INTERNET EXCEPTIONS
Dot-coms Retrench, Refinance and Reshuffle to Keep Going
The Return Exchange Inc., an Internet-based returns management outsourcing company, recently walked away with some venture capital funding.
So did HireRight Inc., an Internet-based background screening and pre-employment service company.
The Irvine businesses raised $15.1 million combined, a major coup since the technology meltdown has dimmed the chances for online companies to raise money.
These two companies are some of the few that have been able to close deals as of late.
“We’re still in a very dry period,” said Mark S. Ham-mond, chief executive of The Return Exchange, which raised $7.9 million. “There’s a lot of good companies that aren’t getting funded because of the overreaction. Some of the smarter venture capital firms are opening up a little bit more, but overall the market is still very tight with money.”
The aftermath of the tech disaster still is playing out almost two years after the dot-com bubble burst.
“It’s an exceptionally difficult market out there,” said Jeff Anderson, managing director at the Los Angeles office of Mellon Ventures Inc., an investor in HireRight. “The pace for venture investing is half of what it used to be. That probably reflects some of the market opportunities.”
Anderson said information technology budgets have been frozen except for a few key areas.
“A lot of venture-backed companies aren’t getting traction and therefore have a hard time convincing venture capital firms to put money into a growth story if there’s no growth,” he said.
“Companies that are driving revenues or building a strong pipeline are getting the attention of venture capital firms. But you’ve really got to prove that you have got something that customers want.”
These days, investors are interested in “anything that has immediate impact on operating expenses.” That doesn’t describe many dot-coms.
But HireRight looks good, Anderson said, because the pre-employment screening category,background checks,has gotten a lot of interest post-Sept. 11. Plus, he said, the company, which raised $7.2 million in the first quarter, is making headway in a rebounding economy.
There’s no question online companies long ago started maneuvering in a new reality.
“The rules have changed,” Hammond says.
Besides a renew-ed focus on experienced management teams and getting profitable, there’s also been a thinning of the herd.
“At one point, at the height of the frenzy, we were the only company in our space,” Hammond said. “Then there were 26 competitors a few months later. We had to fight for visibility.
“Now we’re down to three competitors,” he added. “The survival of the fittest is happening, and I believe there will be winners in each sector.”
A number of dot-coms fell to the wayside in OC, but a few have been able to quietly gain ground.
That includes WhyRunOut.com Inc., an online delivery service for groceries, movies and other items. The Aliso Viejo-based company turned a profit in the fourth quarter, around the same time Albertson’s Inc. made a splash with plans for home delivery in OC and elsewhere in the Southland.
Dan Frahm, WhyRunOut’s founder, said the company continues to “be profitable and has not needed to rely on outside funding to support continuing operations.”
Frahm said its revenue has grown from $200,000 in 1999 to $16 million in 2001.
Still, the dot-com has been hunting for additional capital (about $5 million to $10 million) to “fuel future expansion”,so far unsuccessfully.
“(We) have not reached mutually agreeable terms with any third party,” Frahm said.
But he says WhyRunOut is getting more bites lately.
“From a purely subjective standpoint, it does seem to me like there is more interest in us from venture capital firms recently, since they now appear to be focused on ‘real’ businesses with customers, revenues, operations and earnings, rather than purely on concepts like they were a couple of years ago,” he added.
Cutting Costs
Irvine-based online automotive referral service Autobytel Inc. has turned a corner.
The company reported its second consecutive quarter of operating profit in March, and said it expects to see positive net income in the fourth quarter.
Chief executive Jeffrey Schwartz said the “driving factor” was the company’s buy last year of Autoweb.com Inc., a Santa Clara-based rival.
The acquisition allowed the company to save about 40% in operational costs, including a reduction in workers from about 420 to 270.
Autobytel continues to trim down in its quest to be profitable. Last month, the company cut 40 jobs, or about 15% of its workforce, to save about $4 million a year.
The tactic has become commonplace for online companies. Many in the past year or more have slashed staff, refocused business models and tweaked management teams to get back on track.
Aliso Viejo-based Buy.com Inc. is a prime example.
The online retailer last year laid off most of its staff, closed some of its operations, restructured and was taken from public to private by founder Scott Blum.
President Robert Price said the dot-com has made progress,though “few people have given us any credit.”
The changes, however, did bode well for Buy.com’s vendors, advertisers, distributor partners and customers, many of whom turned their back on the company in its darkest hours.
“Just now are we starting to get some of the recognition from people like that, ‘Hey, Buy.com is here to stay,'” Price said. “I think that’s why we’re getting some traction on the top line.”
Still, Buy.com has a big hurdle to clear: getting profitable.
Price said the company “made a small profit” on operations in December, but is hoping to get in the black by the end of the year.
That’s also critical for Costa Mesa-based Tickets.com Inc., which runs call centers and sells tickets online and related software.
Tickets.com posted sales of $17.9 million for the quarter ended March 31,a 20% increase vs. last year. Its net loss was $5 million for the period, compared with $28 million a year ago.
Eric Bauer, Tickets.com’s chief financial officer, said the company hopes to post a profit sometime this year.
“Until you reach a point of profitability, people view you as running under the radar screen, saying, ‘Once you’re profitable we’ll take a look at you again,'” Bauer said.
Last month, the company trimmed its staff after consolidating several of its divisions for efficiency. It also added to its management team, which has seen shuffling over the years.
The key ingredient for Tickets.com: the company raised $20 million from existing investor General Atlantic Partners LLC in March.
Plus, Bauer said the company has made other advances, including adding new sports teams to its roster and upgrading its technology and services.
Aliso Viejo-based Fax.com Inc., a five-year-old fax distribution company with online services, keeps chugging along.
President Kevin Katz said the company isn’t “highly profitable” but “we survive.” The privately held company says it has revenue of $15 million.
“Most of the Internet companies love to use the words ‘burn rate.’ My burn rate isn’t as bad as the other guy,” Katz said. (A company’s burn rate is a measure of how fast it is spending its cash.)
“We’re able to keep going without having to worry about additional money coming from investors to run our business.”
But Katz said his competition remains just as fierce,if not fiercer.
“For us it’s gotten harder,” he said. “A lot of our competitors have dropped their rates a bit. But we’ve been able to stay competitive and still give your customers results.”
