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When times were giddy and billfolds bulging, investors tossed tens of millions of dollars at companies built around the notion that the world wanted to buy art online. That largess drove Toni Sikes crazy, which is unsettling, since she was a recipient of some of that generosity. “I became terrified,” recalled Sikes, who started her business life as an arts-book publisher in the mid-1980s and founded the online Guild.com in early 1999. Venture capital backers threw money at her, then pressured her to quickly expand. By February 2000, she had raised $30 million and still had $8 million in the bank. But after running the numbers, Sikes drew the heart-stopping conclusion that Guild.com would run out of cash by year’s end. “We had this enormous overhead,” she said, recalling her decision to downsize even before the bubble burst. “Sooner or later we were headed for disaster.” A wild ride ensued. Guild.com pulled off another funding round, sweated through a VC meltdown, agreed to a merger, then spun itself off. In July, Sikes recast the Madison, Wis.-based company into a more modest enterprise. After all this excitement and trauma, said Sikes, “I’m just trying to calm down the staff.” In the online art business, as in so many other e-tailing areas, the conventional wisdom about e-commerce did a mind-bending flip-flop. Extraordinary hype and easy money came to an abrupt end; almost overnight, funding evaporated. “It was like the emperor had no clothes,” said Abby Adlerman, CEO of another online arts retailer, nextMonet Inc. Investors turned their backs on the sector and wrote off their investments. Online art looked like it was spiraling into the abyss, just like online pet food. COSTLY FAILURES And in fact, many investments made during the funding frenzy have been lost. In the costliest failure, publicly traded Getty Images Inc., the Seattle-based photography stock house, shuttered its Art.com site in May. Two years earlier, it paid $115 million in stock for the prints e-tailer. But this is not just a story of hype and disaster; this is the tale of how to survive in the post-dot-com age. Surprisingly, Guild.com, which also sells upscale items such as glass and pottery, isn’t the lone survivor. A handful of e-commerce arts vendors remain open. NextMonet and eyestorm offer limited-edition prints and photographs. Artland produces high-quality digital prints of museum art. Paintingsdirect.com sells original artwork. Further consolidation is possible. Although Sikes, for one, believes there’s room and market enough for all, some in the industry continue to question the ability of the five remaining players to endure. Regardless, reports of online art’s death have proven premature. “I’m delighted in having a second chance,” said Tom Terry, Guild.com’s chairman and a current investor who also was one of the company’s seed investors. According to Sikes, consultant McKinsey & Co., in a study for Guild.com, estimated that the U.S. art market alone totals $10 billion. Paintingsdirect.com co-founder Christine Bourron tacks on another $9 billion for picture framing. McKinsey projected online art could capture 5 percent to 10 percent of the market in five years, Sikes said. In fact, online art this year may total $20 million to $30 million, not $500 million. And while the repeat business is growing — at nextMonet.com it’s now 20 percent of total customers, at Paintingsdirect.com it’s 60 percent — there’s nothing to indicate explosive growth. The size and nature of the art market initially bewitched both entrepreneurs and investors. The calculus that drove online believers was similar to that which propelled other categories of e-commerce. Grab just 10 percent of a multibillion-dollar market and you can retire and, well, collect original Rembrandts. ACCESSIBILITY AND NO INTIMIDATION What’s more, selling art isn’t like peddling dog biscuits, Snickers bars or shin guards, where competition is as close as the corner grocery or nearest mall. Selling art online appeared to hold a huge advantage: Consumers didn’t have to deal with art galleries, which have well-deserved reputations for snobbishness and exclusivity. “I feel intimidated when I go into a gallery,” said Boris Bally, a Providence, R.I.-based jeweler and furniture maker who sells on Guild.com and is an enthusiastic backer of the site. For even well-heeled consumers, art galleries are difficult places in which to get their bearings. And the economics of the art world are poorly understood beyond collectors and dealers. “The whole pricing structure is vague,” said Adlerman, a former managing director with Hambrecht & Quist, now part of JPMorgan H&Q. And there’s the question of accessibility — or lack of it. While some people may have the ability to wander into galleries on their next shopping jaunt, for others, a gallery expedition involves airfare and a hotel. The Internet, by contrast, could offer phenomenal reach, huge inventory and educational tips in a nonthreatening way. “Galleries are there for people who know what they’re doing, they’re not set up as a library of information,” said Linda Fiske, who manages the New York eyestorm gallery (the company also has a gallery in London). With the Internet, “There’s so much information available, if you really want to learn, you can.” With all that promise, everyone from art gallery owners to investment bankers drew up business plans for online art retailers. In 1999 and 2000, investors poured at least $200 million into 12 major startups. Dozens of smaller ventures popped up as well. Guild.com alone at one point had a valuation of $105 million and counted as investors high-profile VCs Benchmark Capital, Bowman Capital and Technology Crossover Ventures. RAISING MONEY In those days, it was “Throw everything up against the wall and sees what sticks,” said Adlerman, who co-founded online arts dealer Visualize Inc. in 1999. In January, Visualize merged with nextMonet and assumed the nextMonet name; terms weren’t disclosed. Now, nextMonet is attempting to raise more funds. “We didn’t expect the money to come in as fast or as much as it did,” said Guild.com’s Terry, a retired executive with mutual funds company The American Funds Group. But the money was no blessing. “It put pressure on us to book more revenue, but it became very difficult, if not impossible, to build a market so quickly.” Venture capitalists, Terry said, wanted “an IPO as quickly as possible.” Of the many fatal flaws of online commerce, market