Just too late
• Oliver Moor

After having been a spectacular prodigy in its infancy, the Internet has now reached a troubled adolescence. Worldwide layoffs are occuring on a daily basis; entrepreneurs once worth a fortune are now watching their millions vanish as their companies founder. Greg Clarke, a Briton who sought an Internet fortune in Canada, describes his experiences as a cyberspace venture capitalist.

I joined Digiventure Finance Corporation in 2000, having moved from London to Canada at the end of 1999. I was looking for a change from what I had been doing there and was intrigued by the business model -- about as far from the pinstriped environment of the City as it was possible to imagine and still be in an office. The company was what’s known as an internet incubator -- basically a cross between a venture capitalist and a management consultancy – all the rage between 1997 and April 2000, although they only really appeared outside Silicon Valley in 1999.

Basically, companies like Digiventure would finance very early-stage companies up to $1M, for a stake of up to 50% in the startup. Although it was assumed some would fail, the idea was to get a few floated, then sit back and watch the share price rocket.The startups tended to be run by people often having their first attempt at running a business, and the ideas were of the "wouldn't it be cool if..." variety. It sounded quite a heady environment.

Like many people in the business, I had no experience in “incubation”, but could claim some six years marketing experience (with three of those years in technology and ecommerce). I’d worked for some pretty high profile companies and felt that my background was definitely strong enough. 

Initially, I felt my curiosity had definitely been rewarded. The work was genuinely fascinating. People arrived with unusual ideas all the time, and I'm all for people experimenting with new ways of doing things. At the time virtually anything seemed possible. Very serious money was being made (elsewhere) - pretty much on faith alone -- so why not have faith?  

It was also extremely entertaining – we were a young crowd, all very keen, and it was great fun. The management was refreshingly unstructured. Being in a new country also made it easier to try something new. As the token “cynical Brit” I rather enjoyed emailing friends back home with regular tales of tears in “sync-ups” (i.e. meetings), as well as daily “emotional check-ins”. People used aromatherapy candles extensively. All a little crazy, but entertaining! 

I had joined some months before the firm’s IPO (Initial Public Offering) and at the time things looked pretty good – even 3 weeks before IPO the share price was 100% higher than the eventual float price. But the market started to crack mid-April -- and the directors decided to slash the price. It looked already like we may have been too late, but management decided to go for it and we went public in early May.  

There was, however, a significant problem. We hadn’t managed to persuade any institutional investors to come on board: all the shares were in the hands of individuals. This made the share price particularly volatile. It peaked the day it floated, up 4% on its launch price. The next day saw the start of its inexorable march south. As the price dropped through each significant psychological level, we were told that it was “a great time to buy -- the market’s undervaluing the stock!” -- a line that was only abandoned when we were at 10% of our IPO price -- just six months later.  

What were the reasons behind our spectacular decline? Firstly, and most importantly, it rapidly became apparent that a lot of our investments were basket cases. A few of us did a back-of-the-envelope calculation of money-in-bank versus burn rate, which gave about 11 months until the money ran out. It was becoming unlikely that any of our investments would reach a "liquidity event" before then. In addition, there was a major flaw in the business models of most of the companies we were investing in: simply, that the cost of getting people to their web sites was higher than the revenue they produced once they were there. It appeared that nobody (until I arrived) had tried to work out this critical number -- vital to any internet business, particularly ones that have no other source of revenue. This meant very few of the startups would ever break even. 

There was, however, a more insidious problem: few people on the inside took the view that we, as a corporation, were part of an experiment, the results of which were far from clear. Most people there had significantly less business experience than I, and were believed that rocketing markets were evidence that the model was already a success. A second serious mistake. 

The third was believing our own propaganda. One thing I have learned is that it is one thing to spin a story for the market -- but don't fall for it yourself. Many in the company did – and produced a deeply dishonest environment with most employees blithely singing from the company songsheet. There were some personal disasters: one 20-year-old employee and his parents invested $40000 on the strength of the hype; another borrowed heavily to invest in the company.

Being skeptical was considered counter-culture. I got increasingly frustrated by the lack of business sense (or even common sense), especially as things got bleaker and still people were coming out with the same platitudes. I even mischievously suggested that we should adopt the mission statement: "When all else fails, blind optimism will see us through". (This was not widely appreciated.)  

The end came in January 2001 when 25 people (including me) were laid off, reducing the company to ten, with new management in place. I’m not bitter about the way it was handled – in a high risk business redundancies are inevitable. In some ways I have to admire the management for attempting what they did; in the end, however, it boiled down to too many (rather inexperienced) cooks. Will the remnant survive? I don’t know. The internet has still to produce many more casualties – we’re still waiting for a really big firm to go under, and there will be a huge shakeout when that happens. It’s on it’s way. 

All names have been changed

© Oliver Moor 2001

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