Com announced the resignation of CEO Bill Malloy due to "physical and mental exhaustion." Malloy was hired at Peapod.Com just six months ago. He was tasked with finding investment so Peapod.Com could catch up to its better-funded competitors. At the end of February, Malloy, a specialist in such work, announced an upcoming injection of $120 million into Peapod.Com from four different sources. However, after his sudden resignation, investors backed out, and Peapod.Com shares immediately fell in price by 50 percent, to $4 per share. At the beginning of April, Peapod.Com had only three million dollars of “real” money left - at most for a month of normal operation. The founders of one of the pioneers of the industry are feverishly looking for other investors; no success has yet been heard.
Of course, a company in dire need of free money does not have to go bankrupt; this is the most radical way out of the situation. Many more Internet companies will be acquired by their successful competitors. True, this also does not always turn out to be successful. Jason Olim, who founded CDnow six years ago, took it public in early 1998, after which the stock price first rose to $40... and fell to $20 last summer. Then Olim agreed to merge with Columbia House (owned by Time Warner and Sony). However, when Columbia House discovered in March that it did not have enough money to pay for its partner's advertising, it refused to support the project. CDnow's share price has already dropped to $5. It is unknown whether Olim will be able to get out of this situation - although, however, he hired a banker specifically to find money. “I don’t think the current state of things is in any way reflective of our true value,” fumes the CDnow founder.
He can only hope that his employees will take these words as they should. In general, in Silicon Valley, workers tend to sharply reduce their work enthusiasm when the price of their company's shares begins to fall. For example, Beyond.Com, a major online software seller, hired expensive employees and spent money on television advertising when it went public in December 1998. However, meeting deadlines for new projects, an unsuccessful strategy, and unplanned financial losses led to the fact that the share price gradually fell to $8 per share. The employees began to grumble. Then people started leaving, angry that the company's CEO, Mark Breuer, was busy writing a book while his company was slowly going under. “The price per share did not reach three digits - this was disappointing for many,” says Breuer himself.
And those who were disappointed did not stay on the company’s staff. After all, this is Silicon Valley - it doesn’t work out here, it will work out somewhere else.
Meanwhile, more and more young Internet companies are finding that finding investment is becoming exceptionally difficult. Less than a year ago, MotherNature.Com raised $42 million in just two weeks. Then in November the company took its shares public at $15 per share, and the price soon halved and then stalled there. In other words, it is not possible to raise money through the issue of shares - what to do when financial reserves run out? Finding other private investors appears to be "extremely difficult" for Michael Barak, who runs MotherNature.Com, as Wall Street figures believe the online sector of the industry has already been pumped enough with investment and is now looking for profits. But there are still no profits - Internet companies rushed to become “big” and make money by trading their shares without first checking the viability of their business models.
True, it is very difficult to completely “drown” in Silicon Valley. The same Darby Williams from the bankrupt Cook Express received a good dozen offers for leadership positions in venture funds. And Beyond.Com's Mark Breuer is about 60. "Everyone wants to share with me a piece of the magic of the early years of the Internet boom," he says. Just before he left Beyond.Com, Breuer remembers being in an elevator with a fellow board member and discussing the company's deteriorating state of affairs. “It’s okay, Mark,” a colleague noted, “you learn more on the way down than on the way up.” If this is true, then hundreds of senior managers at Internet companies are currently gaining truly invaluable experience.
(Printed with abbreviations)