extrapolation proved one of the costliest for online art retailers. Entrepreneurs and their backers saw no difference between selling a $15 book online and a $1,500 watch. Consumers, it quickly became obvious, had radically different ideas. “There’s a very strict correlation between conversion rates and price,” Adlerman said. So, the online art world began with a huge financial handicap. Even now, the average purchase is about $500, according to a poll of the five companies. Anything above $1,000 remains a very hard sell. Add to that another inherent limitation: Art is in the eye of the beholder. “It’s the most bizarre concept, buying something as personal as what you want to hang on your wall,” said Bobby Neel Adams, a photographer who has sold one photo on nextMonet.com. FUZZY PICTURES The low-resolution images online hardly do justice to the art itself. That becomes obvious when visiting eyestorm’s 4-month-old gallery in New York’s SoHo. Fiona Rae’s whimsical screen print called “Bewitched” hangs prominently on one wall. In the print, a black background offsets colorful symbols. Black glitter is sprinkled on parts of the background, a detail impossible to see online. Lost visual elements aren’t the only drawback. There are questions of scale, texture and depth. With images on a computer, “You can never get that tactile quality,” Fiske said. Large artwork poses particular difficulties, both Fiske and eyestorm CEO Don Smith believe. To convince consumers to at least take a look, online art companies engaged in a kind of marketing madness. They spent millions on advertising and on marketing tie-ups with the likes of AOL and Yahoo. “None of us knew what we were doing, so we tried everything,” Sikes said. “When you have all the money in the world, you assume you’ll always have it.” Wrong assumption. For Sikes, visions of a bleak future forced her to take several steps, not all of which proved advantageous. In March 2000, Guild.com laid off about 30 percent of staff and raised an additional $10 million. But soon thereafter, she said, her board of VC backers “lost faith.” They showed signs of desperation, demanding she drop book publishing, even though it was a profitable, stable business. “There was pressure on us to focus our energies on what the board considered high-growth potential.” With money in the bank, Sikes first weighed buying a rival. In November, however, she agreed to merge with luxury goods e-tailer Ashford.com for $4 million in Ashford stock. DISGRUNTLED INVESTORS That deal almost killed Guild.com, but eventually proved its salvation, Sikes believes. The Guild.com site was folded into Ashford.com. But Ashford.com provided Guild.com with sophisticated back-office and customer support, Sikes said. Guild.com was able to trim its staff by almost half, the level it remains today. But Ashford.com was living on borrowed time as well. Its shares were sinking; disgruntled investors were suing. In July, Ashford.com agreed to divest itself of Guild.com, which got $1 million in hardware in return for splitting art sales on Ashford.com’s site. (Ashford.com in September said Global Sports Inc. would purchase it.) “It was the best piece of negotiation I’ve ever done,” Sikes said. She then turned to individual investors for an undisclosed cash infusion. “It’s not $40 million. I can tell you that,” she said. Today, dreams of IPOs and riches and revolutionizing the art market have vanished. “We think the online art market will grow, but not overnight,” said Terry. “We intend to build slowly and deliberately.” There are some artful insights here. One is the importance of cost controls. “The assumption from 1999 to 2000 was that to launch a Web site, you needed to spend a lot of money. Well, you don’t,” said James Danziger, Artland’s founder. “It comes down to having operating expenses low enough to give you the opportunity to survive.” Realistic expectations about both the medium and the market provide another lesson. “We realized the original dot-com formula was not going to work,” said Danziger, himself a prominent photographer. “That galleries online would revolutionize the market — that idea has been completely discredited.” NO MORE PURE PLAY The Internet has gone from being the be-all and end-all of selling art to being just part of a multichannel strategy, one that also typically includes catalogues and corporate sales. The so-called pure play has pretty much become a museum piece. Only Paintingsdirect.com continues to rely exclusively on online sales. (With only original art, a catalogue becomes impossible to produce.) The company, however, didn’t go the VC route but was funded much more modestly than rivals by Bourron, her family and friends. While Bourron wouldn’t reveal how much was invested, she did say revenues this year would total about $1 million and that Paintingsdirect.com became profitable last quarter. However, Artistsdirect.com operations, located near the World Trade Center, were severely disrupted by the Sept. 11 attacks. The company relocated to a New York suburb. London-based eyestorm, which produces exclusive limited editions of well-known contemporary photographers and artists, is particularly ambitious in crafting choice. Eyestorm’s Smith listed the different ways his company sells its wares: Online, eyestorm showrooms, catalogues, wholesalers. Add to that, he said, plans to sell through unnamed third-party retailers. Eyestorm raised $24 million from an international group that included London’s Arts Alliance and venture capital firms New Enterprise Associates and Singapore-based Vertex Management. The company is attempting to gain another $18 million to $25 million to fund an artists’ agency, either by acquiring an existing agency or building one from scratch. The agency would represent a stable of artists in licensing and rights deals. Eyestorm’s idea is to provide a kind of full-service shop. “We’ve reached out to a customer base to see what their needs are,” said Smith. The next phase is to “pull in the business needs of artists.” As Sikes surveys the market, she remains optimistic. “There are so many opportunities because there are so few of us left,” she said. But then she catches herself. “What I’ve said to my investors is there is no exit strategy,” she said. “What I’m going to do is slowly build a successful, potentially nice-sized company. It will take time and be done the old-fashioned way.” Copyright (c)2001 TDD, LLC. All rights reserved.

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