In the accompanying chart I have compiled all the published data relating to startup companies that experienced serious financ

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

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 and EnerTech Capital Partners.	· Company says that the problem was not the space or the opportunity Essential.com was targeting. It just could not raise more capital, even with a scaled down business model and evidence of traction in the market. · Company went through 3 CEOs since its start in 1995. · Strategy wasn’t very profitable: in 1999 the company pulled in revenues of just $527,000, with a net loss of $12.9M. The expensive business model may have had a shot if Essential.com’s IPO had succeeded. The company filed to raise $86 million on the public market in April 2000, just as the Nasdaq began its free fall; the registration was withdrawn in November 2000. · Company laid off 40 of its 146 employees in April 2001 to cut costs. It could not raise an extra $15M from venture strategic sources. Customer list was sold to Kennebunk for $1.3M.

Cerulic (Bluetooth)	Wireless services provider. Airports were to use the wireless technology to deliver services (like remote check-in and flight updates) to travelers’ mobile devices..	Shutdown operations after 16 months in business, as of 8/01.	$1.3M.	1	Accenture Technology Ventures and Bill Harris (former CEO of Intuit).	· Even with one major strategic investor, a trial project under way with a huge customer, a chairman (CEO Robert Crandall American Airlines) with a great resume, the company could not overcome the problem of delayed revenues. · Ran out of cash while trying to raise $8M-10M in series B financing.
CityReach International	Internet hosting.	Filed for bankruptcy as of 8/01.	$332M in equity and debt	4	Battery Ventures, Chase Capital Partners (now JP Morgan Capital Partners), Investcorp, Vulcan Vuntures, and MC Venture Partners. Chase and Merrill Lynch provided the debt.	· Problems began to emerge in May 2001 when 2^nd quarter sales proved weaker than expected and it became clear that an additional $44M in funding would be needed. Risk profile of the debt providers made it impossible to cut a deal. The lenders who had pumped $107M in to CityRech stood to recoup $27M by shutting the company down and with a prospect of an IPO stalled, they were unwilling to pump more debt into the beleaguered telecom sector.
AristaSoft	Host software applications targeted specifically at electronics manufactures.	Reports say that company began winding down operations as of 9/01 and plans to shut down operations as of 10/01.	Burned through $103M.	N/A	Crosspoint, Azure Capital Partners, C.E. Unterberg, Towbin, Enron Broadband Ventures, and Warburg Pincus.	N/A
Zenestra Photonocs	An optical components startup.	Filed for bankruptcy as of 10/01.	$40M	2	Bank of Montreal, Business Development Bank of Canada, Eastern Technology Seed Investment Fund, VenGrowth Investment Fund and Ventures West.	N/A

II. Survival Techniques for Companies Experiencing Financial Distress

During times of financial distress, emerging growth companies should not rush to file for bankruptcy. There are a number of survival techniques that may assist a struggling company to buy enough time to endure temporary economic downturns. While results may vary depending on the company type and industry, management should consider strategies that focus on rethinking a business model, eliminating uneconomic or non-strategic product lines, cutting excessive costs, and preparing the company for strategic partnerships or acquisitions. Finally, if bankruptcy is the only option available, companies should be diligent to avoid common mistakes such as misleading creditors and employees, or not saving enough cash for bankruptcy expenses.

Review and possibly rethink business model. Look to see if other business opportunities exist with given technologies and assets. For example, GoodHome.com was a failing furniture e-commerce site that quickly burned through $45M in VC cash. While e-tailing was dying out, major furniture manufacturers were requesting to license GoodHome’s software. Initially, GoodHome refused to license its software wanting to protect its technology. Eventually, it recognized the market opportunity. Letting go of the e-tailing business, the company changed its name to Scene7 and now licenses its unique software to venders like Victoria Secret, Sanyo, and F. Schumacher & Company. The software allows online viewers to change the color, pattern and texture of products they view on a Web site. The company has signed 15 licensing agreements to date and boasts a tremendous reduction in burn rate (lower that $700,000 per month).

Get rid of “bleeders.” Eliminate division or product lines that are draining more from the bottom line than they contribute. Companies cannot afford money-losers during a critical cash requirement period. For example, Envive was a manager service provider (MSP) and a SAP monitoring business. When the xSP market tanked, VCs did not invest in them anymore. To prevent further cash drain, Envive sold the assets of the MSP business to Keynote (Nasdaq: KEYN). The sale also included Envive’s customer contracts and some of Envive’s employees.

Conserve cash and make the company an attractive strategic partner or acquisition target. If existing technologies and assets are applicable to other businesses, including competitors, cut costs to increase cash reserves and prepare the company for a possible strategic partnership or acquisition. With respect to strategic partnerships, a start-up may consider partnering up with a large company. Because large companies have an extensive customer base and sales force, this may assist a start-up in selling to that existing customer base. With new customers and higher revenues, a start-up may find it easier to cover their expenses. Large companies may also be a significant source of funding that may assist a start-up with co-marketing or further developing products. Since an effective strategic partnership may validate a start-up’s business, in certain situations, a start-up may even attract new investment from the VC community.[2]

Preparing the company for a possible acquisition may be another healthy strategy. For example, eCircles.com recognized that its main source of revenues (ad sales), and consequently its valuation, was falling with virtually no chance of rebound. The CEO quickly conserved cash by reducing its employee staff and its $1M per month burn rate in half. Within six months, Classmates.com acquired eCircles in an all-stock deal. Ecircles’ products were integrated into Classmates.com’s offerings. Other companies have attempted to follow similar paths by hiring outside consultants or investment banks to sell their business.

