Just too late
having been a spectacular prodigy in its infancy, the Internet has
now reached a troubled adolescence. Worldwide layoffs are occuring
on a daily basis; entrepreneurs once worth a fortune are now watching
their millions vanish as their companies founder. Greg Clarke, a
Briton who sought an Internet fortune in Canada, describes his experiences
as a cyberspace venture capitalist.
I joined Digiventure
Finance Corporation in 2000, having moved from London to Canada at the
end of 1999. I was looking for a change from what I had been doing there
and was intrigued by the business model -- about as far from the pinstriped
environment of the City as it was possible to imagine and still be in
an office. The company was whats known as an internet incubator
-- basically a cross between a venture capitalist and a management consultancy
all the rage between 1997 and April 2000, although they only
really appeared outside Silicon Valley in 1999.
Basically, companies like Digiventure would finance very early-stage
companies up to $1M, for a stake of up to 50% in the startup. Although
it was assumed some would fail, the idea was to get a few floated, then
sit back and watch the share price rocket.The startups tended to be
run by people often having their first attempt at running a business,
and the ideas were of the "wouldn't it be cool if..." variety.
It sounded quite a heady environment.
Like many people in the business, I had no experience in incubation,
but could claim some six years marketing experience (with three of those
years in technology and ecommerce). Id worked for some pretty
high profile companies and felt that my background was definitely strong
Initially, I felt my curiosity had definitely been rewarded. The work
was genuinely fascinating. People arrived with unusual ideas all the
time, and I'm all for people experimenting with new ways of doing things.
At the time virtually anything seemed possible. Very serious money was
being made (elsewhere) - pretty much on faith alone -- so why not have
It was also extremely entertaining we were a young crowd, all
very keen, and it was great fun. The management was refreshingly unstructured.
Being in a new country also made it easier to try something new. As
the token cynical Brit I rather enjoyed emailing friends
back home with regular tales of tears in sync-ups (i.e.
meetings), as well as daily emotional check-ins. People
used aromatherapy candles extensively. All a little crazy, but entertaining!
I had joined some months before the firms IPO (Initial Public
Offering) and at the time things looked pretty good even 3 weeks
before IPO the share price was 100% higher than the eventual float price.
But the market started to crack mid-April -- and the directors decided
to slash the price. It looked already like we may have been too late,
but management decided to go for it and we went public in early May.
There was, however, a significant problem. We hadnt managed to
persuade any institutional investors to come on board: all the shares
were in the hands of individuals. This made the share price particularly
volatile. It peaked the day it floated, up 4% on its launch price. The
next day saw the start of its inexorable march south. As the price dropped
through each significant psychological level, we were told that it was
a great time to buy -- the markets undervaluing the stock!
-- a line that was only abandoned when we were at 10% of our IPO price
-- just six months later.
What were the reasons behind our spectacular decline? Firstly, and most
importantly, it rapidly became apparent that a lot of our investments
were basket cases. A few of us did a back-of-the-envelope calculation
of money-in-bank versus burn rate, which gave about 11 months until
the money ran out. It was becoming unlikely that any of our investments
would reach a "liquidity event" before then. In addition,
there was a major flaw in the business models of most of the companies
we were investing in: simply, that the cost of getting people to their
web sites was higher than the revenue they produced once they were there.
It appeared that nobody (until I arrived) had tried to work out this
critical number -- vital to any internet business, particularly ones
that have no other source of revenue. This meant very few of the startups
would ever break even.
There was, however, a more insidious problem: few people on the inside
took the view that we, as a corporation, were part of an experiment,
the results of which were far from clear. Most people there had significantly
less business experience than I, and were believed that rocketing markets
were evidence that the model was already a success. A second serious
The third was believing our own propaganda. One thing I have learned
is that it is one thing to spin a story for the market -- but don't
fall for it yourself. Many in the company did and produced a
deeply dishonest environment with most employees blithely singing from
the company songsheet. There were some personal disasters: one 20-year-old
employee and his parents invested $40000 on the strength of the hype;
another borrowed heavily to invest in the company.
Being skeptical was considered counter-culture. I got increasingly frustrated
by the lack of business sense (or even common sense), especially as
things got bleaker and still people were coming out with the same platitudes.
I even mischievously suggested that we should adopt the mission statement:
"When all else fails, blind optimism will see us through".
(This was not widely appreciated.)
The end came in January 2001 when 25 people (including me) were laid
off, reducing the company to ten, with new management in place. Im
not bitter about the way it was handled in a high risk business
redundancies are inevitable. In some ways I have to admire the management
for attempting what they did; in the end, however, it boiled down to
too many (rather inexperienced) cooks. Will the remnant survive? I dont
know. The internet has still to produce many more casualties
were still waiting for a really big firm to go under, and there
will be a huge shakeout when that happens. Its on its way.
All names have been changed
© Oliver Moor 2001
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