Start-Ups that Flopped in 2001; What Twenty-Four Financially Distressed Start-Ups Did to Attempt to Save Their Company

by Abdi Shayesteh of White & Lee LLP

Overview

The purpose of this article is to provide information and analysis on twenty-four start-up companies that experienced financial distress during 2001. The article is broken into two parts. The first part is a chart that compiles published data related to these twenty-four financially distressed companies. It includes data on each company’s business model, current financial status, and source of funding (i.e., total money raised, number of rounds, VC backers affected, etc).[1] The chart also highlights reasons for each company’s financial distress, including specific actions taken by their management to remedy the situation.

Overall, most companies blamed their financial distress on certain factors such as weak market conditions, the fall of consumer e-commerce, customers’ reluctance to embrace new technologies, market saturation, unanticipated costs or complexities, excessive spending on research and development, or pursuing national markets without first developing smaller or local markets. While most companies eventually filed for relief under Chapters 7 and 11 under U.S. bankruptcy laws, many made last minute attempts to survive and possibly forego bankruptcy options by rebuilding their business model, getting acquired at a steep discount, or cutting costs and selling some of their assets. As a result, this data highlights that filing for relief under the bankruptcy laws was a remedy of last resort, rather than a first response, to a sudden financial crisis.

The second part of this article lists possible survival techniques for companies currently experiencing financial distress. These techniques are derived from the limited number of success stories described in the chart.

Cybermoola.com	Offered a prepaid card that allowed consumers (mainly teenagers) to shop on Web.	Went out of business as of 1/01.	$3.5M	2	Skywood Ventures, Swander Pace Capital, friends and family.	· Could not obtain new capital. · Pursued M&As and was not successful. Analysts claim that it was too small to find buyers (i.e., it only had 30,000 users since its inception in 1999 and had contracts with just 40 companies).
Foodline.com	Database and reservation software for restaurants.	Filed for Chapter 7 Liquidation.	$13M	1	Amercan Express, TicketMaster Online, City Search, Zagat Survey, Wasabi Fund, Kestrel Venture Management and assorted angels.	· Spent most of VC money on R&D and a national sales force. · Claims it should have worked on a smaller, local scale before going national. · Ran out of money too fast. Could not obtain new capital. Burn rate of $1.2M/month. · Laid off 150 employees without severance pay.
Greatentertaining.com	Online party planning and commerce Web site. Sold candles, plastic turkeys and Tupperware, etc.	Began closing as of 1/01.	$33M	3	Benchmark, Attractor Investment Management, Infinity Capital, Technology Crossover Ventures, Information Technology Ventures.	· Claims that failure had nothing to do with the management, but the lack of interest in consumer e-commerce companies these days. · Failed to find a buyer after 3 months of searching. · Sold inventory to its loyal customers, instead of liquidators. · Did not run out of cash (sources say) but was not able to ascertain if it will return any money to its investors. A year before closing, Co-founder and CEO, Tanya Roberts, was suddenly replaced and 40 employees were laid off.
Voter.com	A political Web site with aggregated and original news stories steered by executive editor Carl Bernstein.	Shut down as of 2/01.	$20M	3	Sigma Partners, Charles River Ventures, Bessemer Venture Partners, and Skywood Ventures.	· Board members and executives shut it down, despite their love for the concept. · Had some success stories (e.g., on the day of the election 3.5 million readers logged on to site - making it the site’s best day). · Investors were on board for a $40M round of VC and signed the term sheets. Investors were ready to sign in October, but lead investor, The Interpublic Group of Companies (NYSE: IPG), got cold feet and other investors backed out. 40 layoffs followed. · Had possible acquisition deal by Qorvis Communications, a PR firm. Qorvis agreed to the deal and so did CEO Justin Dangel. But board did not approve and decide to it shut down. · Company said it would have broke even in 9 to 12 months. Ads were slim. Had revenue of $ 1M in 2000.
iBelieve.com	Christian portal, targeted religious goods customers.	Shut down.	Burned $30 M	N/A	Madison Dearborn Partners, Family Christian Stores, and Hallmark Cards.	· Internet reality: customers prefer stores to the Web.

