VC Investment Busts

Sunday, December 16, 2007

InsideCRM, http://www.insidecrm.com/

It's important to learn from mistakes. Investors are especially wary of losing their money (especially their limited partners' investment money), especially on a repeat mistake. Certainly mistakes were made, but were they factors of timing, market demand, execution error and/or all of the above and then some?

It's important that you are versed in some of the classic investment disasters of recent history -- so you can hold your own at any cocktail party or BBQ as well as to be prepared to explain how your deal is different than the ones that went awry.

InsideCRM recently published a list of what it called the, "20 Worst Venture Capital Investments of All Time." My initial follow-up was to get comments from VCs who were involved in the aforementioned busts, to kind of create an anti-anti-portfolio. But it was apparently a case of piling on, or perhaps these particular VCs simply are unaccustomed to self-depreciation. Replies were few and very far between.

So I decided to make my own list, by using the Venture Economics database. It includes how much money each company received, and its Top 20 diverges quite a bit from what was compiled by InsideCRM. For example, our top dog is Formus Communications Inc., which raised over $500 million between 1996 and 2000. In place and show were Digital Access Inc. ($490m) and VeloCom ($442m). InsideCRM “leader” Amp’D Mobile doesn’t appear on our chart until number 7.

In all, we uncovered 4,300 VC-backed busts that raised over $63 billion in funding. To qualify, a company had to meet three qualification: (1) Raised VC funding between 1990 and 2007; (2) Be based in the United States; and (3) have since gone out of business and/or declared Chapter 7 or Chapter 11 bankruptcy. Unlike InsideCRM, we did not include companies that were acquired (even if the sale price was a pittance compared to the initial investment).

Not because there aren’t hundreds deserving of bust status, but because it made the database work too complex. You can download the full listing here.

I also did a couple of related searches. First up was a look at which VC firms had backed the most losers. It’s an interesting grouping, with some selection bias toward firms that do lots of deals. It goes like this:

1. JPMorgan Partners
2. New Enterprise Associates
3. Intel Capital
4. Bessemer Venture Partners
5. Oak Investment Partners
6. Kleiner Perkins Caufield & Byers
7. Sequoia Capital
8. Mayfield Fund
9. Windspeed Ventures
10. BancBoston Ventures/BancBoston Capital

In addition, I broke down the entire grouping by industry sector (using MoneyTree categories). It looks like this:
1. Telecom (19.96% in terms of dollars lost)
2. Software (14.75%)
3. Networking & Equipment (11.27%)
4. Media & Entertainment (9.37%)
5. IT Services (8.12%)
6. Retailing/Distribution (5.59%)
7. Consumer Products & Services (5.03%)
8. Biz Products & Services (3.84%)
9. Financial Services (3.44%)
10. Medical Devices (3.03%)
11. Industrial/Energy (3.02%)
12. Semiconductors (3.01%)
13. Healthcare Services (3%)
14. Computers/Peripherals (2.63%)
15. Biotech (2.62%)
16. Electronics/Instrumentation (1.06%)
17. Other (0.26%)

20 Worst VC Investments of all time:

1. Amp'd Mobile: Amp'd Mobile takes the crown for money-burning, with $360 million that ended in bankruptcy. The company's major problem was its customers' ability to pay. While other mobile providers check for an ability to pay bills within 30 days, Amp'd let it go to 90 days and marketed to these risky customers. It has been reported that 80,000 of the company's 175,000 customers were unable to pay their bills.

2. Procket: Networking company Procket was once one of the most highly valued telecom startups in the U.S. It had $272 million in venture-capital funding and a valuation of $1.55 billion but was ultimately sold to industry behemoth Cisco Systems Inc. for a disappointing $89 million.

3. Webvan: Webvan was a grocery-delivery business that served nine metropolitan areas. Once valued at $1.2 billion with plans to expand to 26 cities, the company went bankrupt in 2001. Despite millions in sales, the company's demise was brought on by a money-burn that exceeded sales growth. Major purchases included $1 billion for warehouses, enterprise servers and more than 100 Aeron chairs. Additionally, it acquired HomeGrocer just a few months before going under. This fast expansion proved to be too much for Webvan. This company that once had about $800 million in venture capital ended up with $830 million in losses, with about $40 million on hand.

4. Caspian Networks: Caspian Networks, orgiginally founded as Packetcom Inc., had a number of ups and downs, including a washout in 2002; the company finally shut down in 2006. Caspian Networks fluctuated from more than $300 million in funding and 323 employees to less than 100 employees and closed doors.

5. Pets.com: This icon of the dot-com bubble died out in November of 2000, going from a listing in NASDAQ to liquidation in just nine short months. The site sold pet supplies and accessories online. Once backed with $50 million by Hummer Winblad Venture Partners, Bowman Capital, and Amazon.com Inc., Pets.com had promise and even bought out competitor Petstore.com. But in the end, its stock bottomed out at 19 cents per share. Remembered for its sock-puppet ads, the expense of its $1.2 million Super Bowl ad, as well as large infrastructure investments, proved to be too much. Pets.com's sock puppet lives on as the icon of BarNone Inc.

