Last month Cook Express became a pioneer in a way Williams never imagined, as the first e-commerce company to declare bankruptcy in San Jose, Calif., district court this year. The bankruptcy filing lists more than $2 million in debts, including claims by food suppliers, business partners and, fittingly–considering the hype and press the Net boom has generated–a whopping $78,000 bill from its public-relations company. The filing, says Williams, came after four futile months of courting 15 separate Silicon Valley venture-capital firms. The VCs looked at his 10,000 enthusiastic customers and weighed them against a costly expansion plan and a steady diet of projected losses. Then they did what few VCs have done in recent years: say “no.” Says Williams: “The hardest part is knowing how big it could be, and seeing it right beyond your grasp.”
The fate of Cook Express is looming like a specter over the cubicles of many other Internet companies. While the Net has powered one of the most fabulous economic booms in the history of capitalism, some start-ups are losing steam. Even though the tech-heavy Nasdaq has been soaring, well-established “new chips” like Yahoo! and Cisco have accounted for much of the increase. Wall Street has run out of patience with Net companies that are dogged by rivals or mired in red ink. And there is growing sentiment that many firms went public too early, before they were ready for the harsh scrutiny of the public markets. The upshot is that investors are “shooting the wounded,” dumping their holdings in former high fliers, including eToys and CDnow, and turning them into “single-digit midgets,” Silicon Valley parlance for companies with droopy share prices. “Things just got too crowded,” says Henry Blodget, senior analyst at Merrill Lynch who predicts that 75 percent of all Internet companies will never make money.
Some of these companies may eventually turn out to winners. But for fledgling start-ups that need a steady flow of cash to lure customers or set up distribution systems, a depressed stock price can have dire effects. It can cause employee defections and investor wrath and, perhaps most problematic, it can shut off a company’s ability to raise more money in the market. According to stock-tracking firm IPO.com, more than a quarter of the 71 Netcos that went public in the past year are now trading under their offering price. Says Jim Breyer, managing partner of venture-capital firm Accel Partners, “There’s a lot more blood to come.”
Already, some once promising firms are under extreme pressure. In a dramatic series of events beginning two weeks ago, Peapod.com, a pioneer in the online grocery business, announced that its CEO, Bill Malloy, had left the company reportedly suffering from “mental and physical exhaustion.” The company had brought in Malloy six months earlier to raise cash so that Peapod could catch up with better-financed rivals, Webvan and Homegrocer.com. Malloy, a seasoned “grown-up” with an impressive track record at AT&T, was making progress. Last month he announced a $120 million cash infusion from four different investors. But after his abrupt departure, the investors backed out and the company’s stock plunged 50 percent to $4. More troublesome, Peapod confirms that it has just $3 million left in cash–enough to keep the company afloat for only a few more weeks. With two stockholder class-action lawsuits pending against the company, Peapod execs declined to comment further. But industry insiders say Peapod’s founders are desperately seeking new backers to save the company.
Olim must be hoping that his employees get that message. In Silicon Valley, when the stock goes down, worker enthusiasm tends to follow. Leading up to its December 1998 IPO, online software retailer Beyond.com hired scores of employees and spent lavishly on TV ads that featured a naked man connecting to the Web from home. But missed deadlines for major projects, a meandering corporate strategy and mounting loses drove the stock below its offering price last year, down to $8. That’s when employees started to grumble. According to interviews with several former Beyond.com staffers, people started boycotting the company’s Friday beer gatherings. Angry employees were annoyed that CEO Mark Breier was writing a book while the company floundered. Breier, who resigned from the company earlier this year, shrugs off the turmoil as simple disappointment. “A lot of people expected triple-digit stock growth, and that didn’t work out,” Breier says.
When it became clear that it wasn’t working, many of those disappointed employees simply jumped ship. On top of 75 layoffs, Beyond.com says 55 out of 400 employees quit. (Former employees think the toll was much higher.) “The unemployment rate is way too low for me to sit there and ride it out,” says one ex-employee. Adds another: “It’s Silicon Valley. You say, ‘It didn’t work. That’s life. Move on’.”
With their stock in the basement and red ink all over their balance sheet, many stuggling Netcos are finding that fund-raising has become an exceedingly difficult proposition. Less than a year ago Michael Barach, the CEO of MotherNature.com, raised $42 million in private financing in just 13 days. Then last November, MotherNature.com went public at $15, and the stock dropped to single digits, where it remains today. Barach says he feels “heartbroken for our investors and employees.” But his big problem will come when he burns through his stockpile of cash reserves. It would be “excruciatingly difficult” to raise money today, he says, because Wall Street acknowledges that capital has already flooded the online-retailing sector, and now wants to see profits.
Lise Buyer, an analyst at investment bank Credit Suisse First Boston, says she is seeing many companies like MotherNature.com, which limp back to the public for more funding. “You take a look at the income statement or the balance sheet and you say, ‘You know, I’m sure you wish there was a secondary [offering] coming, but not with my name on it’.” One stumbling block is that the market capitalizations of some Web firms are so low that large institutional funds won’t touch their stocks.
Luckily for execs at the struggling companies, it’s still pretty hard to flunk out of Silicon Valley. Darby Williams of bankrupt Cook Express, for example, says he has received about 10 CEO offers in the past few weeks. And Mark Breier claims that since he left Beyond.com, he’s been offered 60 jobs and is being courted by top venture-capital firms. “Everybody wants a bit of that magic sauce,” he says. “I’ve ridden the wave.” Breier recalls riding in an elevator last January with a member of his board of directors and discussing the precipitous decline of the company. “Hang in there, Mark,” she said. “You learn more on the way down than on the way up.” If that’s true, a lot of other Internet execs should be getting a valuable lesson in the months and years ahead.