SingleSource IT	Online IT.	Shut down.	Burned $19.2M	N/A	The Mayfield Fund, Levensohn Capital Management, McCown De Leeuw, and Tibco Software.	N/A
Desktop.com	Online file-management company.	Shut down.	Burned $29M	N/A	Sequoia Capital, Accel Partners, Kohlberg Kravis Roberts.	· Company gave back about half of the venture funding it received. · Got out before it hit the bottom.
Charitableway.com	Online charity services in an ASP format.	Shut down as of 3/01.	$43.3M	2	Softbank, Benchmark Ventures, Technology Crossover Ventures, Paine Webber, Chase HQ, and Donaldson, Lufkin and Jenrette.	· After burning through $43M in cash without turning a profit, company closed its doors. · Market was not as big as expected. · Customers were not moving fast enough from traditional, paper-based models. · Some VC money left for investors. · Most of the VC money raised was used to build the technology with very little left to market the company name. · At its peak, it employed 100 people while burning about $1.5M per month. · Executives place blame on charitable organizations reluctant to embrace the new technology. · Liquidated its assets and held a fire sale for the technology platform it spent millions building. · Executives warn others to close business when their company living month to month.
Communities.com	Developed online forums so virtual communities could interact with one another.	Closed doors and filed for Chapter 7 Liquidation as of 3/01.	$95M	11	Softbank Venture Capital, Time Warner, Intel, Helix Investments, Opentext and others.	· Burned $95 M. Investor disagreement about the terms of a $5M bridge loan led to dissolution. · Owes $2M in cash to creditors. · Bridge loan was to keep operations afloat. Two investors agreed to match each other, but one reneged and offered only $500,000. Once that happened others pulled out. · Burned about $1.2M a month and posted $250,000 in revenue for the month of February. Never profitable. Three companies rolled into one: Onlive, The Palace, and Electronic Communities. Together they pulled $95M in VC and $3.4M in revenues for 2000. Company had expected to post $7M in revenues at the end of the year.

Ecircles.com	Offered online message boards and photo albums for friends and families to keep in touch.	Shut down web site as of 4/01. Sold business to Classmates.com for undisclosed amount in December of 2000.	$28M	N/A	Adobe Systems, CMGI@Ventures, New Vista Capital, iMinds, Ziff Davis.	· CEO, Prescott Lee, brought in a $20M round in June of 2000 with a post-money valuation of over $100M. Yet, he was ready to close shop two months later. Reasons: Ad sales were falling and they were the company’s primary source of revenue. Realized that the fall in ad sales was more than a temporary downturn. Saw valuations dropping and ad prices going from CPM to click-through rates, to cost-per-click, until even that was dropping. · In an effort to conserve cash and make eCircles.com an attractive acquisition target, Mr. Lee cut his 90-employee staff and $1M burn rate by half. · By December 2000 Classmates.com acquired eCircles.com for an all-stock deal. VCs have yet to be paid, since Classmates.com is still private. Value of deal is undisclosed. · ECircles.com (site discontinued to be operational as of 4/15) was integrated into Classmates.com’s offerings. · Mr. Lee’s advise to entrepreneurs: find a board with its eyes open that knows when a company is at its peak. · A fair chunk of eCircles.com’s $20 M last round was repaid to investors.
Bluemeteor	Application service provider (ASP) that hosted human resource, customer service, and email software for mid-size companies.	Selling assets as of 4/01.	$31M	2	Minotaur Capital Management, Wheatley Partners, Bluevector.	· After striking out with VCs, company hired Lehman Brothers to find investors. Lehman visited 43 potential investors and came up empty-handed. · Board then hired a Chicago firm to sell Bluemeteor’s assets. VCs will probably get nothing. · Decided to close up shop in March. · In 3^rd quarter of last year, had a valuation of $100M and had take in $4.5M in revenue in its first 8 months of operation. The revenue was 73% integration fees and the rest hosting. · Started to layoff employees last year and all were gone by March. All employees received severance pay. · Reasons for failure: Overestimated the complexities of the sales process. Expected to close sales too quickly. Sales took 3-6 months to complete.

