BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
BUSINESS WEEK E.BIZ -- NET WORTH Going Back to Dot-Coms Do these venture capitalists know something you don't? Could be Veteran venture capitalist C. Richard Kramlich is one of the last people you would expect to be sinking money into a new consumer dot-com. The man who backed such communications equipment highfliers as Ascend Communications Inc. and Juniper Networks Inc. (JNPR) has stated openly that venture investments over the past three years in e-tailers and other consumer offerings have been largely faddish and lacking in business fundamentals. In fact, Kramlich, the founding partner of New Enterprise Associates, vowed to stay out of the retail sector forever after a spate of disappointing investments his firm made some 20 years ago. So much for old vows. In September, Kramlich put $8 million into his first--and only--consumer Internet startup, eyestorm.com, an online site that sells modern and contemporary art as well as photography. Kramlich is quick to point out that his deal is vastly different from most others. Eyestorm, he says, is operated by experienced executives who know how to make a business successful. Kramlich adds that the company is on track to book $5 million in revenues this year and turn a profit sometime next year. ''This is a business with real traction,'' says Kramlich, an avid art collector. ''It's not like selling pet food.'' That Kramlich is bucking the overwhelming trend away from anything having to do with consumers and the Internet is contrarian, to be sure. But he is hardly alone. Softbank Venture Capital recently pumped an undisclosed amount of money into guggenheim.com, a yet-to-be unveiled site that will bring the Guggenheim art collection online. On Nov. 9, Active.com, a participatory sports site, took in $21 million from a group of investors including ABS Ventures, the venture arm of Deutsche Banc Alex. Brown Inc. And on Nov. 13, Redpoint Ventures agreed to invest $10 million in LivePlanet Inc., a multimedia entertainment site started by Hollywood actors Ben Affleck and Matt Damon. Do these venture capitalists know something you don't? Maybe. The contrarians, most of whom have been burned at least once by troubled Net upstarts, are convinced that the time has never been better to enter the beleaguered business-to-consumer sector. They say the thrashing Internet stocks have taken from Wall Street coupled with the virtual evaporation of any chance to go public in the near future has made many of these deals relatively cheap. Several venture capitalists say they spend up to a third less now for the same equity stake in startups than they did at the beginning of the year. What's more, these financiers believe that the previous failings have given them the knowhow to discern what works and what goes awry online. None of the new upstarts come with bottomless marketing budgets. Their founders don't blithely say they have little idea when or how they will reach profitability. Nor do they sell commodities online, such as furniture, that can be purchased just as easily from a local merchant. ''This isn't a repeat of 'Let's give free services to anyone or do ad-based models,''' says Kleiner Perkins Caufield & Byers partner Vinod Khosla, adding that Kleiner is currently considering funding a new consumer upstart. ''These are good opportunities based on good business propositions, not on hype.'' They had better be. Dot-com layoffs and outright bankruptcies are accelerating, and they're only expected to get worse. Since last December, more than 22,000 jobs have been cut at Net upstarts, with more than 275 of these companies shutting down, says outplacement firm Challenger, Gray & Christmas Inc. Even companies such as Pets.com Inc. (IPET), Garden.com (GDEN), and Kibu.com, backed by the most elite venture money, haven't been able to make a go of it. ''This is the perfect storm,'' says Gary E. Rieschel, a partner at Softbank, which has backed dozens of consumer Web ventures. ''If you were trying to pick the worst-case scenario for Internet-era companies, this is that time.'' Belly-up. Most VCs are battening down the hatches. The number of venture-backed consumer Net deals is down 33%, to 90, for the first nine months of this year, compared with the same period in 1999, according to San Francisco researcher VentureOne Corp. In that same time frame, money going into consumer Web startups is down, too, from $2.4 billion to $1.8 billion. And most of those deals don't involve the creation of startups. Rather, they are largely follow-on financings for existing companies. Ron Conway, a partner at Angel Investors, says his Internet-focused firm is doing almost no new deals. Roughly 8% of the firm's portfolio, or 18 companies, have gone belly-up. So Angel Investors has earmarked $50 million to finance companies already backed by the firm. ''We are going through a market cycle where business-to-consumer companies are simply out of favor,'' says Conway. No argument there. But that hasn't stopped Kramlich and others from putting to work what they think they have learned about consumers and the Internet. For example, the latest crop of e-tailers are fiscally disciplined businesses that offer either unique merchandise or services, or are run by entrepreneurs who have successful track records. Zoza.com, which launched in October, is an upstart that sells its own line of apparel and is operated by the couple who founded Banana Republic (GPS). Guggenheim.com is banking on its worldwide reputation and proprietary art collection to draw in customers. Eyestorm.com relies on an exclusive pool of more than 70 international artists for its merchandise. And Kick.com Inc., which raised $6 million in venture money in November, claims to be defining a new market by delivering personalized content to listeners of digital music. ''If you have a good business model backed up by great technology, it's not as hard to raise money as people might think,'' says Kick.com's communications manager Michael Lattig. Beyond being more discriminating, today's dot-com backers argue that the best is yet to come for consumers and the Internet. They say the online shopping and entertainment experiences will only get better as broadband technology and the speed of home Internet access improves--leading consumers to spend more of their income on the Web. Certainly, online spending projections support some optimism. Researcher Jupiter Media Metrix Inc. estimates that consumers will fork over $86.3 billion to Net companies by 2003, up from just $17.3 billion in 1999. That may be why the recent venture competition over funding LivePlanet was so fierce. Several of Silicon Valley's top venture firms, from Sequoia Capital to Redpoint, jockeyed in early November for the right to put millions into the star-studded multimedia company. The appeal, they say, is that Damon and Affleck plan to integrate every media form--from television to the Internet to film--into every project they produce. Their first, dubbed Runner, will air on ABC next summer and features a single person vying for $1 million by trying to cross the country in 30 days without being identified by viewers. Clues and games about the runner will be posted on the Web while the reality-based series airs. ''This wasn't a no-brainer given the current environment,'' says Redpoint partner Geoffrey Y. Yang, who landed the deal. ''Even though the markets are in the tank, we still really believe in the convergence and integration of traditional media and Internet media.'' Against the grain. That's not to say that the idea isn't fraught with risk. In fact, venture investors know that it may take a while for this new crop of consumer Net sites to take off, which may be why the contrarians that have stepped forward are among the largest and best-known funds in the country. New Enterprise Associates just raised a record-setting $2.2 billion fund in September, while Redpoint and Softbank's U.S. arm both sit atop more than $1 billion. ''If you have branded capital, you can go against the grain,'' observes analyst David Wright of the Aberdeen Group Inc.'s private equity services division. They will most certainly need that dough to keep their new Web babies thriving if the public markets continue giving dot-coms the cold shoulder. But, asks Softbank's Rieschel, ''if you have guts and you have capital, how can you not be optimistic about the consumer market?'' He might want to ask the ex-employees of Pets.com about that. By LINDA HIMELSTEIN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					e.biz Contents for Dec. 11, 2000 issue RELATED ITEMS Going Back to Dot-Coms TABLE: Try, Try Again ONLINE ORIGINAL: VCs Who Still Believe in Consumer Sites INTERACT E-Mail to Business Week Online

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