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Net Firms Running Out Of Cash?
mmccune writes, "Barrons is running an article about how many Internet based companies are about ready to run out of cash and are having trouble raising new cash. Their list includes many well know companies such as CDNow, Secure Computing, drkoop.com, Medscape, Infonautics, Intraware and Peapod.
Read more about it on
ZDNet. "
For those wondering "how could it be?", here's a simple rule of Real Economics:
Equity DOES NOT necessarily mean capital!
Equity is what you use to buy other companies and raise cash from investors. Capital is what you use to pay the bills, ship the goods, and do all the mundane things like that (pay your employees, for instance). As long as these dot coms are all losing money, they will be dealing with dwindling supplies of capital. If the market is no longer interested in the company's future, there will be nobody to exchange equity for capital. Your stock can be worth a fortune on the Street, but if people won't buy the stocks or securities you issue, you'll run out of capital. Period.
The other side of this is that equity in the dot com world is like a shark. If it stops moving, it dies. Companies need to keep making aquisitions and keep selling equity to expand in order to maintain investor interest. So far, there hasn't been a whole lot of interest in profits, but that will invariably change - and probably soon. Companies that are low on cash don't necessarily have to make money today, but soon - real soon. Because otherwise the dogs'll stop eating the dogfood, and that's what these companies will become. Don't use Amazon as an example - it's not so much that they are trying to become a huge Net company, the're tring to become a huge compoany, period. That creates a somewhat different mentality.
Peapod will probably be the first of these companies to go down. Their strategy was for many years to use a proprietary Windows & modem-based system to place orders that would be fulfilled by local partner grocery stores (Stop & Shop here in Boston) using Peapod vans and employees. They finally went to the Net, but all the supermarkets are moving off on their own and leaving Peapod behind. They had just planned a debt offering that was abruptly cancelled last week when their CEO quit, and now they only have a couple of monts' worth of working capital, despite their stock value. They're toast. Someone will buy them for pennies on the dollar, and then only for what's left of the brand name.
That particular case is a little bit near and dear to my heart, since I used to work for an ad agency that did supermarket flyers. And we thought about going on the Net with our customers about four-plus years ago, when Peapod was still using modems and no other web businesses were on the drawing board. This was in the days when people still believed that an immediate profit was needed to prove value. So we wimped out. As it turns out, we could have started it, lost money, sold it, and been dot com millionaires by now. Bitter? Me? Naaahhhh....
- -Josh Turiel
-- Josh Turiel
"2. Do not eat iPod Shuffle."
When the money runs out, there will be a huge shakeout. Pure content plays are going to really get slammed, along with anything else that relies on ad revenue. What will we learn from this? Perhaps that it is better to start small, building out your business as you gain customers, than to burn huge amounts of money on marketing, hardware, and what amounts to buying customers. IOW, that the good old-fashioned way was better.
-jwb
Whether or not the Barron's article holds water is moot, the fact that people are starting to tread carefully around the "netconomy" is so rad. Everyone will fall victim to cash flow at some time, despite what everyone thinks about e-commerce. A majority of the new internet based companies are service providers, a service business is VERY EXPENSIVE. Manpower is expensive especially when a company needs oodles of noodles of programmers to maintain their site. What I bet you'll see is all the damn nitche market companies start to die off, ones that need 10 million a year to operate but don't make nearly enough to keep running. It used to be an IPO was to get EXTRA cash to cover expensions, aquisitions, mergers, ect. not a quick and easy way to get some attention and make the CEOs billionaires overnight. If you take a step back all these net companies start to look like well funded get-rich-quick schemes. Build a website, get alot of people to check it out at least once, then overevaluate it's stock price. The investors sell out with their chunk of the cash and buy Ferraris and 5 bedroom houses in San Jose. If you want a successful internet company watch television for a day, the stuff that makes money on television will make money on the internet being related media types. Entertainment, edutainment, and product sales. E-companies also forget an important thing, money. You need to CHARGE for your services rather than give them away for free. Advertisement revenue does not make nearly as much money as charging for services. People need to visit your site for the ads to work. If a million people visit in a single day you make alot of money, if after the first day only ten people come to the site you're screwed.
You want to know a good way to charge for services? SUBSCRIPTIONS! Magazines and newspapers have been doing this for centuries! With subscriptions all you need is that first million page hits. AOL makes their billions in part to subscriptions, the subscriptions don't make the company money, they save them money. Every person on AOL subscribes to view advertising and product promotion, AOL's cash cow. Their internet connection (cost distributed among millions of users) only costs AOL 15$ at most, then on top of that AOL gets another 6.50$ that covers regulatory and rental fees. But for every 21.50$ that a user costs AOL they make them 1,000$ from advertising, affiliates, promotions and the like.
If you want to start a company on the internet ask yourself what you can provide to people, then ask how much it's worth to them, give them a discount, charge them for services, use them to make you money, and lastly, niches are for weenies.
I'm a loner Dottie, a Rebel.
