VCinJerusalem

Facebook Fallout: Nobody Wins, Especially VCs and Start-Ups

You have heard me go on before about why I thought the valuation Microsoft gave Facebook for its "strategic investment" was way out of line (nice way of saying absolutely ridiculous). Below please find analysis by Daniel Primack (of PEHub fame), which I think is spot on, so simply reposting in...bottom line, Dan thinks that "Microsoft’s initial investment may be one of the worst venture capital deals of all time."

Not only do I agree, but want to add that in addition to being terrible deal for MSFT, also sent shock waves through the entrepreneurial ecosystem, even here in Israel, which made entrepreneurs (and some VCs and Angels) silly for several months. All of a sudden every idea for a new social network was deemed to be worth $5 million pre-money...which is one of the reasons Jerusalem Capital did make any new investments since September 2007.

We already see that people have come back to reality, a bit. Anyway, here's Dan:

                                                                

	Dan Primack | 1191 articles posted | contributor since 11/2006         read my column ...
Facebook’s Valuation Problem
Topics: VC Deals,  PE-Backed M&A,  PE Exits		This entry was posted on 05-09-2008

 

The WSJ recently reported that Microsoft is sniffing around Facebook, less than seven months after investing $240 million in the social network at a $15 billion valuation. It was largely discounted as the hopeful fumblings of Steve Ballmer, in his search for a rebound acquisition after being dumped by Yahoo. But it got me to thinking: Microsoft’s initial investment may be one of the worst venture capital deals of all time.

Longtime readers know that the current title-holder is Hummer Winblad, for its Napster investment in the midst of that company’s legal morass. And it will remain that way, as Microsoft’s Facebook deal presents neither the legal difficulties nor the likelihood of a total write-down. In fact, it’s probably been a good strategic deal for Microsoft, which doesn’t need to sweat the small stuff (i.e., cash). The only caveat to that last part is that Microsoft is now expected to overpay for all its other acquisitions, which has led to a trickle-down throughout the Web 2.0 market. For example, macro valuation inflation helped scuttle the Internet roll-up envisioned by Ross Levensohn and Jon Miller — as their targets upped their respective asking prices.

Anyway, back to my thesis. The reason this might be one of the worst VC deals is that all of its negatives fall on its supposed beneficiary: Facebook.

This isn’t a dilution argument, but rather one of public perception. Social networks partially work because of functionality, and partially because of bandwagon popularity. You don’t necessarily join and use Facebook because it works well, but perhaps because your friends have joined and use it. And, as has been proven with MySpace-Facebook-Beebo, that usage can be fickle and prone to migration.

Public perception is very important, and I think the Microsoft investment has set Facebook up for a giant egg pie in the face. For example, imagine the endgame is to go public. If so, there is no way a company with such low revenue could possibly get near a $15 billion valuation (this isn’t 1999, and Facebook isn’t Google circa 2004).

So let’s generously imagine it could get $5 billion. Know what the headline will be? How about: “Facebook Files for IPO.” Looks good, but check the subhead: “Social networking company worth just one-third of 2007 valuation.”

Ditto for an acquisition, as no company in its right mind would pay close to $15 billion for Facebook. Yes, that includes Microsoft.

What this means is that Facebook is going to lose heat upon liquidity, and a loss of heat can lead to a loss of cachet. Remember all the buzz when Facebook got the $15 billion? Now imagine it again, but with a negative spin (particularly outside the TechMeme bubble, where most of Facebook’s users actually live).

All of this is exacerbated by the fact that Facebook never really needed to take the Microsoft money (could have gotten it elsewhere), and certainly didn’t need to confirm the valuation in a press release.

The only out I see for Facebook is to take another big strategic investment at the $15 billion figure. It could provide liquidity for Facebook’s early VCs like Accel (whose LPs would really like some payoff) and other employees looking to turn their paper green. And, yes, that probably means Microsoft again. If not, that original investment will hurt Facebook far more than it will help it.

