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Stagnant market hastens demise of some Net firms

For every Net company that has received a financial lifeline in recent months, another has quietly given up the search and shut down.

For every Net company that has received a financial lifeline in recent months, another has quietly given up the search and shut down.

For several months, struggling Net start-ups have made headlines after being acquired or receiving substantial cash infusions.

But the major stock market correction in April practically eliminated any hopes that many companies had of going public or raising additional funds privately. As a result, several companies have been forced to take more drastic actions: closing up shop or filing for bankruptcy protection.

Two weeks ago, Nickelodeon's e-commerce venture, Red Rocket, quietly closed shop. Violet.com, a specialty boutique, silently wilted in recent weeks, and Craftshop.com, backed by CMGI's @Ventures, is planning to file for bankruptcy protection from its creditors, according to an attorney working with the company.

Of course, businesses in general die off every day. In fact, 40 percent of all start-ups fail within the first six years, according to estimates from the Small Business Administration. But within the Net economy--where it seemed stock prices only went up--investor skepticism has snuffed out any hope of long-term survival.

"We've been living in the land of smoke and mirrors, and the (stock market) crash has dispersed the smoke," said Evie Dykema, senior analyst at Forrester Research.

Forrester said it predicts that the majority of dot-coms will go out of business by 2001, and many others will have to radically revamp their business strategies. The stock market malaise (the Nasdaq is down more than 25 percent from its all-time high in March) is not the sole contributing factor, but it has certainly hastened the process.

The market decline "sends a resounding wake-up call to investors to think hard about the true value of their investment's hard assets," Dykema said.

In many cases, thinking hard means asking whether a company expects to be profitable--soon. Unable to meet this new expectation, many young businesses are disappearing.

CNET TV: E-shakeout
CNET TV: E-shakeout

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Meanwhile, aspiring businesses looking for start-up funds are having to work harder to prove that their business models can buck the odds.

"The rule of thumb is that for every 100 business plans that are submitted to a venture capitalist firm, 10 get a serious look and one gets funded," said John Taylor, director of research for National Venture Capital Association.

"For those that drift off to oblivion or die, we don't hear from them because they tend to not do press releases or contact us," Taylor said.

Among the most common reasons for failures: the high cost of running an online business, competition, slim profit margins, lack of marketing and a poor business plan.

"When you're a small niche retailer you face a lot of challenges generating traffic, transactions and credibility. If a customer doesn't know you, you're going to lose out to a company they do know," said Carol Ferrara, e-commerce analyst with research firm Gartner Group.

Venture capitalists and analysts agree that start-ups need to hit three points to succeed: Defining a profitable business plan, building strong barriers to entry, and executing business basics such as marketing and order fulfillment.

Ironically, venture capital and investments in tech companies abound; but investors are becoming more selective about where they park their cash. In the first quarter of 2000, venture capitalists invested $17.05 billion in Internet-related companies, a 425 percent increase from the $3.25 billion invested in the same quarter of 1999, according to a recent report by the National Venture Capital Association and Venture Economics.

At the same time, "late-stage funding" is getting harder to come by for start-ups. It dropped from 28.55 percent in the first quarter of 1999 to 11.82 percent in the same period of 2000, according to the report.

Overall, business-to-business companies topped the list of those receiving funds, at $4.72 billion, while consumer e-commerce trailed with $3.21 billion, an 83 percent increase over the same period last year.

Although the fiercely competitive landscape of dot-com retail has taken out little-known start-ups, it also has stricken such high-profile Net companies as Value America, Buy.com and Peapod.

Last-minute cash infusions have recently propped up several struggling companies, though many had to give up sizable stakes in exchange for the lifeline:

• Value America received $90 million in equity from new and previous investors.

• Mexican billionaire Carlos Slim Helu bolstered CDNow's flailing business by buying a 9.2 percent stake in the company for $52.8 million. The troubled company announced in March that it was looking for an investment or a merger partner after its proposed merger with Columbia House fell through.

• International food retailer Royal Ahold bailed out cash-strapped Peapod with a $73 million investment.

Gartner predicts that Royal Ahold's investment will not be enough to sustain Peapod's business; the company will probably have to reduce its overhead by using Royal Ahold's fulfillment centers, according to the research firm.

"A lot of them seem to be getting a last-minute bailout," said David Cooperstein, an e-commerce analyst with Forrester.

"What e-commerce companies didn't realize is how forceful the brick-and-mortar and manufacturers are in the market. The real estate that (e-tailers) have is just a 14-inch screen," said Cooperstein, whose firm predicts that only three companies will survive in each e-commerce category, such as music or groceries.

For those who find themselves among the exiled, entrepreneur Nick Hall has launched Startupfailures.com as something of an online group therapy session.

"Start-ups take a toll on people's bodies, spirits and credit cards," said Hall, who has founded two ventures that have failed. "This is a community to help people bounce back. But I don't want people to be there forever."