The pace of the development of e-commerce – and its derivatives such as digital commerce and mobile commerce – has been irresistible. Or so it was thought.
The last six months or so have been financially much harder for dotcom start-ups. Hot on the heels of the initial blaze of publicity surrounding stock market flotations of the likes of Lastminute.com and other high-profile dotcom pioneers in this country have come market-wide concerns about the sector’s financial health. There have been the liquidations of Boo.com and Netimperative and the placing of Leisureplanet.com into administration. And, more recently, high-flier Clickmango.com has announced its intended shutdown, while Urbanfetch.co.uk has laid off 15% of its staff only two months after its launch. The liquidations have been particularly notorious for the huge disparity between the investments made and the asset values realised by the liquidators.
Commentators tend to focus on these financial problems from the perspective of the companies concerned or the investors. This article will look briefly at certain impediments that hamper dotcoms generally and what this means for the management of the companies involved.
The dotcom arena
The market has readjusted since the initial frenzy of all things internet-related, and there is a realisation that things are not as simplistic as many thought. The market needs to be viewed in two distinct parts. To date, the failures have been concentrated in the tough business-to-consumer (B2C) market. Those active in the business-to-business (B2B) sector are showing much more resilience. B2C may have the profile, yet represents no more than perhaps 20% of all e-commerce activity.
The bulk comprises B2B transactions between businesses where the internet simply offers a much more efficient medium for buying and selling. There is less of a sea change in the attitudes to dealing than there is in the consumer market. After all, electronic data interchange has been around for many years as a mechanism where suppliers are automatically informed of what replacement supplies are needed by supermarkets when goods sold are swept through their tills’ bar-code readers.
There are other problems for B2C firms. Key among these is the under-investment in most dotcoms. Or, more accurately, while fundraising activities may have brought in millions in the first financing rounds, subsequent capital has been much harder to attract. In a large part, investors have been put off by what is known as the ‘burn rate’ – the rate at which cash is consumed, especially before there is much evidence of significant sales, let alone any profits. Cash in many businesses is perceived to be being consumed too quickly, largely as a result of on-going, ambitious but costly marketing initiatives.
Dotcoms, other than perhaps those dealing in dematerialised products such as online share dealers, are generally constrained by their very essence. While conventional companies will have at least some bricks and mortar and other tangible assets, most dotcoms have little more than intangible potential.
This has one particular downside: banks and other lenders refuse to lend them money. A full security such as a debenture (comprising charges over all of a company’s assets) will be of illusory value when given by a typical start-up with little more than a rented office and a few chairs and PCs. Even if intellectual property rights are available, these are notoriously difficult to value accurately for security or other purposes. Moreover, such businesses are unlikely to be generating enough, or a regular flow of, cash to meet the interest instalments that would be due on such loans.
Dotcoms are left with one option: the issuing of shares to investors, whether institutional (such as venture capitalists) or individual (including business angels). However, following the initial seed capital financing rounds, investors will want to see tangible evidence of robust business progress before more money will be available.
Meanwhile, the company continues to incur both fixed costs (such as employee payroll, rent and software development costs) and variable costs (such as on-going marketing expenses) which will be difficult to meet.
So what if cash is fast disappearing and there seems little realistic justification for continuing the business?