Get lean and mean in a hurry (the catch-all survival mode method). Sometimes companies recognize that the plunge in revenues and economic slow down is only a temporary set back. They do everything possible to extend their lifespan by reworking their business plan, cutting costs and going into full survival mode. For example, Drivecam Video Systems, a two-year-old company that measures vehicle motion and incorporates cameras and microphones to give drivers feedback on erratic moves, was making great strides towards profitability until the tragic day of September 11. Drivecam’s main customers, companies that shuttled tourists to and from airports, suddenly had bigger worries than driver training. Revenues dropped 70% in a month due to the change in demand and cancellation of orders. Before September 11, Drivecam was near the break-even point and had raised $1M in seed funding in late 1999 and $2.4M from VCs. Ed Andrew, president and CEO of DriveCam, had expected to be profitable by November and seek another round of funding. With the prospects of new VC funding unlikely, Mr. Andrew turned his profitability timetable into a six-month survival plan. If revenues continued to slump by 70%, DriveCam would run out of money by January. In drawing up his survival blueprint, Mr. Andrew asked himself: Assuming revenues remain this low for six months, how can DriveCam stay in business?

Mr. Andrew went through various scenarios to reduce expenses. His goal was to continue cutting costs, so that by the end of March, the doors would still be open, the lights would be on, and money would be in the bank. This is what he did:

Þ Laid off four employees, reducing the staff to 14.

Þ Met with a supplier who had forced DriveCam to accept $25,000 worth of components on a non-cancelable, non-refundable order. Got tough with the supplier by threatening to never buy from them again. This tactic persuaded the supplier to let DriveCam return the order.

Þ Suspended some Internet services.

Þ Postponed the hiring of a regional sales manager for New York.

Þ Cut back on the work the company had given to a patent consultant.

Þ Stretched out the timetable for releasing software upgrades and cutting expenses for research.

Þ Negotiated with an outside consultant to take 50% of his fee in stock rather than cash.

Þ Canceled some equipment purchases.

Þ Canceled outside sales and marketing plans and set a strict monthly budget for its public-relations consultant.

Þ Negotiated with a creditor, who agreed to take a note for the $20,000 owed by DriveCam.

Þ On the sales side, the company switched its priorities. As long as the tourism industry is reeling, DriveCam's No.1 target customer could no longer be passenger-carrying vehicle fleets. Now, its focus is on ambulances and security vehicles.

Avoid the common mistakes. While making the critical decisions regarding the financial health of the company, it is important to be aware and avoid some of the common mistakes that companies make during this period. Avoiding them will benefit the corporation regardless of what action is taken.

Þ Don't fire your controller. More so than at any other time in the business life of an operation, accounting personnel are indispensable during a financial crisis. Unless the accounting personnel are suspected of fraud or complete incompetence, it's best to keep them on board.

Þ Don't shut out or mislead creditors -- or employees. Maintaining good relationships with creditors and company staff can salvage what's left of the company and help facilitate a workout of bad debt. Ignoring telephone calls and inquiries will almost always result in creditors presuming that there is something more to hide than just the fact that they aren't being paid.... What may be worse than refusing to return that call, however, is communicating incorrect or misleading information.

Þ Cut overhead. Analyze overhead and operating expenses to see what can be eliminated for significant cost-savings. Do not let certain perks – such as gourmet breakfast, lunch and dinner -- become sacred cows.

Þ Put some cash aside for bankruptcy expenses. If the company files for bankruptcy, or the financial dilemma becomes public knowledge, creditors are going to insist on cash on delivery. It is also important to have some funds stored away for court expenses, like U.S. trustee fees, appraiser fees, and deposits.

Þ Don't give away the farm. Avoid being pressured into offering new collateral in exchange for an extension of debt. If the company files for bankruptcy protection, the fact that the company put up assets as security at the last minute can vastly complicate matters.

Summary

In summary, there are lessons to be learned from the experiences of the above companies. A company should pay more attention to controllable patterns such as high expenses, excessive spending on research and development, or pursuing national markets without first developing smaller or local ones. Finally, if financial distress becomes inevitable, a company may save itself and possibly forego bankruptcy options by finding other viable uses for their existing technologies, selling their unhealthy product lines, forming strategic alliances, merging with other companies, or simply cutting costs until the economic conditions improve.

[1] This data was retrieved from various publications including Red Herring, Red Herring Online, and Business Week Online.

[2] Adrian Ott, “Strategic Alliances: 10 Pitfalls to Avoid When Approaching Large Companies,” SDForum News, Vol. 4, Issue 11, p.4, November 2001.