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* A biweekly column on net culture appearing *
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* Copyright 2000 Karl Mamer *
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IPOut
The fun had to stop. A year ago a week didn't go by that we
didn't hear about a new record IPO. A company making some
product only tangentially related to Linux or Business-to-
Business software would go public and by the end of the trading
day it would have a market cap bigger than General Electric or
Sweden.
These days a week doesn't go by that we don't hear about one of
these dot.coms going out of business or laying off 300
employees (half of them being European pastry chefs, Gulfstream
flight crews, and Pete Townsend).
In the last six months the term "cash burn rate" has been added
to the popular lexicon. A cash burn rate gives an estimate of
how long a company can stay in business given the amount of
money it raised in an IPO, its current expenditures on things
like salaries and marketing, and the amount of money that may
(or may not) be coming in for banner ads or, if the company is
particularly clever, for services rendered.
When you look at a company's cash burn rate, you encounter
frightening possibilities. For example, Forbes magazine
estimates Amazon.com will run out of dough before it hits its
goal of turning a profit by 2002. Last year Amazon.com had
gross sales of $2.18 billion dollars and it managed to lose
nearly half a billion dollars. Think about this a second.
Amazon.com is no more complicated (or needs to be no more
complicated) than a web page wired to an electronic copy of
Books in Print, a warehouse, and a shipping department. How can
you spend $2.5 billion dollars a year on that?
What are these dot.coms spending their money on? First and
foremost seems to be advertising and other forms of promotion.
Companies that derive a majority of their incomes from banner
ads buy a lot of banner ads on other web pages to drive traffic
their sites. Ironically, TV, which has lost a considerable
number of viewers to the Internet over the last few years has
reaped huge dollars from cash-laden dot.coms.
Super Bowl XXXIV (January 2000) featured ads from 30 dot.coms,
some paying as much as $2 million for a 30 second spot. Some of
these companies raised only $5-$10 million in their IPOs and
threw a huge chunk of it at a single ad. It's not the smartest
business model but some dot.coms were likely trying to emulate
Apple's famous Super Bowl XVIII "1984" commercial.
In 1984, Apple spent nearly a million dollars on an Orwellian
themed Super Bowl spot. The 1984 commercial introduced the
world to Macintosh (see www.uriah.com/apple-qt/1984.html).
Apple aired the commercial only once. However, over the last 16
years, the commercial has generated non-stop talk and it's been
endlessly repeated (for free) by various news programs. In June
1999, TV Guide magazine proclaimed it the greatest TV
commercial ever made. If anyone knows what goes into making
quality TV it's TV Guide right?
Probably the record for burning through IPO cash and going
straight into the toilet is a company called Pixelon. Born in
October 1999, it died a spectacular death May 2000, filling for
Chapter 11 bankruptcy protection.
Pixelon raised $35 million from investors. It immediately blew
half of that on a party at the MGM Grand Hotel in Las Vegas
featuring The Who.
Pixelon's ultimate goal was to develop broadband software and
content.
To further put the boot in, in April 2000, the company's
founder, David Stanley, turned himself in to Virginia
authorities after skipping out on a judge's order to pay back
over a million dollars he swindled out of investors. In 1989
Stanley pleaded guilty to 55 counts of taking money in a fraud
scheme in Virginia and Tennessee.
Pixelon's massive bash was atypical only in terms of degree.
Silicon Valley's cultural center, San Francisco, plays host to
a dozen dot.com bashes every week, featuring free drinks, food,
and musical acts such as Elvis Costello and the B-52's. The bar
and entertainment tabs are a bit more modest compared to the
Pixelon bash. These only run between $50,000 - $250,000.
The excuses these dot.coms use for hosting such lavish parties
is they a) need to create buzz b) need to throw these parties
to attract talent in a tight labor market. It used to be if a
company had a foozball table in the lunchroom, it was
considered a funky place to work.
If you want to check out other horror stories of excess and
spectacular dot.com flame outs see www.startupfailures.com.
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