Note: Much of the above argument was first made (to my ears) by venture capitalist Stewart Alsop, at this year’s VC in the Rockies conference. It took my a while to come around, but I’m now there. Hope he doesn’t mind the pilfering.

If a "Tweet" Falls in the Forest....Does a VC hear?

If you have not yet heard of Twitter you are part of the blessed 99% of the population of the Western world that are not "early adapters." For professional reasons and general curiosity of the 1% (I consider myself to be a bemused observer of the early adapters) I signed up for Twitter back in January, although Twitter has been around as a public service since October 2006 (see here for more on history).

OK, so what is Twitter? Its is a messaging service limited to 140 characters...wait, all of you semi-Geeks ask, isn't that the same as SMS? Well, yes. And aren't there dozens of companies that allow you to message blast from/to mobile phones, PCs, etc.? Yes. So what is new about Twitter? Well, nothing and everything. Nothing technically new, that's for sure.

So what is/was new about Twitter? Well, they picked a funky name, that's always important (think Yahoo!, Google, Ebay...). And they specifically marketed their service to US semi-geeks (think self-important VCs and well-known bloggers). And timing was right, when [finally] the 1% crowd in the US felt comfortable messaging from their mobile devices. And of course after the first blogging wave, which already prepared us to be interested in complete nonsense(;-)).

One of the "features" that Twitter added (this feature exists in many blogging platforms) is to sign up to receive the tweets of a certain Twitter. Basically, to get their micro-blog feed. The 1% crowd loves this, all zapping messages to one other all day long.

As I said, I signed up, literally to just see what the sign-up process was like, see how it worked. Sent a few twits to test web/sms interfaces. haven't twitted in quite some time. But slowly slowly people have found me on Twitter and have signed up to "follow" me. So far only 18, but half of those people I don't even recognize their names! And there is nothing to follow.

To understand better how Twitter is being used by the 1% crowd, I popped over to Brad Feld's Twitter home page, and see that he has 1,383 people "followers" and that he is "following" 132 people. Very believable, and reasonable, given that Brad is one of the best living VCs, and prolific blogger. Persusing through his "tweets," I recommend he stick to blogging, and stop tweeting, but whatever makes you happy.

And then I looked at super-uber-blogger Robert Scoble's Twitter page, and see that he is sending tweets every few minutes (while awake, and sometimes while sleeping). He claims to be following 21,209, and to have 22,545 followers. Meaning every time he sends a tweet, goes out to 22,545 people. That's a lot of virtual ink. Does this make sense? Could he really be keeping up with 21,209 people? Doubt it, but maybe he has outsourced himself...

Bottom line: with all this tweeting, does Twitter make any money (you knew I was going to ask)????

Answer: a few weeks ago, on their Japanese version, started running some ads. Other than that, nada. no revenues.

The aptly named Peter Kafka wrote the other day on Twitter's current fundraising round, see here (asking the age old question, but this time for Twitter, How Much Is Twitter Worth?):

The bigger question: How do you put a value on Twitter, anyway? The company has only just started seeing a trickle of revenue, via advertising on its Japan version. But beyond that there's no money coming in, and it's not clear what the model will be.

While Twitter itself has great buzz, we hear the majority of the site's traffic comes from outside the site, via other apps like Twhirl, mobile access, etc. So traditional online advertising--a difficult prospect to begin with for a communications service (see the struggles of various IM, email platforms) may be even harder.

That said, based on Twitter's growth and brand dominance, $75 million post-money seems plausible. There must be a pony in there somewhere.

I am sorry, Mr. Kafka. A company that has no real technology, a usage base of uber-geeks, and no significant revenue should not be valued at $75 million. It's bad for the business of creating businesses.

Are VCs To Blame For "Free?" And Is Free Model One Size Fits All?

Excellent posting by Hank Williams today on Silicon Alley Insider, which is one of my favorite sources. See full text of his original post below, and definitely check out the discussion that erupted within minutes on SAI...back and forth brings out the angst that many of us have been dealing with over the past few years.

