************************************************************** * * * CYBERSPACE * * A biweekly column on net culture appearing * * in the Toronto Sunday Sun * * * * Copyright 2000 Karl Mamer * * Free for online distribution * * All Rights Reserved * * Direct comments and questions to: * * * * * ************************************************************** IPOut The fun had to stop. A year ago a week didn't go by that we didn't hear about a new record IPO. A company making some product only tangentially related to Linux or Business-to- Business software would go public and by the end of the trading day it would have a market cap bigger than General Electric or Sweden. These days a week doesn't go by that we don't hear about one of these dot.coms going out of business or laying off 300 employees (half of them being European pastry chefs, Gulfstream flight crews, and Pete Townsend). In the last six months the term "cash burn rate" has been added to the popular lexicon. A cash burn rate gives an estimate of how long a company can stay in business given the amount of money it raised in an IPO, its current expenditures on things like salaries and marketing, and the amount of money that may (or may not) be coming in for banner ads or, if the company is particularly clever, for services rendered. When you look at a company's cash burn rate, you encounter frightening possibilities. For example, Forbes magazine estimates Amazon.com will run out of dough before it hits its goal of turning a profit by 2002. Last year Amazon.com had gross sales of $2.18 billion dollars and it managed to lose nearly half a billion dollars. Think about this a second. Amazon.com is no more complicated (or needs to be no more complicated) than a web page wired to an electronic copy of Books in Print, a warehouse, and a shipping department. How can you spend $2.5 billion dollars a year on that? What are these dot.coms spending their money on? First and foremost seems to be advertising and other forms of promotion. Companies that derive a majority of their incomes from banner ads buy a lot of banner ads on other web pages to drive traffic their sites. Ironically, TV, which has lost a considerable number of viewers to the Internet over the last few years has reaped huge dollars from cash-laden dot.coms. Super Bowl XXXIV (January 2000) featured ads from 30 dot.coms, some paying as much as $2 million for a 30 second spot. Some of these companies raised only $5-$10 million in their IPOs and threw a huge chunk of it at a single ad. It's not the smartest business model but some dot.coms were likely trying to emulate Apple's famous Super Bowl XVIII "1984" commercial. In 1984, Apple spent nearly a million dollars on an Orwellian themed Super Bowl spot. The 1984 commercial introduced the world to Macintosh (see www.uriah.com/apple-qt/1984.html). Apple aired the commercial only once. However, over the last 16 years, the commercial has generated non-stop talk and it's been endlessly repeated (for free) by various news programs. In June 1999, TV Guide magazine proclaimed it the greatest TV commercial ever made. If anyone knows what goes into making quality TV it's TV Guide right? Probably the record for burning through IPO cash and going straight into the toilet is a company called Pixelon. Born in October 1999, it died a spectacular death May 2000, filling for Chapter 11 bankruptcy protection. Pixelon raised $35 million from investors. It immediately blew half of that on a party at the MGM Grand Hotel in Las Vegas featuring The Who. Pixelon's ultimate goal was to develop broadband software and content. To further put the boot in, in April 2000, the company's founder, David Stanley, turned himself in to Virginia authorities after skipping out on a judge's order to pay back over a million dollars he swindled out of investors. In 1989 Stanley pleaded guilty to 55 counts of taking money in a fraud scheme in Virginia and Tennessee. Pixelon's massive bash was atypical only in terms of degree. Silicon Valley's cultural center, San Francisco, plays host to a dozen dot.com bashes every week, featuring free drinks, food, and musical acts such as Elvis Costello and the B-52's. The bar and entertainment tabs are a bit more modest compared to the Pixelon bash. These only run between $50,000 - $250,000. The excuses these dot.coms use for hosting such lavish parties is they a) need to create buzz b) need to throw these parties to attract talent in a tight labor market. It used to be if a company had a foozball table in the lunchroom, it was considered a funky place to work. If you want to check out other horror stories of excess and spectacular dot.com flame outs see www.startupfailures.com.