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The new bottom line

by margo mccall
May/June 2001

Like phantoms of wrecked ships that appear off the coast on stormy nights, numerous startups persist in a limbo of Web pages and phone answering systems.

Their Web pages boast of just-signed customers and strategic partnerships and their automated phone systems suggest that the person you’ve called has just stepped away from her desk. Ostensibly, these companies remain in business. But rumors make you wonder if there’s even a desk to step away from in the drafty caves of exposed brick and halogen lighting where the walls once reverberated with the excitement of promising technology.

Faced with declining return on investment due to the faltering market for initial public offerings, venture capital firms are reevaluating their portfolios. They’re side-stepping startups seeking additional rounds of funding, particularly those whose path to profitability has the taint of vagueness. For startups, it’s time to scuttle or sail. The latter option still is possible: Clearwire Holdings, a wireless Internet access provider recently secured a whopping $97 million second round. But increasing numbers are going down in the storm.

The scenario is startling: Some wireless Internet firms will disappear along with the online grocers. And these companies’ dreams are being crushed with Internet speed.

Just months ago, San Francisco startup Livemind Inc. celebrated an agreement to integrate its software with Portal Software Inc.’s customer management and billing platform and demonstrated the technology at the 3GSM World Congress in Cannes, France. But in March came reports of CEO Karen Wilson’s firing and a walkout by employees. At issue: backer Technology Crossover Ventures’ demand for a four-fold return on a $3 million bridge loan the company needed to stay in business. Today, calls go unreturned.

Red Jade, a maker of wireless game devices and applications, is another firm struggling to develop a new business plan to attract additional funding. Last September, the Palo Alto, Calif.-based startup raised $7 million from Ericsson Business Innovation, the venture arm of the No. 4 wireless phone maker, and $3 million from IT Provider of Sweden. Ericsson is waiting for the company’s new plan to decide if it will continue funding.

Perhaps there’s mercy in a swift scuttle. Netmorf, the Boston-based mobile enterprise platform developer, sank suddenly from sight just before CTIA’s Wireless 2001, leaving 85 employees adrift. The company had new funding lined up, then lost its backers. Netmorf’s main backer says it was willing to contribute but didn’t want to lead the round. Netmorf says another VC company offered support, but its main backer dropped out.

Netmorf had been building up revenue by attracting solid customers such as Barnes & Noble, so its sinking shocked the industry. News of the company’s death provided a sober undertow to the scores of new product and service announcements at CTIA Wireless 2001. Even competitors appeared sorry to see Netmorf go.

Why? Perhaps fear. The Netmorf case shows that if further funding can be withheld from a firm rapidly ascending to market dominance, the same thing can happen to anyone.

After all, venture funding is about the bottom line, not the excitement of creating new technology. And the new bottom line is this: The IPO market has dried up and venture firms are casting a cold eye on current and potential investments in light of the first negative return the venture industry has seen in more than three years. Life preservers suddenly are in vogue.

Margo McCall is business editor at Wireless Week. Contact her at mmccall@cahners.com.