Home » Uncategorized » Raising Cash For E-Commerce

Raising Cash For E-Commerce

As with all Internet enterprises it seemed like a good idea at the time. The Right Start, an upscale child …

As with all Internet enterprises it seemed like a good idea at the time. The Right Start, an upscale child and baby item retailer and catalog company, decided it would create a separate e-commerce company to market its goods via the Web. So in June 1999, RightStart.com was born, with 50 percent owned by The Right Start and the rest by venture capitalists. The launch had gone very well and by January 2000, RightStart.com filed for an IPO. But in March, the NASDAQ market collapsed and two months later, the IPO was withdrawn.

The Right Start does about $50 million in annual revenue with its 65 stores, while its subsidiary company, RightStart.com, which includes the catalog business, will notch about $20 million for 2000. Not bad numbers, considering the size of the parent company, which is why the Internet venture is not going away, says Jerry Welch, chairman and CEO of The Right Start and RightStart.com. “Like everyone else, we spent a lot of money,” Welch says, “and because of the competitive nature of the business we were aggressive, but the market is rationalizing itself very rapidly.”

Welch moved just as quickly, making the Internet venture self-sustaining. “It won’t grow as fast as it would if we had a lot of capital to throw at it. On the other hand, we’ve got a business model that allows it to be profitable.”

The principle component of that model is gross margins-at 50 percent for the stores-and even with a lot of promotional discounts, gross margins for RightStart.com were in excess of 40 percent. “RightStart.com is growing and it will continue to grow without funding,” reiterates Welch.

“At this time next year, there will be a much smaller group of Internet retailers and they will either have to be profitable or close to it,” he say. “Once that group can establish that it can be profitable, the capital markets may, in fact, turn around and look very favorably on those companies.”

It’s been a rough year for Internet companies and their VC funding partners. Heavily financed e-commerce firms have imploded by the dozens, and even those that are still around, like Priceline.com, are barely standing as stock prices have declined precipitously. That’s certainly made VCs wary. According to the National Venture Capital Association, for the first time in more than two years VC investment fell; in the third quarter 2000, spending on Internet companies declined by $4.4 billion.

“The amount of funding is down drastically,” observes Andrew Oleszczuk, senior VP of development for the Tribune Co. and head of its venture capital unit, Tribune Ventures. “Certainly the bubble has burst and it’s a lot more difficult now than it was not too long ago to raise capital.”

Consider too that about $26.5 billion of venture capital was invested in Internet-related companies, according to PricewaterhouseCoopers, compared with about $150 billion raised though IPOs and follow-on offerings, according to CommScan. With the IPO market as flat as it is, there simply isn’t as much cash available for e-commerce ventures that might otherwise have sold stock on the public market to fund their projects.

Still, there is VC money out there, experts say. Companies just need to know where to find it, and what qualifications are needed to secure it. Tribune Ventures’ efforts, for example, have been concentrated in interactive services and Internet businesses, predominantly in information technology and emerging media firms. Companies that it’s helped fund include BlackVoices.com, Excite@Home, iVillage, Hollywood.com, and iBlast Networks. “The Internet media stuff has been knocked around quite badly and we’re not doing as much of that as we were,” says Oleszczuk. But that doesn’t mean there aren’t people looking for capital. As Oleszczuk notes, “the number of opportunities coming across our desk are way up.”

This year Tribune Ventures will invest about $70 million to $80 million and expects to do the same next year. What will make Tribune Ventures bite? The company looks for a developing business that has some relationship to media, the Tribune’s core business, and a company with which it can work directly with management, as well as one that will make a financial return.

FrontLine Capital Group is somewhat of an oddity. Spun off in June 1998 from Reckson Associates Realty Corp., a real estate investment trust, FrontLine Capital was, itself, part venture capital company, with investments in OnSite Access, EmployeeMatters, RealtyIQ.com, and Upshot.com. Last year, it was the sixth best performer on the NASDAQ stock market.

All those giddy days of the NASDAQ bull have since disappeared and FrontLine has been gored as well, its stock dropping from $65 to $15. Correspondingly, the company has ceased new investment activities and laid off about 75 percent of its employees.

