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.