With the success of Google, who weave billions of dollars of profit from millions of "keywords", convincing the world that a "click" has inherent value, there has been a run on the bank. Literally. Everything is now supposed to be supported by "advertising." But remember, as I have often said, in the end someone needs to buy something. That's how advertising works. Otherwise its a massive ponzi scheme.

Traditional media companies have always had (and will have) advertising as a dominant (and sometimes sole) source of revenues. But advertising was never 100% of the revenues, think of movies, video games, even most daily newspapers. There is a price. It is not free.

And now think of services that are not media companies -- there is no historical justification for free. Salesforce.com, a pioneer of using Web X.0, charges. And many gladly pay. Is Gmail free? For now. I doubt it will last, and if it does will mean a re-shuffling, but not complete revolution.

Advertising has its place, but I for one am tired of very smart entrepreneurs acting like deer in the headlights, who have been brainwashed by VCs with too much money that usage/users  are all that's important. We will be facing a capital crunch in the days, months, and years ahead -- those who have developed real revenue generating businesses will survive.

I agree with Hank, that VCs are killing many businesses, but there will be a revival of the dead. Make sure you are prepared!

Free" is Killing Us--Blame The VCs

             

Hank Williams             April 4, 2008 9:20 AM        
                          I believe it should be possible to start a small business and to have a small number of profitable customers, and to earn a living. From there, it should be possible to work hard, and to grow your business into something substantial. Until recently, this was the American way, and it applied to technology as much as to any other business. But no more.

In today’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business. If businesses were based on the idea that people paid for services then small companies could succeed at a small scale and grow. But it is very hard to charge when your competition is free.

The economic problem with advertising businesses is that advertising businesses do not work without really significant scale. In the past, a good product or service could address a niche and succeed without being a home run. Today, a home run is required because if you do not reach a massive scale, advertisers are uninterested. And even if advertisers could be attracted, CPMs are so low that the revenue would be inconsequential. Small Internet businesses don’t work.

So how did we get here? In a word, VC.

Venture capital has totally distorted the market. VCs are investing billions of dollars in companies with instructions to get big fast and to worry about advertising revenue later. As a result the competition is for users and not for paying customers.

Unfortunately, to fix this, many more companies need to die.

With less “free” floating around, a more regular supply and demand dynamic can take hold, customers will have to pay for the things that are important to them and non-quantized growth dynamics can return. In the meantime, why should consumers pay for products and services that VCs and their pension fund investors are willing to give away for free?

The good news is at some point VCs will indeed realize how dumb all of this is and stop giving away everything of value on the Internet. This will all stop when the average VC can’t get any of his/her companies to scale because there is just too much VC sponsored free stuff out there. Then and only then will this crazy eyeballs business model redux finally be put to bed.

I cant wait.

SAI Contributor Hank Williams is a New York-based entrepreneur. He recently launched a new blog: Why Does Everything Suck? Exploring the tech marketplace from 10,000 feet.

    

   

When Everything Goes Wrong...VC, CEO, Board Be Prepared

Today I spent a few hours dealing with one of the "downs" in start-up life. Biggest deal portfolio company X was working on came to a screaming halt. Not important for this posting as to why the deal got pulled -- important is how the company deals with it. As we are still too close to this situation, will not speak to how CEO of company X and us, his board, are working through this issue (but trust us, we are, and will not only survive but thrive).

But do want to point out that CEOs and boards of early stage start-ups need to constantly be ready for "When Everything Goes Wrong." Because inevitably it will! If start-ups do not operate in that mode, i.e. always being ready for the worst case scenario, then they are not being responsible start-upists. VCs who want to play in "seed" stage start-ups either need to be really deep pocketed or really smart (that would be us ....;-)). Being really smart means planning for the worst, and working for the best.

Is that an almost impossible tension to live with on daily basis? Sure, but "buyer beware," "enter at your own risk" to start-up land. If you want to have a guaranteed salary and multi-year job security, well, then get tenure at the nearest university.  Yes, Big Company could theoretically provide that job security, but only in theory, because here today and Bear Sterns gone tomorrow...