“Part of our game plan was to look for new investments, but when the market conditions were changing we realized we were better off allocating our resources to our existing investments,” explains Scott Rechler, CEO of FrontLine and co-CEO of Reckson Associates. As someone who has been at both ends of e-commerce ventures, Reckson offers this advice: “Whether you are an old economy or new economy company, your e-commerce venture should enhance your core business model. It should help you sell better or serve your customers better.”

Institutional Venture Partners, a long time VC company, remains very active even in today’s volatile market, but that’s because consistency has been its hallmark. The company began venture investing in 1974, funding more than 200 companies, 60 IPOs and over 25 IPO-like acquisitions. Companies IVP helped to fund include Excite, Ask Jeeves, Bay Network, LSI Logic, Seagate, and Sequent.

What we want to see in e-commerce ventures today,” says Norman Fogelsong, an IVP managing director, “is a viable business model. One that can take the company to profitability in three to four quarters. We are not interested in funding a concept venture that will run in the red for three to four years.”

IVP scans over 100 proposals a year, making investments in eight to 10. It still likes the concept of e-commerce ventures being spun-off from existing, old-line entities. “In the case of old economy companies doing a spin-off, we are very sensitive to the strength of the brand and to what extent it can be fully leveraged in a spin-off,” says Fogelsong. “Old economy brands sometimes do better than complete start-ups in the new economy world.”

Another VC that continues to be active is Red Rock Ventures. Begun in 1997, Red Rock invests in early stage companies that develop and sell B2B Internet or e-commerce solutions. It currently boasts $130 million under management, and has investments in 27 companies including Supplybase, Plum Tree Software, Silicon Energy, All Bases Covered, and nCommand.

“The market is tighter then it was prior to April,” says Peter Dumanian, a Red Rock Ventures general partner. “Companies are having a more difficult time raising capital in this environment. The bar is definitely higher.”

Red Rock Ventures expects to stay busy, sticking to its plan of investing $1 million to $3 million in early stage financing. “We are very much looking for companies that are meeting large unmet needs, where there is little or no competition, with teams capable of developing software and selling it to customers, and where there is reasonable valuation expectations,” says Dumanian.

Sometimes, however, it takes a completely different mind-set to make e-commerce ventures successful, especially when the both the stock market and venture capitalists are in particularly glum moods.

eCOM Partners came rather late to the VC party, not fully getting underway until mid-1999, and as a result missed the great wave when money could be thrown at start-ups, which would go public at inflated values, allowing investors to bail out six months later at great profits. So far eCOM has invested in 11 companies, mostly with outlays in the $3 million range. “We are a seed stage investor,” notes partner Tony Menchaca. One company that eCOM put money into was CorporateGifts.com, which provides tools to design and run incentive and recognition programs online. Richard Maxwell was recruited to be CEO and reported for work at the company the third week in July 2000. Literally, the day Maxwell joined the firm, two eCOM people sitting on the board of CorporateGifts.com bumped into a 108-year-old, $70 million incentive manufacturing company from Attleboro, MA, called The Robbins Co., and decided the two companies should merge so as to create a stronger single company. “eCOM was not caught up in a strict model as to how their investments were going to unfold,” Maxwell observes.

Still, to do this deal necessitated a second round of funding, which wasn’t easy. “We would go to the true venture capital companies and they didn’t know how to handle debt,” says Maxwell, “and then we went to the leverage guys and they wanted to have ownership. We were falling through the cracks.” Eventually Fleet Bank came into restructure the existing debt, which enticed a combination of new and old venture capital investors in CorporateGifts.com to do a second round of funding.

“We have tried to take a longer term view,” says Menchaca. “We invested in e-commerce models that we not only felt were sustainable but would be successful married to a real world company.”

This is a different approach, adds Maxwell. This is a marriage of bricks and clicks, which is a better way to go than “sitting and talking about a burn rate.”


STEVE BERGSMAN is a Mesa, AZ-based freelance business writer, who has written about corporate finance for Reuters, Barron’s, and Global Finance, and is frequent contributor to CE.

About steve bergsman