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 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 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, 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, 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 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, 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, 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.

There's likely to be no shortage of troubled dot-coms in the near future. But what happens when the shakeout is over? Marchick says that he isn't worried. By then another industry will be in a downturn, with Bid4Assets ready to scoop up the remains. "That's kind of how it works in bankruptcy," he says.

Emily Barker is a senior staff writer at Inc.


The downturn among online companies has launched a slew of Web sites for the downsized and the people who love them to complain or commiserate or both. And -- surprise! -- some of those sites are even making money. Here are some of the loudest voices., in New York City, publishes a list of troubled Internet companies, based on reports that founder Philip Kaplan collects from disgruntled dot-commers.

What spawned it: Last June, Kaplan, the founder and CEO of a small Web-design company, put up the site as a joke for his friends. He got back from vacation a week later to find his answering machine full of calls from reporters.

Tone: Gleeful schadenfreude. Kaplan even runs a pool that lets users bet on which Internet company will be the next to fail.

Revenue sources: Advertising; job listings; merchandise, including T-shirts and coffee mugs., in Yonkers, N.Y., posts essays, rants, and other contributions from tech workers. The offerings provide a virtual underground guide to the Internet workplace.

What spawned it: Founders Bill Lessard and Steve Baldwin started the site in 1998 to relieve their burnout after a series of frustrating Internet jobs.

Tone: Grassroots subversion with a high-tech twist. Stories on sweatshop recruiters, articles on drug use in dot-coms, and gift suggestions for the special geek on your list.

Revenue sources: Advertising, plus sales from Lessard and Baldwin's 1999 book, NetSlaves: True Tales of Working the Web, which was launched on the site and has sold 50,000 copies so far. Another book is in the works., in Castro Valley, Calif., offers advice and a community that help entrepreneurs bounce back after their companies have failed.

What spawned it: Last February, after his third start-up in a row tanked, founder Nicholas Hall came up with the idea of starting a Web site for guys like him.

Tone: Helpful encouragement of the "You get right back in there and keep trying" variety. Hall refers whiners to "I didn't want to have that karma," he says.

Revenue sources: Sponsorships, plus off-line business coaching, speaking engagements, and workshops.


Opportunities Abound

Seth Freeman, managing director of EM Capital/EM Management Inc., a San Francisco consulting firm that specializes in turnarounds, talks about some of the opportunities that he sees in the Internet shakeout.

Inc.: What can turnaround experts do for distressed dot-coms?

Freeman: Venture capitalists, private-equity funds, and banks are beginning to use turnaround managers to evaluate their portfolio companies. And that leads to another opportunity for turnaround people: performing a planned wind down or asset sale that delivers as much value as possible.

Inc.: What are the challenges of working with Internet companies?

Freeman: There's a perception among turnaround specialists that with dot-coms leverageable assets don't exist. There hasn't been much understanding of how to value and use intellectual property as collateral. Also, the ability to appraise the value of a dot-com brand name is still developing.

Inc.: What are the opportunities for new turnaround companies?

Freeman: You're going to see firms set up to work as advisers to Internet "vulture" funds. Those are run by people who would like to buy either the assets or the ongoing companies at a discount. For that, they'll require new-economy-savvy consultants.

Inc.: How long will such an opportunity last?

Freeman: I think it's permanent. We're going to continue to see new Internet start-ups. And many of those will fail.


So What's to Sell?

How is liquidating an Internet company different from dissolving any other type of company? Jeffrey Wolf, a bankruptcy specialist at the law firm of Greenberg Traurig, in Boston, who represents and other more traditional liquidation companies in many of their transactions, explains.

Inc.: What are the opportunities for liquidators in the dot-com downturn?

Wolf: Clearly, there will be a lot of failed dot-coms. The real question is, What is there to liquidate? Many dot-coms have no inventory. Obviously, there are the minimal physical assets, like office equipment, used computers, and the like. Then there are the intangible assets: the technology, the licenses, the customer lists, the domain names, and any intellectual property. And each one of those unfortunately comes with its own liquidation difficulties. For instance, customer lists, which everyone at one time supposed would be a very valuable asset, have become difficult to liquidate because of privacy concerns.

Inc.: Sounds as if the opportunities for liquidators could be pretty small, then.

Wolf: Yes and no. If liquidators can find efficient, cost-effective ways to dispose of companies' assets, there could be a lot of opportunity, especially for online liquidations. Since the cost structure of an Internet-based auction is theoretically very low, the net results will be higher.

Inc.: What's the competition like?

Wolf: Some companies have tried to liquidate themselves over eBay and other online auction sites. And some of the traditional liquidators are experimenting with dot-com liquidations. I don't know how successful they'll be without partnering with an experienced online player. The investment criteria of a traditional liquidator may not justify spending a lot of time or expense in that area. I think the traditional liquidators will have plenty of brick-and-mortar retailers to work with very shortly and will not necessarily be focusing on the dot-com sector.

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Published on: Mar 1, 2001