6. Optiva: Optiva, a nanotech company that laminated flat-screen TV sets, had to shut down after it failed to continue to raise funding. It initially raised and ran through $41.5 million in venture capital. The problem was that it took too long to release its product, which was obsolete by the time it came to market.

7. Kozmo.com: Kozmo.com's small-goods delivery service, while a recipient of around $250 million in investment, and popular with students and young professionals, ultimately met its end and liquidated in 2001. Its business model was criticized as unprofitable because it didn't charge for deliveries. Kozmo.com's demise is profiled in the documentary film e-Dreams.

8. CueCat: This much-mocked pen-sized bar-code scanner was designed to make finding information about ads easier. Instead, Digital Convergence Corp., CueCat's creator, burned through $185 million from investors like The Coca-Cola Co. and General Electric Co. The device simply failed to catch on, and it was plagued with security problems.

9. DeNovis Inc.: DeNovis software once attempted to change the medical-claims world but ended up shutting down instead. It raised $125 million in venture capital and had 110 employees. Unfortunately, that wasn't enough, and this promising solution simply didn't have the cash to hang on until the software could be launched.

10. PointCast Inc.: After tens of millions of dollars in venture capital and a $400 million buy offer, PointCast was finally sold for $7 million. It was originally touted as the next big thing, but failed to live up to its hype when its software and downloads irritated customers.

11. eToys: Despite being measured as the "benchmark against which all other sites are measured," eToys ended in bankruptcy. The company was largely edged out by Amazon.com, which formed a partnership with Toys 'R' Us, but ultimately, customers just weren't willing to wait a few days for their Legos. It was backed by VC firms Idealab, Highland Capital Partners LLC and Sequoia Capital Partners.

12. AllAdvantage: AllAdvantage offered Internet users 50 cents per hour to watch banner ads on a "Viewbar." Of course, the problem with their business model was that advertisers didn't see the appeal of the low-pay demographic AllAdvantage offered. This company represents $135 million in venture capital down the drain.

13. FastForward: FastForward's software and design took a nosedive due to faltering profits. Investors sunk $54 million into the company,
which ended with bankruptcy and a selloff designed to raise funds to pay around $2 million in debts.

14. Xoma: While many pharmaceutical companies enjoy soaring profits, Xoma isn't one of them. This 26-year old company has not earned a profit since its inception in 1981. In fact, it has run through more than $700 million. Its stock has gone from highs of $32 per share to $3.04. Of course, this company's future is much more promising than many of the other companies profiled in this article. There's still a chance that Xoma will see success, even this far down the road. Perhaps you'll see Xoma on a future list of VC turnaround stories.

15. Flooz.com: Flooz was a digital currency that could be bought online and used somewhat like a gift certificate for online retailers. The company raised more than $50 million in support but, despite backing from big names like Whoopi Goldberg and J. Crew, went broke in 2001 after revenue slowed down. The company also suffered because thieves charged around $300,000 in Flooz to stolen credit cards.

16. Vanguarde Media Inc.: Vanguarde Media, publisher of Savoy, Heart & Soul and Honey, couldn't stay afloat, filing for bankruptcy in 2004. Even after $60 million in VC funding, the company simply wasn't able to sustain its business model with advertising revenue. Vanguarde Media also had troubles with real estate and Web sites.

17. Pixelon.com: Although Pixelon's money-burn of $16 million isn't remarkable in comparison to the other all-stars on this list, the way it was burnt certainly is. Pixelon's founder, "Michael Fenne" was more con man than entrepreneur, spending most of the company's investment on a Las Vegas launch party peppered with stars like Tony Bennett, Kiss and The Who. Eventually, it came out that Mr. Fenne was actually David Kim Stanley, a man on the run from the law and living in his car, who previously pleaded guilty to swindling $1.5 million from friends and neighbors.

18. Bolt Media Inc.: Bolt Media survived the dot-com era but finally met its end. This video site, launched in 1999, had more than $60 million in venture backing, and even went through a number of trials like a management buyout in 2004. In the end, Bolt's lawsuits kept it from being bought out by GoFish Corp., and the company has since shut down.

19. DigiScents: Would you like to "smell" the Internet? Yeah, we didn't think so. Neither did potential investors for DigiScents. After $20 million in investment, this smelly company was shut down because it couldn't come up with additional cash to go on.

20. Boo.com: Boo is a prime example of dot-com excess, with $120 million burned on apartments, gifts and a huge site that left dial-up modems struggling. The company had Miss Boo, a sales-assistant avatar, and loads of JavaScript and Flash. Essentially, the site lacked usability. The book "Boo Hoo: A Dot Com Story," chronicles the company's boom to bust.

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