How 9 Tech Companies Lost 2 Billion Dollars
To an outsider looking in, venture capitalists may look like the cavalry of the gravy train. Images come to mind of handsome men in sharp looking suits, swooping in on helicopters with briefcases full of money for people like us to follow our dreams. But to the insider who has actually worked in those fields, venture capitalists are just that. Capitalists. They are businessmen whose jobs, just like any other businessman, are to make money. And like anyone else, they are capable of mistakes. Aggressive lending and bad management can easily destroy any business. And no where is this more famous than in the tech industry.
Webvan -- Webvan started as a reasonably sensible idea, "A Super Market that Delivers!" Unfortunately the leeway offered through $800,000,000 gave the company enough slack to hang itself with its own spending. With those kinds of funds at Webvan's disposal the company grew at such a rate that it overextended itself. Throughout a period of eighteen months, Webvan expanded its reach from San Francisco to eight other cities across the United States. At its zenith it reached a value of over 1.2 billion dollars. But supermarkets already have razor-thin profit margins. Add that with the burden of a new, untested business model, and the growing pains alone were enough to finish off the company. To this day, one may be able to find WebVan logos in the nooks and hideaways of AT&T park (then Pacific Bell), the stadium Webvan sponsored when it thought it had money to throw away.
Pets.com -- Started by Greg McLemore then bought by venture cap firm Hummer Winblad and executive Julie Wainwright, Pets.com was proof that it takes more than a "money is no object" marketing campaign to save you. The talking sock-puppet Pets.com became known for was a balloon in the Macy's Thanksgiving Day Parade and even made it into the crown jewel of all television advertising, a spot during the Super Bowl. But as popular as their mascot was, Pets.com was never able to convince its prospective customers why they should buy their pet supplies online. Ironically, it could be said that the initial investors were directly to blame for Pets.com's downfall. Investors pumped millions into the company with the predetermined knowledge that it would be thrown at marketing. Then, before any real value had been established within the company itself, Pets.com was made public. The company still could have plausibly been saved, but the investors instead allowed it to die quickly without giving it any long-term opportunity to grow. With the release of its IPO, Pets.com raised $82.5 million only to disappear less than a year later.
Kozmo.com -- A great idea poorly executed. Kozmo.com was founded by investment bankers Joseph Park and Yong Kang. The company's purpose was simple: to deliver a wide variety of small goods within an hour for no delivery charge. Wanted popcorn, soda, and a movie on your doorstep in under an hour? No problem! Unfortunately for Kozmo, the gimmick that made it famous, "Free Delivery", was also its undoing. The company claimed that the money saved by not needing rental space for store fronts would easily offset the costs of delivery. This however was not the case as the company would shut its doors after only three years of service. Kozmo raised roughly $250 million in funding including $60 million directly from Amazon.com, but one wonders what their logic was when they promised $150 million of that money to Starbucks for advertising.
Flooz.com -- Why spend dollars when you can use the internet's own new currency, "Flooz!" Why indeed? Flooz.com would go belly-up after only two and half years, but not before burning through something between $35 and $50 million in venture capital funding. With that kind of money it's obvious how Flooz.com was able to afford their spokesperson, Oscar-winner Whoopi Goldberg. Despite acquiring a well-received spokesperson, one has to question the rest of this company's logic. Namely, why would someone exchange currency backed by the United States government for currency backed by only a fledgling internet startup company in New York? At least gift cards are backed by their merchant. When Flooz.com went under, all Flooz credit became worthless.
eToys.com -- At first glance eToys.com seemed like a sound idea, "Sell toys on the internet!" However, when placed in the context of competing with an alliance between Amazon.com and Toys 'R' Us, it's obvious how bleak the picture really was. Funded by "idealab!" eToys raised $166 million with its IPO, but within 16 months its share price went from a high of $84 down to a low of 9 cents. "Idealab!" itself would be burned so badly through its tech investments that it would close a number of its offices and cancel its own IPO. Like other internet startups, eToys would burn through the bulk of its income through aggressive marketing and expensive advertisements. In the end however, its income would never exceed its spending. The company went under in less than two years after its IPO.
Go.com -- As a web portal, Go.com became definitive proof that even the "old guard" weren't safe from blowing large amounts of money by investing in the tech industry. Created by the Walt Disney Internet Group, Go.com was founded in 1995, but really began in 1998 when it merged with Infoseek. The intention was for Go.com to become a destination site, much like Yahoo, or later Google. Countless millions were spent in advertising with the site never growing popular enough to justify the costs. In the end, many people lost their jobs and Disney took a write off of $790 million. A lot of cash, even for a company like Disney. Go.com exists today but uses Yahoo as its search engine and only carries feeds from other Disney Web properties.
GovWorks.com -- Founded by childhood friends Kaleil Tuzman and Tom Herman, GovWorks.com began as a way for people to pay their parking tickets online. But with Kaleil serving as salesman and Tom designing the technology, GovWorks.com grew into a site with the intention of allowing people to perform all necessary business with municipal governments online. Kaleil and Tom quickly found themselves hobnobbing with power players within the United States government, and were able to gather $60 million in venture capital funds. Soon afterwards however, tension grew between the two friends, and Tom was kicked out of the company. In the end, GovWorks.com was a complete flop and was taken over by a competitor.
MVP.com -- Your online sports equipment store! With John Elway as chairman, and Michael Jordan and Wayne Gretzky serving as directors, MVP.com was the veritable Planet Hollywood of the internet. But like Planet Hollywood, it took more than big names to keep the company afloat. It also took more than the mere $65 million war chest MVP.com started with. After entering into a four-year advertising deal with CBS, MVP.com promptly failed to pay the $10 million a year it had agreed to within their contract. All this despite the fact that MVP.com charged the same amount online as one would find in a retail store. The company folded soon after and was taken over by CBS's online affiliate Sportsline.com.
When companies such as these fail, it is more than just a website going down. Consumers are left with fewer choices, and today's new online companies find it that much more difficult to raise capital. Ideas that could bring fabulous new services to the marketplace will never see the light of day due to the careless failures of their predecessors. Unfortunately, the same thing is still going on today. EONS, the social network for senior citizens has had $32 million invested into it despite sporting such tasteful features as an obituary section. Although not a website, Amp'd Mobile recently went under, burning through $360 million in only two years. Often, ill-fated business decisions can be attributed to naivety, but other times it is plainly more malicious. Filmloop.com recently went under, because its primary funding venture capital firm forced it to sell for bottom dollar, despite the business doing well. In other cases, venture capital groups have made countless new companies possible through initial funding, only to then dog-ear that money for marketing to produce buzz. Once that buzz was established and the stock had raised, the venture capitalists would sell and move on, leaving the public share holders to bear the collapse of a company that could have made it had it been given a chance through patience, and better management. In this list alone, almost $2.5 billion was lost. Money that could have been better spent than in the risky world of venture capital.