Red Gorilla, an Internet billing service, gets cooked by a flawed plan to hook customers.
The business: Online time-tracking and billing service Founded: May 1999 Closed: October 2000 Cause of death: Flawed scheme to attract customers
"The problem is the capital markets," John Witchel told reporters last October, explaining why his company, Red Gorilla, had gone bust. Witchel had started his online time-tracking and billing company 17 months earlier, when the mania for Internet businesses was at a fever pitch. Red Gorilla's lavish offices -- located on Market Street in the heart of San Francisco, topped by a 20-foot neon sign -- bespoke the erstwhile easy money and glamour of the dot-com world. And when a Darwinian thunderbolt hit that world last year, Red Gorilla appeared to be just another dot-com casualty. Having concluded that entire categories of businesses were fundamentally not suited to the Web, venture capitalists and other investors stopped pumping money into many of them. Red Gorilla, for example, had been unable to secure a third round of funding in September.
So Witchel's explanation seemed right on. Surely, Red Gorilla had been a victim of the credit crunch.
But there's more to the Red Gorilla story. The company's line of business was cut out for the Web, say industry experts, who attribute its failure instead to a simple blunder. Red Gorilla adopted a revenue model that sought to lure customers to its premium offerings by charging them nothing for its standard service. "Giving anything away is trouble," says Helen Chan, an analyst at Boston-based Yankee Group, because such a strategy "attracts a certain kind of customer" who won't "upgrade and start paying."
Witchel, who declined Inc.'s request for comment, was no neophyte when it came to the Internet. He'd been a consultant at two other Web-based businesses before becoming Red Gorilla's CEO. In starting Red Gorilla, he was exploiting Internet technology to help professionals like lawyers and consultants keep track of their time and bill their clients with an easy-to-use format that was available at all times from anywhere.
The company's decision to provide its basic service free of charge was supposed to draw as many customers, or "eyes," to Red Gorilla as possible. "Once we got the eyes, we'd upsell them" such premium services as wireless access ($9.95 a month) or invoice faxing ($4.95 a month), says Todd Fulton, Red Gorilla's former chief technology officer and one of its cofounders.
Phase one of the strategy showed promise. Red Gorilla attracted 67,000 customers, who signed up for the premium services at a "fairly good" conversion rate of 8%, says Alan Dishlip, a former member of Red Gorilla's board and a partner at Utah Ventures, a venture-capital firm based in Salt Lake City.
However, an application service provider like Red Gorilla must cover the high cost of supplying server capacity and customer service. The 8% conversion rate would not have translated into enough revenues to "support" those operations for the 92% of nonpaying customers, says Mark Goldin, president of Elite.com, which acquired some of Red Gorilla's assets. Red Gorilla was "not a valid business," insists Goldin.
Red Gorilla aggravated its cash drain by marketing its service on OfficeMax.com, Adobe.com, and some 40 other Web sites. Those partnerships further jacked up the number of Red Gorilla users -- but at a steep price. For each user it acquired through some of those deals, the company typically agreed to pay a bounty of at least a dollar. If the user became a paying customer, which rarely occurred, Red Gorilla had to share that income with its partner. Meanwhile, Red Gorilla was spending heavily to rent its premier office space and to maintain a 90-employee payroll.
The company earned no revenues until last year's third quarter, when sales totaled about $750,000, according to Fulton. By the time it closed down, Red Gorilla had "burned through everything," including the $7 million it had raised in venture capital and loans, Fulton says. The shutdown left all those eyes staring at a blank screen.