Amid the dot-com carnage, some promising startups are going under
The following article appeared as the main story in the Sunday Business section of the San Jose Mercury News on Jan. 7, 2001.
For me, the public’s weariness with Internet companies hit home when I filed my claim for unemployment. “What do you know,” the state worker on the phone said tartly, “another dot-gone.”
Call it Revenge of the Dot-Nots. One can hardly pick up a newspaper, turn on the TV or fire up the PC without encountering an army’s worth of slings and arrows raining down on the Internet industry. The new conventional wisdom, spouted by everyone from the media punditocracy to the cubicle dwellers at the state unemployment office, goes something like this:
The startup meltdown is a healthy development. Layoffs and closings are a brutal but necessary part of the Darwinian natural order. Most of the fallen dot-coms offered nothing of value anyway. In short, these upstarts had it coming.
Like all conventional wisdom, there’s a good deal of truth in the wolf pack’s pronouncements. Too many Internet startups lacked any solid chance of long-term success. I mean, a breakfast flake portal? Get real.
But lost amid all this eye rolling and tut-tutting is another truth: Some promising startups with solid business models are going down the tubes, victims of the venture capitalist stampede toward the exit signs.
Among the casualties of the down cycle was the company I worked for, iVendor, which folded its tent in Sunnyvale, Calif., a few weeks ago. Our sin — besides having an “i” in front of our name — was simply this: After two years of operation, $22 million in venture financing and a postponed IPO, we came up eight months short of profitability.
The company’s story is not the usual one of clueless managers, bogus business models and no clear paths to profits. It is, instead, a sobering reminder that the fates of thousands of Internet employees hinge at least partly on the vicissitudes of capital markets — and today’s negative market psychology. Where irrational exuberance was once the catch phrase of the new economy, caution and timidity now rule the day.
That’s understandable, given the downturn in the market. But painting the Internet economy with too broad a brush — and punishing the entire online retailing sector, as many investors and venture capitalists seem prone to do — threatens not only marginal dot-coms but promising young companies in the high-tech sector as well.
Here, briefly, is a requiem to one such fallen company.
iVendor’s original vision was to become the e-commerce engine behind thousands of content and community sites. We executed well on that vision, building and managing the online stores for ABC, Fox, the Oscars, Star Wars, GetMusic, iSyndicate and others. Independent analysts such as Jupiter Communications said we were light-years ahead of competitors in our space. When Napster came shopping for an online store to go live in less than a day’s time, they came to iVendor. (They canceled plans for the store when an appeals court granted them an 11th-hour reprieve, but we were well on our way to building it — in 10 hours flat.)
Despite the star-studded client list, over time we came to realize that our existing model didn’t scale. Last June the company laid off 30 people and refocused on a promising new revenue model: creating e-catalog solutions for large brick-and-mortar retailers.
To put it simply, we saw a day, not long from now, when shoppers would no longer walk out of a retailer like Macy’s or Nordstrom if the store didn’t carry clothes in the right size or color. Instead, the customer would swipe the garment’s tag across a scanner and have it drop-shipped to his or her home a few days later — with the fit and hue the shopper specified.
Our plan, in effect, took a blasting cap to the already fossilized concept of e-commerce. By plunking down Web kiosks in the middle of their stores, retailers could reduce inventory costs, extend product lines by stocking a manufacturer’s full line of garments or products offsite in a virtual warehouse, capture lost sales because items would never be out of stock, and increase customer satisfaction. We were speaking a language — increased profitability — that even the most cyber-illiterate retailers understood. And iVendor had obtained the inside track to those customers.
We forged an exclusive strategic relationship with NCR Corp., the $4.2 billion goliath that controls about half the world’s market in kiosks, bar code scanners and ATM machines. They put us in contact with their top clients, and our business development team amassed a formidable customer pipeline. The company focused like a laser on making money, and the executive team forecast a positive cash flow for the company by May 2001. Our team spent the fall building the e-commerce component of a kiosk-based online marketplace that a major client planned to roll into 1,100 convenience stories nationwide over the next year.
It won’t happen now.
We had known for weeks that the venture capital market had soured, which led the executive team to seek out a buyer for the company. Four suitors emerged. For weeks we rode an emotional roller-coaster, as management kept us apprised with weekly “all-hands” meetings. On one Thursday, we were told that the company was days away from running out of cash and would be forced to eliminate all but 40 positions. The next day, a new potential buyer had emerged, an e-commerce software company that was interested in buying the company intact, with no layoffs.
Finally, on a cold fall day, Box gathered the entire staff into the game room. The most serious potential buyer decided to pass, for reasons none of us could fathom. Another suitor, a public company, pulled out of the running when its stock got hammered by the free-fall in the stock market. Potential investors for a third round of funding were similarly spooked. We had braced for the worst, but the news still hit hard. “It’s the end of the road,” Box said, voice barely audible. “Thanks. It was a hell of an effort,” he added, to scattered applause.
As we shuffled out of the room, I turned to Chief Financial Officer Russ Lampert and said, “We had the vision. We were executing brilliantly. What happened?”
He smiled wanly. “It’s all about cash.”
In the short run, that may be true. Over the short term we’re likely to see similar tales of innovation stopped in its tracks. Startups will die and promising business plans will wither on the vine as venture capitalists sour on entire sectors of the Internet economy, analysts tout the virtues of “creative destruction,” and investors on the sidelines worry about how it will all shake out.
Most of my colleagues at iVendor are already snapping up offers from other high-tech companies, and others remain optimistic. A few hope to transport their vision to another startup. Me? I’m a content guy. Content is no longer king, and for us, the Internet job market is far harsher than just a few months ago.
But there’s no going back. For those of us inside the Internet bubble, the short-term downturn has not shaken our long-term core convictions — our sense that the new economy’s engine has not run its course, that great ideas can still be turned into great businesses, and that despite the current slowdown, the revolution lives on.
An hour after iVendor shut its doors, I shopped at Macy’s for a dress shirt for a new round of job interviews. None fit. After a dozen attempts, I gave up and walked out, empty-handed, wondering how many years it will be before a well-funded Internet retailer executes on our vision. All they need is the talent. The courage to help invent the future. And the cash.
J.D. Lasica was Director of Content and Production for iVendor.
