All you had to do was mutter a few vague comments about B2B and B2C strategies offering first mover advantage and hint that you might actually earn some revenue - as distinct from making an actual profit - at some point during the first half of the 21st Century, and you were all set for an exciting foray into the brave new world of the new e-conomy. Why, even top City law firms were so keen to jump on board the bandwagon that they were prepared to waive their normal rates and accept equity in lieu of fees. Nine months later and you can hardly open a national newspaper without reading of yet another internet business closing its doors as it makes the sad transformation from dotcom to dot-going-going-gone. In fact, US recruitment agency Challenger Gray & Christmas reported last week that layoffs by internet companies are increasing - October saw an 18% increase in layoffs compared with the same period in September - with a total of 16,289 staff laid off by US dotcom companies in the first nine months of this year. For the record, of the 274 companies that have made cut backs, 44 have since gone out of business. For those of us still working in the real world, there is an irresistible element of schadenfreude about all this. It may be a serious blow for the individuals concerned, but it is hard for the rest of us not to resist a smirk when we read about the 'Ninety Percent Club' comprising 'centimillionaires' involved with dotcom companies whose values have plunged by 90% or more since the world stock markets started giving internet companies a hard time in the spring. For example, there is one US company - ICG Communications - whose share price has fallen by 99.4% from its peak of $39.25 in March this year to just 25 cents last week, and, in the process, transforming the value of its founder's stake in the company from $89 million to $550,000! There is however a serious side to all this - that is in addition to being forced to sell all those company jets, yachts, Ferraris and Palm Beach mansions - namely that the problems the dotcom companies are now facing are forcing some unpleasant beetles to crawl out of the woodwork. For example, last week the corporate security and private investigation group Kroll Associates issued a warning that executives in internet companies are four times more likely to have "unsavoury backgrounds", including records for insurance fraud and breaches of stock exchange rules, as well as undisclosed bankruptcies and links to organised crime, than executives in other industries. Kroll says that over the past six months it has carried out 70 background investigations and discovered problems in 39% of cases, whereas it would normally only expect a 10% problem rate. Kroll believes the problem is with what it calls "vampire investors", typically older managers who are brought in to add stature to a start-up but then try to rip off the company with exorbitant consultancy fees or placing family members in highly paid posts. So what happens when a dotcom company does run into problems? Sadly, the fate of many staff is to find themselves out of job without any of the severance pay they were legally entitled to under contract or statute. In some instances, they may not even receive full payment for the work they did do - particularly if overtime was involved. They could even, as happened to some staff with the failed fashion portal Boo.com, find themselves left to pay for credit card debts legitimately run up in the course of their work for their ex-employer. And, of course, all those generous share options schemes they were offered - which was the reason why they were prepared to work all hours of the day for virtual peanuts - are now not even worth the paper they were printed on. Talking of shares, there is finally the still as yet unresolved position of all those professional advisers - the bankers, accountants and lawyers who nine months ago were only too keen to jump on the internet bandwagon. One of the complaints internet entrepreneurs are making is that the reason why so many companies are now folding is because their venture capital backers and advisers are pulling the plug on plans for additional funding rounds to help build businesses that would otherwise reach profitability in fairly traditional time frames, typically three to five years. Yet it was these self-same VCs and advisers who in the first place helped draw up the companies' business development plans and earnings targets that are so reliant on this extra funding. So, to paraphrase the argument, having helped create an overheated market, the advisers are now bailing out, leaving companies with unsustainable business strategies. This of course rather prompts the question: shouldn't the advisers have been a little more realistic at the outset, so as to have avoided all the heightened expectations and hype surrounding the dotcom boom? Or, did they too get carried away with the thought of all those professional fees they were going to make advising on IPOs and similar financial deals? Writs are going to fly over this point - or at least they will do if the failing dotcoms can scrape the cash together to fund the litigation. (31/10/00) CHARLES CHRISTIAN can be contacted at: |
What
a difference nine months can make. At the start of the year the standard
strategy for internet start-up ventures was to draw up a viable business
plan on the back of an envelope. Or, if this was not an option, a halfway
plausible business plan. Or, failing that, a completely hare-brained
business plan. It did not really matter because there were apparently
queues of venture capitalists waiting out there to turn you into overnight
paper millionaires.