I can't wait for the day when companies get interested in profits again, as opposed to the current stock price. Used to be businesses sold products. Now they just sell themselves. Sounds too much like prostitution for my tastes.
A Government Is a Body of People, Usually Notably Ungoverned
According to this article, the methodology applied in calculating these companies that are going to go broke is flawed for "wholesale application". In summary,
Barron's calculates the "months until cash burn-out" by extrapolating Q499 losses aganist Q499 cash position. This is flawed because of three main reasons:
I haven't read the article, so I can't really effectively offer my own opinions. But suffice it to say that I'm not worried about my stocks. Ever since I heard an analyst on CNBC say that IP is "the technology that allows you to click on a link and retrieve a web page" and then attribute that to a company's profitability and business model, I haven't put much faith in "professionals" and their prediction of technological companies.
J.J.
>> If Amazon could run a self-sustaining and profitable long-term business by dropping its marketing and infrastructure expenditures today, then it should
Ah, but you specify long-term. I just said they could turn a profit this year if they slashed their promotion budget. But they know that if they don't keep growing, somebody will grow bigger, and they'll cease to be profitable. There are a going to be a few big survivors in each category, the rest will be also-rans or mom-and-pop operations. Think of how much Coke and Pepsi sell, compared to how much all the other colas sell. The 'net will probably allow for more survivors in each category, but there will still be a big payoff for being one of them.
Not Peapod! Why, if we didn't have Peapod, then where would we get our groceries online? Oh, wait a second, we still have Webvan, Streamline, and countless other local companies. So there'll be a lot of shakeout among the various online companies, and the less successful ones will die or be bought out buy the more successful ones, but that's the market cycle as it's always been.
Even Ponzi's ventures eventually ran out of money and collapsed. This internet bubble is no different.
"If one is really a superior person, the fact is likely to leak out without too much assistance" -- John Andrew Holmes
I think that anyone who didn't realize that the bottom was going to fall out of the tech stock economic boom is a fool. The only question now is whether they can level off their business or if they are going to crash and burn.
I particularly liked the absurd sites that I have seen advertised such as snowball.com which are spending on tv advertising even, but they literally have no product to sell.
I frankly don't need to look at a million and one websites a day where I get some news and a bunch of random people post their opinions. Oh wait a minute...
Seriously though, I hope Amazon.com and CDNOW.com both do bottom out and end up giving me some really good deals. There's nothing like taking advantage of someone's misfortune.
Investment fads come and go. Biotech had a similar boom in around 1990-1993 and then the bottom fell out of the market when the internet came along. Guess what, venture cap has started to subside for web site companies after people realized that clickthroughs give very little sales and that some of these companies are sooooooooo overvalued that even if their wildest predictions of future growth came true, investors would loose.
Has anyone noticed that the biotech sector has enjoyed a huge boom in the last few months? Could that be due to the beginning of a dot.com bailout?
I bet you Warren Buffett and Alan Greenspan are still considered financial wizards in 15 years.
I'm not saying that all dot.com's are doomed, just most of them.
no sig.
Hotjobs.com, one of the companies that spent a chunk of change on superbowl ads also is broke. What they decided to do about this is venture into the brick-and-mortar and have real live career fairs in major US cities for employeers who want to place facies to these online resumes. Hotjobs claims that these career fairs bring it in quick cash infusions of over $100,000 and help with the lost superbowl cash. It seems that lots of dot comms may have to rethink their internet only strategy or vary their business model if they do not plan to crash and burn.
Mark my words, the Ponzi scheme (named after Charles Ponzi, a swindler in the 20s who robbed from Peter to give to Paul - ie one investor to another - slightly different from a pyramid scam in that it isn't necessarily hierarchical) will be renamed the Amazon scheme soon enough.
My only fear is that this eventual return to market sanity will precipitate a major crash. Most other industries are reasonably valued, having suffered from a hidden bear market as all the money has gone into tech. But a mass rush from tech may not necessarily go back into value companies (ie those with profits).
Keep your eyes open folks, and hope that your online broker's servers are up for the stampede, when (not if) it comes.
GdI
The bottom line is that there are some fundamental rules by which companies can be evaluated, the bottom line, the revenu, the growth rate, ability to pay all the outstanding bills at the end of the year, etc. Some dot coms just don't show most of those qualities and investors are tired waiting.
BTW did Amazon come up with some 10 years plan for revenues? That's what Fred say, the Amazon is saying that in 10 years they will be profitable, and this is in the time when billions of dollars appear and disappear over night!
Did you know that dot coms constitute over 8% of all business trades on the Wall street? That's over 1.1 trillion USD. Huge bubble!
You can't handle the truth.
This market is no different, and its a healthy process.
As it stands, AOL and Yahoo are flush with cash, hence they stand poised to be the consolidators, not the consolidatees.
