Online companies are falling left and right. But for some start-ups, that spells opportunity.
Cleaning Up from the Dot-Com Mess
Online companies are falling left and right. But for some start-ups that spells opportunity
It's been almost a year since the Nasdaq crashed last April, and the results haven't been pretty. Anyone who has invested in Internet companies, worked for one, or simply enjoyed shopping online has probably had a disappointment or two. Some 210 dot-coms closed up shop during the year 2000, according to a report by Webmergers.com. That desperate gasp you hear emanating from places like the San Francisco Bay area and New York's Silicon Alley is the sound of Internet hopefuls running out of money.
Of course, not everyone is suffering. In fact, the spate of deaths in the Internet world is fertilizing a new crop of start-ups. Look at it this way: when an epidemic hits, you need doctors to tend to the sick and undertakers to bury the dead. New companies like NetCatalyst are aiming for the Internet first-aid niche, while others like Bid4Assets.com are standing by to take care of the dot-coms that won't make it to the hospital.
Life support
Long before last April, Ronald Posner knew that a dot-com shakeout was coming. Too many start-ups were getting funding too quickly, without enough due diligence. That's what prodded Posner and cofounder Chris Karkenny to start NetCatalyst in August 1999. Posner, then 56, was a venture capitalist and former CEO of five software companies. Karkenny, 32, was running an Internet incubator. They believed, Posner says, that "when the downturn did come, there would be a lot of good companies looking for partners" -- that is, hoping to be acquired by a stronger company.
Billing itself as a "liquidity engineer," NetCatalyst is not a plumber but an investment bank, with some management consulting thrown in. Its target customer is a high-tech company whose venture capitalists have turned off the spigot or a business that has realized that attaining the nirvana of a public offering is no longer a possibility. ("Internet companies that have hit a road bump," as NetCatalyst's Web site delicately puts it.) NetCatalyst's aim is to help such companies get back on the road by finding an acquirer, a merger partner, or a new investor.
When necessary, though, NetCatalyst will also supply some management advice to get an ailing company into better shape before shopping it around. If NetCatalyst manages to match a company with a new partner, its fee is usually 3% to 10% of the acquisition or investment amount. The company also charges time-based fees for its management-consulting services, which generally total less than $100,000.
What companies like NetCatalyst can provide is "a fresh set of eyes" to find efficiencies and help a dot-com reposition itself in the market, says Emily Meehan, senior analyst at the Yankee Group. Many Internet companies have relied on incubators and venture-capital firms for capital and guidance. Now, says Meehan, "that help is totally drying up." It's hard to put a number on the potential market for NetCatalyst's services, given that the number of failing dot-coms is still unknown. But researchers at Gartner Group estimate that as many as 60% of business-to-consumer Internet start-ups founded in the past three years will be gone by 2005. And even if the dot-com epidemic abates, says Karkenny, Internet mergers and acquisitions will undoubtedly continue.
One early NetCatalyst client was Alert-IPO.com, an Internet business that tracks initial public offerings. The company hired NetCatalyst early last year while debating whether to seek a large round of venture capital, says Karkenny. NetCatalyst's recommendation: bring in more experienced management and look for a strategic partner instead of VC money. Within 90 days, NetCatalyst engineered Alert-IPO's acquisition by Internet.com, a portal consolidator that has rolled up more than 67 Web sites since 1995.
In a year and a half of operations, NetCatalyst, which is based in Santa Monica, Calif., has worked with approximately 30 companies as an acquisition or investment intermediary. Its revenues for 2000 totaled some $2 million in cash, which doesn't include the more than $10 million in equity that the company has garnered from some of its deals. Increasingly, says Posner, NetCatalyst finds itself being retained by venture-capital firms whose Internet portfolio companies need attention -- fast. "They may have investments in 30 to 40 companies and don't have the resources internally to deal with more than 4 or 5," says Posner. "They're turning to people like us."
NetCatalyst is picky about choosing which dot-coms to take on, though. Posner says he looks for companies that are fundamentally healthy, despite cash-flow problems, with a technical advantage or a business model that differentiates them from the rest of the marketplace. And if the company is down to its last nickel, forget it. "We don't do dot-bombs," says Karkenny. "If they have less than three months' worth of cash, we don't get involved at all."
Last rites
Those unlucky Internet companies that fail to make NetCatalyst's cut might consider the services of Bid4Assets.com. Launched in November 1999 as a site aimed at unloading goods ranging from bad loans to items seized in bankruptcy, Bid4Assets has found a serendipitously lucrative niche in selling the assets of defunct dot-coms.
"This wasn't in our business plan," admits vice-president of strategic development David Marchick. "We didn't really see it coming until about September." But now as much as 20% of the business's revenues come from liquidating Internet companies, and interest in Bid4Assets' services is growing, says Marchick. "We have conversations with between 10 and 20 Internet companies per week," he says.
Based in Silver Spring, Md., Bid4Assets auctions items both online and off. Bidders for the assets of the recently deceased Value America, based in Charlottesville, Va., came from 16 states, says Marchick. "That would never have happened with a live auction," he adds. Unlike Overstock.com, its best-known competitor in the dot-com scavenger business, Bid4Assets tends to sell to businesses rather than to consumers. About 40% of the time, Bid4Assets buys assets directly from failing Internet companies and resells them. In other cases it acts as a broker, usually collecting 10% of sales, plus a premium.
Liquidating dot-coms brings some special challenges. A brick-and-mortar business usually has buildings, equipment, inventory, or other tangible property that can be sold off. Internet companies, which tend to be more virtual, often have a different range of assets. As of mid-December, Bid4Assets was offering intellectual-property rights from the now defunct Zodo.com, an entertainment-content site, including the company's trademark application, its business plan, and its prototype site. (At press time, one bidder had offered $1,000.) Another recent auction involved computer equipment, office equipment, and furniture from the failed Value America, all of which sold for about $300,000. Other typical dot-com assets might include domain names, software, and licenses. Bid4Assets sells retail inventory only occasionally.
"Assets from Internet companies are perishable," says Marchick. "They're like fruit." So Bid4Assets tries to act fast, auctioning items within a week or two. "If you hold on to a server for six months, its value drops exponentially," he explains. Intangible assets like domain names are short-lived, too. Even if a site has tons of traffic, once it shuts down, "within two months no one goes there," Marchick says.