Back to our main issue, planning for worst scenario, for when everything goes wrong.

Number one, what is your back-up plan? If you need to think about it under fire, you will not be able to think straight. So make sure when everything is going right that you have that plan, constantly updated, just in case.

Number Two, look at your cash. When things "go wrong," will make it obviously much more difficult to raise more money -- and you will need to survive in order to thrive. For most entrepreneurs, going without salary,or reduced salary for some period of time, is acceptable. For staff of start-up, usually more of a stretch. But a charismatic  CEO sometimes can stretch it...to a point. People do need to put food on the table.

Number Three, look at your cap table. Know it by heart at all times. You will need to be prepared for intense pressure on cap table both from bringing in new cash (if necessary) and providing incentives to staff.

And finally, just remember that just as things can go all wrong, they can all go all right -- and pray you have just gone through the worst!

Where Google Goes, the Dollar is Not Far Behind

Google has represented the decade we are now winding down, and tracked the resurgence of the American economy after the blows of NASDAQ implosion in 2000 and then of course 9/11. With the succesful growth of Google, its IPO took off, and while I thought it was a short at 80, stock price continued to climb.

While the dollar did not follow the same meteoric rise over the past 6-7 years as the Google stock price, Google is many ways was keeping the dollar propped up, overshadowing the many serious problems in the American economy and government (not the least the American invasion and occupation of Iraq, costing the American taxpayer, which includes me, more money than it would take to feed all the hungry people in the world).

Clicks. Click throughs. PPC. Adwords. Adsense. These are the ingredients of Google's billions of dollars of profits (and still insane valuation). What it boils down to is the ultimate American value point: marketing. The Google guys convinced the world that clicks=$$, and until the emperors cloths start to fade noone knows he is standing there naked (or nude, if you prefer). But how well tested is the core Google theory? What are conversion rates really like? None of "know," tremendous amount of guesswork involved. Look back to my post on Jaxtr for a taste of emptiness of usage--10 million users and no revenue to speak of, in my eyes that is not a business.

Now, let me stress that while I know little about the public markets, I know far less about the global currency market. When my children ask me about the dollar falling in value against the Shekel, I blabber for a bit about "shakiness in the American economy," but actually have no idea what I am saying. I do know, however, that much like Google, America marketed itself well, even in the face of some astonishingly stupid moves in the world. In 1990 we defended one dictatorship from another (to this day not clear why). In 2001, in response to 19 Saudi men bombing New York and Washington the US went to war in Afghanistan and Iraq. Go explain that one to your kids.

Now people are losing confidence in Google, and in the Greenback. As long as you cashed out and your life is all in dollars, nothing to  worry about.

For those of us who live in the world, and I mean in the world...multi-currency,  multi-lingual,  multi-national,  the  rapid deterioration of the  Google stock price and  the dollar  remind  us  that we cannot rest  all our hopes on one player. Going global means being global, and even living in Jerusalem (in the center of the world) I am feeling left behind. Time to move savings in multiple currencies. Time to figure where the next waves are coming from -- because Google Greenbacks are so....what do we call this decade?

The Model Works: Mazel Tov Fraud Sciences Founders, BRM, Redpoint

Often we hear murmurings in the venture industry about the "model being broken." I wholeheartedly disagree. The model works, just needs tweaking from time to time. In addition, I am always on the lookout for proofs to my "New Israel" pitch regarding the state of the tech industry here in the Holy Land, and today we had good news that relates to all of the above.