This doesn't mean that the internet shopping revolution is stopping, far from it, it just means it is going to enter into a new and more mature phase. We are going to see the thinning out of the millions and millions of net companies until only the ones that actually provide valuable services and turn a profit remain. Personally, I'm looking forward to it.
OOG NOT SURPRISED!!! ECOMMERCE HYPE, AS ARTICLE SHOW!!! OOG SEE BEHIND FLASHY ADVERTISING AND PROPAGANDA!!! COMPANIES RIDING ON ECOMMERCE WAVE, HAVE NOTHING TO BACK UP INVESTMENT!!! OOG PREDICT FULL INTERNET SHOPPING AGE NEVER HAPPEN!!! INFLATION AND GOOD ECONOMY MAKE IT LOOK POSSIBLE, BUT OOG SEE BAD SURPRISE IN FOR COMPANIES!!! FOR EXAMPLE, AMAZON IN RED DESPITE CLAIMING LARGE PROFITS AND EARNINGS!!! OOG LAUGH WHEN ONLINE SHOPPING COMPANY FAIL!!! OOG BREAK HEAD!!!
Oh stop your celebrating.. Amazon is not going to "fail" or "collapse". It isn't going anywhere. Supply meets demand, folks. People demand Amazon's services. They enjoy spending just two minutes out of their day to have the latest bestseller, or chart-topping CD, video, DVD, etc. sent to them. Amazon provides a convenient service that a lot, a lot, of people use. They have built on literally 6 (?) years of immense brand name recognition which isn't going anywhere soon. By brand-name recognition I mean not just word of mouth or prior customers, but a colossal advertising campaign that includes superbowls, a virtual saturation of the pre-Christmas airwaves, and a even Time Man of the Year. They have had arguably, just maybe, more exposure and mindshare than any company in the past year. Any company. In the world. Say what you want about brand loyalty disappearing on the net, but when people think of buying books online, they think of Amazon.com. As long as that's true, there will always be a market for them, and they will be in that market. They will change, granted - shareholders probably won't shrug off Bezos' foraging into other areas (toys, auctions) and uncharted territory, resulting in huge losses, like they have in the past. There might be a restructuring of the company. But the company itself will be here for a while. And, sadly, as long as that is true, so will their ridiculous patents ;)
--
I think there is a world market for maybe five personal web logs.
However, Pegasus seems to have overlooked some fairly important issues. Chiefly, investments. Most companies avoid keeping massive amounts of cash on hand simply because it's much better off invested in the stock market. See, for example, VerticalNet 's response. When investments are taken into account, at least some of the companies are much better off than the study suggests.
This is another example of non-news, of an old blue-blooded publication pooh-poohing the high-growth economy of the Internet.
Net firms are DESIGNED to run out of money. Here's the way it works. VC's give ten companies ten million dollars each. They companies spend it as fast as they can, provided they get some results for it, and it's off to the races. Of course, startups pace their spending, but if they give themselves a year's cushion of cash, development will suffer and they'll fall behind. Of the ten companies, maybe one will reach maturity before it runs out of money, will go public, and will pay off the investors way better than 10-1.
Amazon could be making a profit today if they wanted to, but they're still spending enourmous amounts on promotion. Folks keep sayting that some sort of bubble is going to burst, but that's not quite accurate. Growth WILL slow down one of these days, though, once we reach a certain point of saturation. When that day comes, many companies will see their stock drop through the floor, and they'll be acquired for pennies by the big fish. With fewer startups nipping at their heels, the leaders like Amazon will reduce spending on promotion, and they'll start to show profits.
Net companies are losing money. So what else is new?
The article claims that Amazon is going to run out of money in 21 months. IFF they don't raise more capital before then. Has amazon *ever* been more than 21 months away from bankruptcy? This is the company which used the 'net 60 days' payment scheme to provide almost all of its working capital for a significant part of its lifetime. I'm certain that it was closer than 21 months away from insolvancy back then.
Yes, if all the funding dried up immediately those companies might be in trouble. But the funding isn't going to suddenly dry up, and even if it did, those companies would easily have enough time to change their business practices (ie, raise prices) so that they could stay afloat.
Tarsnap: Online backups for the truly paranoid
VA Linux has about $130 million in cash less liabilities, and they're losing money at an annual rate of about $46 million. (This is computed as 4x the most recent quarterly figure.) So they're in good shape in the cash department, and have two or three years to become profitable. Yes, the stock is tanking, but they have the money in the bank. This gives them some staying power.
Red Hat is in good shape, too. They have around $88 million in cash less liabilities, and they're losing money at around $14 million a year. So they have a few years if they don't overexpand. Red Hat is trying to do a second-round public offering to raise more money, presumably so they can overexpand. When they filed with the SEC for that offering in January, their stock was at 131; now it's around 59. That's an bad situation in which to try another offering, but they don't need immediate cash to operate.
So neither of those companies is going to go away quickly. They're in businesses that don't really take heavy capital investment, after all. On the other hand, as stocks, both are incredibly overpriced, as the market is recognizing.