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
3rd 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 |