Mazel Tov to  my  friends at   BRM Capital and to their colleagues at Redpoint Ventures , and most of all to the founders of Fraud Sciences, Saar Wilf and Shvat Shaked. Saar and Shvat are serial entrepreneurs, a new breed in Israel in general, and certainly in the internet technology services space. Formerly with Trivnet, Saar and Shvat founded a company playing into a market they knew (payments systems), with a real need (fraud detection). They brought the company to revenue generation, and sold out to the industry leader (Paypal/Ebay). The reported sale price is $169 million in cash. Even with a weak dollar, that's a nice exit for a company less than six years old, and everyone walked away with a nice payday (Globes reports this was a twelve fold exit for BRM, clearing $65 million profit on an investment of $5 million). Total capital invested in the company is rumored to be less than $10 million.

Now I don't know that many ways to make a 12X return...and as BRM's total fund was $150 million, and they have had other profitable exists, this either puts them over the top or greatly increases their profits.

The venture model worked in this case for everyone involved, the founders, the "local VC," and the "US VC." I am sure it did not hurt the company's sale to Paypal having seasoned Silicon Valley venture fund partners involved!

Without knowing any gory details, from the outside Fraud Sciences seems like a "poster child" for the ongoing health of the Israeli venture industry.  Right down to the fact that Fraud Sciences remained a "Ltd." company, meaning registered in Israel. None of that  Delaware shell game.

The Internet, thank God, has become a real business, and Israeli start-ups (and venture funds) are staking their places of expertise and excellence.

May we all go from strength to strength, as my Bubbe used to say.

Fred Wilson is at $5-7 Billion...How Much Would You Pay (to acquire) Facebook?

Hate to stay on the Facebook subject, and I promise I will not return to it for some time (say, until Facebook is profitable....) but just saw this short interview with Fred Wilson in Business Week (here)  and caught him saying he thinks acquisition price for Facebook   just now is at around $5-7 Billion. Now if that is the acquisition price, the private round investment should be at much lower valuation...but Microsoft is not really a rational player, I guess. I still think even Fred is over the top, but I guess I he is factoring in all the momentary hype value.

We are going through a round right now for one of our portfolio companies, which we believe is a path  breaking company  in an area where real money is being made right now. There is no hype value, because the company is not consumer facing--which means it actually has to build a real business case before it will have major jumps in value. Thank goodness for us and our investors, we will get a nice bump up in value terms from when invested (little over a year ago)--but nothing like what Facebook investors have seen. But we are still thrilled with our success, and happy for them!

Valuations are a dark art,and acquisition prices of pre-profit companies even more so.

So ask yourself, would you buy Facebook right now for $7 Billion (assuming you had the cash to spare...)??

Now this is a Great Take on Start-Ups in Late 2007

Not sure what this group's "business model" is, but you MUST check out this video (crank up the volume):

When Does a VC Mean NO

Besides my never ending Inbox overload, from time to time also "suffer" from deal flow overload --and the real problem sets in, which is failing to get back to entrepreneurs to say thanks, but no thanks.In other words, No.

My partner Lior Lifshitz  and I often discuss the difference between an American (read polite) and Israeli reaction to a company presentation. My American background has failed me over and over when trying to decipher the responses that some of our portfolio companies receive from VC funds all over the world. "Very interesting" could mean very interesting, but also could mean "I can't think of any questions, don't want to sit here and not say anything..."

The perennial " we will get back to you" could actually mean that, or it could mean "please never ever call us again."

And when does a VC actually just mean No? And does No mean No,or does it mean keep me in the loop and try and convince me.

What I can do is give you our take on this whole issue, and offer a recommendation that is limited to dealings with Jerusalem Capital, I do not deign to think I can speak for an industry.

We receive, on average, 10-20 new "deals" a week. Some are cold calls, some referrals. We will meet with five companies a week, both new ones and ongoing discussions (most of our time we reserve for existing portfolio). That's at least 60 yes/no decisions a month.

Now many of those are quite easy...not in the range of investments we make (above $1 million), not in areas we invest in (we do not do bio-tech, chip development, hardware development, classic enterprise software).

Then  we get to  the  deals which are potential deal flow for us...first we take quick look at material to gauge whether we have any interest... if so we schedule a meeting. But already there many fall through the cracks--lost in aforementioned Inbox overload. So feel free to send again, as of now email is free. I receive hundreds of emails a day (after cleaning out spam). Sometimes I forget to respond. Even to the deals that I am interested in!

