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STRATEGY

Obit: IPO Plan Lands CEO But Sinks Company

A Denver telecommunications company is undone by its national ambitions.
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Obits

The business: Internet-access provider
Opened: June 1998
Closed: December 2000
Cause of death: Undercapitalized expansion

Like many companies seeking riches in the internet economy, Jato Communications devised a go-go strategy to catch Wall Street's eye, so that the company might go public with a bang. Denver-based Jato had started modestly, offering high-speed Internet access to businesses in the Denver metro area. By the summer of 1999, however, the stocks of many telecommunications companies were soaring. That fact didn't go unnoticed by Jato's board and its three cofounders, who were then running the company. To generate the kind of fast growth that they hoped would culminate in their own initial public offering, they revamped the company's plan. They decided to roll out their service in about 50 metro areas nationwide and recruit a blue-chip telecommunications executive for their management team.

Sure enough, in September 1999, Jato brought aboard a seasoned GTE executive, Gerald Dinsmore, as chief operating officer. Two months later he was promoted to CEO. But Dinsmore was unable to turn the company's high-flying plans into a successful IPO. Two of Jato's three cofounders -- Brian Gast and Bruce Dines, who left their respective positions of CEO and vice-president of operations after Dinsmore arrived -- say now that it was a mistake to name him CEO. "When there's a pot of gold at the end of the rainbow, investors and founders make decisions that take them off course," says Gast. But Rex Humston, Jato's former chief technology officer, says that the company would have gone off course no matter what Dinsmore did. "The fatal flaw was going national," Humston says, before the company had the money in hand to finance such large-scale growth. A spokesperson for Dinsmore said that he would have no comment. Leonard Allsup, Jato's other cofounder, could not be reached for comment.

Gast, Dines, and Allsup had launched Jato in 1998 to provide fast Internet access over telephone wires using DSL technology. The glamour of the then-booming DSL industry helped Jato raise more than $70 million from venture capitalists and other sources. But revenues materialized slowly. In 1999, Jato's only full year of operations, revenues totaled $315,000, which resulted in a net loss of $15 million.

Dinsmore acted quickly to fulfill Jato's national ambitions. Under his stewardship, Jato expanded its workforce from 200 to 575. By early 2000 the company was burning through at least $10 million a month in cash. More costly, says Dines, was Dinsmore's delay in taking Jato public. The company had been shooting for an IPO in February 2000. The deliberations over legal and regulatory issues dragged on until April, by which time the IPO market for unprofitable high-tech companies like Jato had collapsed.

The company then had to scuttle the IPO altogether. "He was not prepared to move at the speed that a small company needed to move" in the telecommunications market, Dines says of Dinsmore.

In Humston's view, however, Dinsmore simply followed the expansion plan of the cofounders and the board. Once he realized that he couldn't raise the capital to support a national company, Dinsmore proposed closing Jato down, according to Humston. Dinsmore left the company in August, and the board named Allsup the CEO.

Allsup immediately laid off 290 employees. The company raised an additional $30 million in private capital and held some discussions with potential buyers, but it was too little too late.

On at least one point virtually everyone involved in the Jato saga concurs: a fast-growth mania seized the company, creating a voracious appetite for capital. "We were always planning for the next round [of financing]," says a former investor. "It was a recipe for disaster. One day we woke up, and it was all gone."


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