Freeride.com	Offered free items for surfing the Web.	Closed Web site as of 4/01. Web site states that it is “rebuilding business model.”	N/A	N/A	N/A	· Lack of profits for a long period of time. · Analysts questioned business model four months prior to close. · Cash reserves at $57M as of 12/00. Closed Web site five months later. · Tried to reduce burn rate back in December. Foresaw that cash reserves would fall below total liabilities without new capital. · CEO blamed current market conditions and weak advertising.
Digiscents.com	Developing technology to let people smell scents while surfing the Web.	Out of money. No longer working as of 4/01.	$11M	1 (+ seed round)	Pacific Century Cyberworks and undisclosed angels.	· Company had a research alliance with Procter & Gamble. · Also purported 5,000 deals with Web sites and software developers to use its technology. · Nevertheless, VCs saw that Digiscents was a long shot.
Scene7 (formerly GoodHome.com)	Now a home portal with a business model based on commerce. Imaging software provider. Licenses software that enables furniture makers and others, like Victoria’s Secret, to let online viewers change the color, pattern, and texture of products they view on a Web site.	Scene7 transferred the failing GoodHome.com, furniture e-commerce site, into an imaging software provider.	$91.3M ($80M GoodHome and recent injection of $11.3M from VCs).	2	$11.3M from Moore Capital Management, tech company Xcelera, GCH Investments, Hearst Interactive Media, Weston Presidio Capital, Halpern Denny & Co., Rhodes Partners, Roger Horchow, Slfier Designs, and TWB Investment Partnership.	· GoodHome was an online home furnishings seller. · It was very well funded, but failed. $45M in cash that went into GoodHome.com burned. · Board noticed how bad e-tailing was doing and changed its business model. Major furniture manufacturers were requesting to license GoodHome’s software. Now software licensing is the new business model. · They have signed 15 licensing agreements. · New burn rate is less than $700,000 a month.
Tradia (formerly Webswap.com)	In 1999 it was Webswap.com, a consumer-to-consumer e-commerce and swapping site. Then as Tradia, it was a B2B and application service provider. Then a web services software company, or Instant XML.	Shut down.	Burned through $14M.	N/A	Sequoia Capital, Accel Partners and angels Roger Sippl and Ron Conway.	· Company made 3 attempts to find the right business model. · Tried to use existing technology from its original business of a C2C e-commerce and swapping site, to a B2B and ASP by selling infrastructure software for corporate bartering based on its existing technology. · Recently it became an InstantXML that allowed Java and HTML developers to Web-ify existing applications. · Faced too many competitors.
Envive	SAP monitoring business.	Sold its manager service provider (MSP) assets to a competitor. Now dissolving its original SAP monitoring business. Winding down operations as of 7/01.	$14M to expand into the MSP market.	N/A	Hummer Winblad and Mayfield.	· Once a profitable SAP performance monitoring software maker, licensing its software to customers like Nay Netwroks and M/A-Com. · Took wrong turn by buying into the hyped application service provider (ASP) market, adding a subscription-based service for load testing and service-level monitoring of Web applications (xSP). When the xSP market went sour and VCs didn’t want to invest money anymore, Envive suffered. · Sold the assets of the MSP business to Keynote for undisclosed amount. Keynote took over its customer contracts, which included Ann Taylor, Equifax, and Wal-Mart. Also hired half of Envive’s employees.
PeopleNews.com	Celebrity gossip/content-driven Web site.	Liquidating.	$7.8M	6	Antfactory and Syntek Capital Group.	· Analysts doubt the success of content driven Web sites. · CEO, Simon Walker, maintains that site attracted 300,000 visitors monthly and was due to break even by October. · CEO blames the quick close on backers’ lack of knowledge about the media industry.
GreaterGood	Web site diverted a potion of e-tail sales to charities.	Shut down as of 7/01.	$30M	N/A	Arch Venture Partners, Madrona Venture Group, and OVP Venture Partners.	· Company’s business model was entirely advertising-dependent. · Cuts took place to bring cash flow to a positive level, but that was not enough. · As online advertising slowed, so did company’s sponsorship dollars.
Intira	A Web-hosting and managed services provider.	Filed for Chapter 11 Bankruptcy protection as of 7/01.	Burned through $247.7M in VC and debt.	N/A	Chase Capital Partners (now J.P. Morgan Partners), Mayfield, New Enterprise Associates, and Spectrum Equity Investors, Bain Capital, Hewlett-Packard, Lehman Brothers, Lucent Technologies, and Stifel Nicolaus.	· As early as May of 2001, analysts warned that Intira faced a major challenge of earning enough to cover steep fixed-capital costs. Three months later it filed for Chapter 11. · It had 30 customers and posted monthly revenue of $1.8M. But saddled with $200M in unsecured debt. · Like its peers in the hosting business, Intira built up its data center capacity during the high tech boom and was hit hard by the downturn in the dot-com economy. · As part of restructuring efforts, it sold some assets to Divine, an incubator-turned-software company. Under the terms of deal, Divine will acquire Intira’s infrastructure and technology, some of the company’s data centers, and other assets for about $7.8M; it is also assuming around $30M in liabilities. · Intira had $112.9M in assets and $152.7M in liabilities at the end of June, according to bankruptcy documents. · Company says it did not fail because it was a bad idea or had the wrong management team; it just got caught at the wrong time in the capital markets. · Too capital intensive, despite offering a good value proposition.
Essential.com	Resold discount energy and communications services. Consumers and small business could buy utility, phone, Internet, and satellite TV services though company Web site and received a single bill.	Filed for Chapter 11 Bankruptcy protection as of 6/01.	$92M	3	Amerindo, Investment Advisors, Bessemer Venture Partners, Brand Equity Ventures, Comdisco Ventures