Then we meet...and we try to determine is these are people we can work with -- if not, no reflection on them or the business, just our belief whether we will mesh well. In our business we need to work quite closely with our partners -- and not everybody can be partners.

After the "people" test comes our analysis of the business itself...and sometimes we are not sure. Usually breaks down that 1/3 of the time we say, we like the people, but don't agree with the business vision. 1/3 we are not sure, 1/3 we say, hey, maybe we can do this.

Then comes the difficult part--can we agree on partnership terms. Some in the venture/start-up world call this "valuation," I say partnership terms...at the stage we get involved in a company, it's silly to talk about inherent value. It's all blue sky.

So why do I mean with the question "When Does a VC Mean NO?"

Because anywhere in our process we could mean NO, but not quite get around to saying it. And then there are times when it may feel like we are saying no (e.g. emails not answered) but we really are just overwhelmed, or perhaps never even saw the email (that happens, email is NOT foolproof).

And when we say No, but keep in touch..it means just that. It means maybe we will do something down the line together, maybe the IDEA will change over time, or we will realize that there is a there there.

If we say a straight no, accept it. Probably means no. But we wish you the best.

20 Worst VC Investments...NOT

Below please find a "top 20" list compiled by the editorial team at Inside CRM . Take a quick look at this list before reading my thoughts. Funny, I saw this just after seeing a notice in local newspaper (Haaretz, I am sure they copied from somewhere else) that a good way to popularize your blog is write a "top 20 list." I think actually it is was editors do when they don't have anything interesting to report (and why would Inside CRM focus on this to begin with...way off field).

Anyway, I would like to argue a bit with the editors. Bottom line, they do not share with us their method of measuring "worst." They offer random notes on each of the "winners"of their top 20 list, but no real criteria by which they were judging, and how they picked these from among tens of thousands of venture deals of "all time."

As these days I am a VC (one of my many identities...) I can speak to this subject with some sense of knowledge and confidence.

As a venture investor, main question is can I make money on this investment, and if I do make money. Everything is nice to have, but way secondary to core question of "are we making money."  Managing the exit from a company is sometimes much more important than anything else--because it is only at the exit, at the successful realization of profits, that a VC has accomplished their primary mission. Remember, everything else is secondary (my partner Lior will be very happy to see me saying this...).

A big part of a successful exit is timing. A VC fund that liquidated its holdings in its public internet portfolio companies in March 2000 did OK...or even hedged it somehow.

Those that held and kept waiting for the market to return, by and large did not do so well. But even there it is an issue of timing. Take  Delta Three,a company I had the honor of co-founding and helping to lead from concept to NASDAQ IPO. Our earliest investors were bought before we went public at an average of 4X return in under two years, not bad. Our second round strategic investor put in ~ $20 million (in cash and stock)for over 90% of the company. A year later Delta Three went public at a $500 market cap, and shortly thereafter reached a market cap of $1.6 Billion. Then March 2000 came, and within 9 months Delta Three's market cap bottomed out at $40 million. Along came another investor, bought out majority holding (from receiver of original strategic who subsequently went bankrupt) and proceeded to wait (as we had built a real company, producing real revenues, Delta Three weathered the nuclear winter and is still around today: NASDAQ: DDDC). Within 2 years the company was worth over $100 million, and the new controlling shareholder (Itzhak Teshuva) sold enough shares to cover his original investment. Now (as of today) its market cap is back down, at $17 million. Was Delta Three a successful VC deal? Depends when.

Looking at list below, many of the early investors in these companies made very nice returns on their original investment, actually exiting successfully. Take etoys for example. EToys gained a name for itself following a spectacular IPO in mid-1999. Shares of the money-losing company soared more than 200 percent to $77 in their first day of trading. For a brief time, eToys had a stock market value of more than $8 billion, larger than that of its established rival, Toys R Us.

