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*                         CYBERSPACE                         * 
*         A biweekly column on net culture appearing         * 
*                in the Toronto Sunday Sun                   * 
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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.

    Source: geocities.com/lapetitelesson/cs/text

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