Dot-Coms Stage Comeback
The Internet digital photo site Webshots seemed destined to dissolve in the dot-com meltdown a year ago as its owner, Excite@Home Corp., prepared to go into bankruptcy.
But Webshots’ co-founders lobbied for another try at developing the site into a profitable business--a goal that doesn’t look as farfetched as it appeared when Excite@Home was poised to pull the plug.
About 150,000 new users register at Webshots each week, up 50% from a year ago. More important, a significant number of those users are subscribing to the site’s premium services, an about-face from the carefree days when everything was free.
“We have a better sense as businessmen what this space is all about now,” said Narendra Rocherolle, one of the three Webshots co-founders who bought the site back from Excite@Home eight months ago at pennies on the dollar.
Redwood City, Calif.-based Webshots is among a few nearly dead Internet businesses trying to reincarnate themselves under new management teams.
Gone is the giddiness of the bubble years. It’s been replaced by a no-nonsense approach.
“It used to be about getting the ‘first mover’ advantage on the Internet,” said Chris Kitze, who invested $9 million of his dot-com fortune to revive Wine.com, one of the Web’s biggest busts, with a strategy that mostly promotes the sale of premium wines. “Now that people have become more rational and sane, there is an understanding that it’s all about becoming the last man standing.”
It’s been an excruciating education for some businesses on the comeback trail.
To get its second shot, high-speed Internet connections supplier Yipes Enterprise Services Inc. went into bankruptcy in April after burning through nearly $300 million in venture capital.
The San Francisco company had approached dozens of suitors but couldn’t find a white knight.
In financial despair, Yipes laid off hundreds of employees, closed several regional offices and alienated creditors by going into bankruptcy to cleanse its balance sheet.
“It was an ugly process,” said Dennis Muse, Yipes’ chief executive.
The reorganization helped Yipes persuade venture capitalists to invest $54 million in a leaner business that emerged from Bankruptcy Court in July with more than 500 customers.
Since then, Yipes has been growing about 10% a month and conserving its money.
“We don’t spend any dollar before we absolutely have to,” Muse said.
During the bubble years, Yipes spent about $15 million more than it generated in revenue each month.
The company’s so-called burn rate is down to $2.2 million. Muse expects Yipes to start generating more cash than it spends by the end of next year.
Ironically, some of the Internet’s comeback companies owe their revival to the severity of the dot-com downturn.
The market is so depressed that bargain hunters have been able to snap up assets at deep discounts.
For instance, Rocherolle and his Webshots partners, Andrew Laakmann and Nicholas Wilder, bought back their site for $2.4 million.
Excite@Home had paid the trio $82.5 million for Webshots in 1999.
“The numbers looked great to us when we crunched them,” Rocherolle said.
Privately held Webshots doesn’t disclose its finances, but Rocherolle said the site’s revenue this year will exceed the price he and his partners paid in January.
Yipes faced a more daunting sales job because it had to raise money from several of the venture capitalists who had poured $291 million into the company during the boom years.
For lead investor Norwest Venture Partners, that meant digging deeper into its pockets at the same time it was forced to write off $50 million of its previous losses.
“You gulp hard because you have to stand in front of your partners and tell them you are going to put more money into this company that already has cost us a lot,” said Promod Haque, a Norwest managing partner who chairs Yipes’ board of directors.
“In the end, you have to decide if there is a large enough opportunity to make it worth going through all the brain damage required to fix the business. We decided the opportunity is there.”
Kitze regards his $9-million investment in San Francisco-based Wine.com as a steal because venture capitalists poured $200 million into the predecessor companies.
Kitze can afford to take a chance because he hit the jackpot during the dot-com boom.
In 1999, Kitze merged his online site, Xoom.com, into the now-defunct NBC Internet Inc. and sold a reported $79 million in that company’s stock. Kitze is so confident in Wine.com that he already is talking about turning a profit in the fourth quarter. The prospect summons up a bubble-era specialty--hyperbole.
“If this works,” Kitze said, “it will be the greatest turnaround in the history of the Internet.”