I know for a fact that IdeaLab, and many other early etoys investors cashed out, far in excess of their original investment. That doesn't mean they took billions of the table--obviously they "lost" a lot of their paper gain. But they did make money (remember our primary mission!).

Obviously many of the deals below were complete failures for everyone involved, except for the people who took [nice] salaries out of all that money invested...But even in some of the other examples below, there were deals done where early investors were bought out a profit.

So what is my main message? We can only judge an investment one of the "worst" investment if we have all the facts. Otherwise, we are just telling stories, and  I for one know of many  stories in start-up/VC life  just during my brief career that are worse than many below.

Next time the editorial team at Inside CRM decides to write a list, they should think it through a bit more....

The 20 Worst Venture Capital Investments of All Time

 

    Catastrophic collapses and classic crashes in the high-tech business world.  

  By Inside CRM Editors
  on November 19, 2007          

Some things were just never meant to be, but that doesn't mean that investors won't pile millions of dollars upon a bad idea — or even a good idea gone bad. Whether they crashed and burned or sucked investors dry, these ventures just didn't work out. Check out our graveyard of dreams and money to get a look at VC (venture-capital) investments that just weren't wise.

 

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1. Amp'd Mobile: Amp'd Mobile takes the crown for money-burning, with $360 million that ended in bankruptcy. The company's major problem was its customers' ability to pay. While other mobile providers check for an ability to pay bills within 30 days, Amp'd let it go to 90 days and marketed to these risky customers. It has been reported that 80,000 of the company's 175,000 customers were unable to pay their bills.
2. Procket: Networking company Procket was once one of the most highly valued telecom startups in the U.S. It had $272 million in venture-capital funding and a valuation of $1.55 billion but was ultimately sold to industry behemoth Cisco Systems Inc. for a disappointing $89 million.
3. Webvan: Webvan was a grocery-delivery business that served nine metropolitan areas. Once valued at $1.2 billion with plans to expand to 26 cities, the company went bankrupt in 2001. Despite millions in sales, the company's demise was brought on by a money-burn that exceeded sales growth. Major purchases included $1 billion for warehouses, enterprise servers and more than 100 Aeron chairs. Additionally, it acquired HomeGrocer just a few months before going under. This fast expansion proved to be too much for Webvan. This company that once had about $800 million in venture capital ended up with $830 million in losses, with about $40 million on hand.
4. Caspian Networks: Caspian Networks, orgiginally founded as Packetcom Inc., had a number of ups and downs, including a washout in 2002; the company finally shut down in 2006. Caspian Networks fluctuated from more than $300 million in funding and 323 employees to less than 100 employees and closed doors.
5. Pets.com: This icon of the dot-com bubble died out in November of 2000, going from a listing in NASDAQ to liquidation in just nine short months. The site sold pet supplies and accessories online. Once backed with $50 million by Hummer Winblad Venture Partners, Bowman Capital, and Amazon.com Inc., Pets.com had promise and even bought out competitor Petstore.com. But in the end, its stock bottomed out at 19 cents per share. Remembered for its sock-puppet ads, the expense of its $1.2 million Super Bowl ad, as well as large infrastructure investments, proved to be too much. Pets.com's sock puppet lives on as the icon of BarNone Inc.
6. Optiva: Optiva, a nanotech company that laminated flat-screen TV sets, had to shut down after it failed to continue to raise funding. It initially raised and ran through $41.5 million in venture capital. The problem was that it took too long to release its product, which was obsolete by the time it came to market.
7. Kozmo.com: Kozmo.com's small-goods delivery service, while a recipient of around $250 million in investment, and popular with students and young professionals, ultimately met its end and liquidated in 2001. Its business model was criticized as unprofitable because it didn't charge for deliveries. Kozmo.com's demise is profiled in the documentary film e-Dreams.
8. CueCat: This much-mocked pen-sized bar-code scanner was designed to make finding information about ads easier. Instead, Digital Convergence Corp., CueCat's creator, burned through $185 million from investors like The Coca-Cola Co. and General Electric Co. The device simply failed to catch on, and it was plagued with security problems.
9. DeNovis Inc.: DeNovis software once attempted to change the medical-claims world but ended up shutting down instead. It raised $125 million in venture capital and had 110 employees. Unfortunately, that wasn't enough, and this promising solution simply didn't have the cash to hang on until the software could be launched.
10. PointCast Inc.: After tens of millions of dollars in venture capital and a $400 million buy offer, PointCast was finally sold for $7 million. It was originally touted as the next big thing, but failed to live up to its hype when its software and downloads irritated customers.
11. eToys: Despite being measured as the "benchmark against which all other sites are measured," eToys ended in bankruptcy. The company was largely edged out by Amazon.com, which formed a partnership with Toys 'R' Us, but ultimately, customers just weren't willing to wait a few days for their Legos. It was backed by VC firms Idealab, Highland Capital Partners LLC and Sequoia Capital Partners.
12. AllAdvantage: AllAdvantage offered Internet users 50 cents per hour to watch banner ads on a "Viewbar." Of course, the problem with their business model was that advertisers didn't see the appeal of the low-pay demographic AllAdvantage offered. This company represents $135 million in venture capital down the drain.
13. FastForward: FastForward's software and design took a nosedive due to faltering profits. Investors sunk $54 million into the company, which ended with bankruptcy and a selloff designed to raise funds to pay around $2 million in debts.
14. Xoma: While many pharmaceutical companies enjoy soaring profits, Xoma isn't one of them. This 26-year old company has not earned a profit since its inception in 1981. In fact, it has run through more than $700 million. Its stock has gone from highs of $32 per share to $3.04. Of course, this company's future is much more promising than many of the other companies profiled in this article. There's still a chance that Xoma will see success, even this far down the road. Perhaps you'll see Xoma on a future list of VC turnaround stories.
15. Flooz.com: Flooz was a digital currency that could be bought online and used somewhat like a gift certificate for online retailers. The company raised more than $50 million in support but, despite backing from big names like Whoopi Goldberg and J. Crew, went broke in 2001 after revenue slowed down. The company also suffered because thieves charged around $300,000 in Flooz to stolen credit cards.
16. Vanguarde Media Inc.: Vanguarde Media, publisher of Savoy, Heart & Soul and Honey, couldn't stay afloat, filing for bankruptcy in 2004. Even after $60 million in VC funding, the company simply wasn't able to sustain its business model with advertising revenue. Vanguarde Media also had troubles with real estate and Web sites.
17. Pixelon.com: Although Pixelon's money-burn of $16 million isn't remarkable in comparison to the other all-stars on this list, the way it was burnt certainly is. Pixelon's founder, "Michael Fenne" was more con man than entrepreneur, spending most of the company's investment on a Las Vegas launch party peppered with stars like Tony Bennett, Kiss and The Who. Eventually, it came out that Mr. Fenne was actually David Kim Stanley, a man on the run from the law and living in his car, who previously pleaded guilty to swindling $1.5 million from friends and neighbors.
18. Bolt Media Inc.: Bolt Media survived the dot-com era but finally met its end. This video site, launched in 1999, had more than $60 million in venture backing, and even went through a number of trials like a management buyout in 2004. In the end, Bolt's lawsuits kept it from being bought out by GoFish Corp., and the company has since shut down.
19. DigiScents: Would you like to "smell" the Internet? Yeah, we didn't think so. Neither did potential investors for DigiScents. After $20 million in investment, this smelly company was shut down because it couldn't come up with additional cash to go on.
20. Boo.com: Boo is a prime example of dot-com excess, with $120 million burned on apartments, gifts and a huge site that left dial-up modems struggling. The company had Miss Boo, a sales-assistant avatar, and loads of JavaScript and Flash. Essentially, the site lacked usability. The book "Boo Hoo: A Dot Com Story," chronicles the company's boom to bust.