Failures and breakthroughs – exposed, reflected, considered

Posts Tagged ‘dotcom

Top 10 dotcom flops

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Starting from year 1995, the world got an extra doze of anxiety. All approaches to millennia are debates between “the roosters and the owls.” Conspiracy theories started to flourish. Anticipation peaked. Some even predicted an inevitable doom and came up with end of the world theories. At the same time though many venture capitalists and investors started zealously investing large amounts of money in all kinds of startups and pouring dollars into pockets of geeeky college grads with barely decent business plans and fairytale ideas. This era (1995-2001) marked the rise and fall of many startups, followed by colossal losses whereby an estimated $5 trillion in paper wealth on Nasdaq were wiped out.

Below is the list of most spectacular and significant of those startups (and their brief stories), which are singled out for the accompanying hype, large sums of burnt money or for manner of their failure.

Webvan (1999-2001)

A core lesson from the dot-com boom is that even if you have a good idea, it’s best not to grow too fast too soon. But online grocer Webvan was the poster child for doing just that, making the celebrated company our number one dot-com flop. In a mere 18 months, it raised $375 million in an IPO, expanded from the San Francisco Bay Area to eight U.S. cities, and built a gigantic infrastructure from the ground up (including a $1 billion order for a group of high-tech warehouses). Webvan came to be worth $1.2 billion (or $30 per share at its peak), and it touted a 26-city expansion plan. But considering that the grocery business has razor-thin margins to begin with, it was never able to attract enough customers to justify its spending spree. The company closed in July 2001, putting 2,000 out of work and leaving San Francisco’s new ballpark with a Webvan cup holder at every seat.

Pets.com (1998-2000)

Another important dot-com lesson was that advertising, no matter how clever, cannot save you. Take online pet-supply store Pets.com. Its talking sock puppet mascot became so popular that it appeared in a multimillion-dollar Super Bowl commercial and as a balloon in the Macy’s Thanksgiving Day Parade. But as cute–or possibly annoying–as the sock puppet was, Pets.com was never able to give pet owners a compelling reason to buy supplies online. After they ordered kitty litter, a customer had to wait a few days to actually get it. And let’s face it, when you need kitty litter, you need kitty litter. Moreover, because the company had to undercharge for shipping costs to attract customers, it actually lost money on most of the items it sold. Amazon.com-backed Pets.com raised $82.5 million in an IPO in February 2000 before collapsing nine months later.

Kozmo.com (1998-2001)

The shining example of a good idea gone bad, online store and delivery service Kozmo.com made it on our list of the top 10 tech we miss. For urbanites, Kozmo.com was cool and convenient. You could order a wide variety of products, from movies to snack food, and get them delivered to your door for free within an hour. It was the perfect antidote to a rainy night, but Kozmo learned too late that its primary attraction of free delivery was also its undoing. After expanding to seven cities, it was clear that it cost too much to deliver a DVD and a pack of gum. Kozmo eventually initiated a $10 minimum charge, but that didn’t stop it from closing in March 2001 and laying off 1,100 employees. Though it never had an IPO (one was planned), Kozmo raised about $280 million and even secured a $150 million promotion deal with Starbucks.

Flooz.com (1998-2001)

For every good dot-com idea, there are a handful of really terrible ideas. Flooz.com was a perfect example of a “what the heck were they thinking?” business. Pushed by Jumping Jack Flash star and perennial Hollywood Squares center square Whoopi Goldberg, Flooz was meant to be online currency that would serve as an alternative to credit cards. After buying a certain amount of Flooz, you could then use it at a number of retail partners. While the concept is similar to a merchant’s gift card, at least gift cards are tangible items that are backed by the merchant and not a third party. It boggles the mind why anyone would rather use an “online currency” than an actual credit card, but that didn’t stop Flooz from raising a staggering $35 million from investors and signing up retail giants such as Tower Records, Barnes & Noble, and Restoration Hardware. Flooz went bankrupt in August 2001 along with its competitor Beenz.com.

eToys.com (1997-2001)

eToys is now back in business, yet its original incarnation is another classic boom-to-bust story. The company raised $166 million in a May 1999 IPO, but in the course of 16 months, its stock went from a high of $84 per share in October 1999 to a low of just 9 cents per share in February 2001. Much like Pets.com, eToys spent millions on advertising, marketing, and technology and battled a host of competitors. And like many of its failed brethren, all that spending outweighed the company’s income, and investors quickly jumped ship. eToys closed in March 2001, but after being owned for a period by KayBee Toys, it’s now back for a second run.

The rest of the five remaining flops can be found here (among which boo.com, the biggest European dotcom failure, about which there is a longer account here). Let us not forget that the huge losses of the dotcom bust must not make us loose sight of the fact that two US corporations (Enron $80+ billion and WorldCom $74+ billion in 2000/2001 alone) probably account for more direct losses than all the dotcom spending.

Let us also remember that not every startup was a looser. Indeed few companies such as Google and Amazon were also created during that period and came out of it healthier and stronger than they or the industry experts could have anticipated.

Both Google and Amazon are still going strong, notwithstanding the recent economic and financial crisis.

How boo.com got booed

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Boo.com was a European company founded in 1998 and operating out of a London head office founded by three Swedish entrepreneurs: Ernst Malmsten, Kajsa Leander and Patrik Hedelin. Malmsten and Leander had previous business experience in publishing where they created an online bookstore, bokus.com, which in 1997 became the world’s third largest book e-retailer (according to Investor’s Week, 26th May 2000) behind Amazon and Barnes & Noble. They became millionaires when they sold the company in 1998.

Then came boo.com.

The owners of boo.com wanted to develop an easy to use experience which re-created the offline shopping experience as far as possible. Boo.com wanted to become the world’s first online global sports retail site. The name of the company (according to Malmsten) originated from filmstar ‘Bo Derek’, best known for her role in the movie ‘10’. The domain name ‘bo.com’ was unavailable, but adding an ‘o’, they managed to procure the domain boo.com for $2,500 from a domain name dealer.

Boo.com was to target mostly ‘young, well-off and fashion-conscious’ 18 to 24 year olds. Boo marketed itself as a premium sports, urban street wear and fashion retailer, stocking quality products for the fashion conscious young individual. However, with premium products came expensive charges. The market for youth clothing was viewed as large: according to New Media Age (1999) and projections from retail analysts such as Verdict. An initial round of funding included investments from the JP Morgan, LMVH Investment and Benetton amounting to a total of around $125 million.

To make things as close to reality as possible, the virtual salesperson, Miss Boo, would great online visitors and guide them through the site, giving helpful tips and advice. When selecting products, visitors could drag them on to models, zoom in, and rotate them in 3D. The technology to achieve this was built from scratch. With all visual gimmicks and stylish add-ons, boo.com promised 8 second waiting time for the website to load.

Immediately before the launch, management team met with Larry Lenihan from Pequot Capital. The boo.com team provided revenue forecasts but were unable to answer questions about potential of the business such as “What kind of conversion rate are you aiming for? What’s your customer acquisition cost? And what’s your payback time on customer acquisition cost?” When these figures were obtained, the analyst found them to be ‘far fetched’ and reputedly ended the meeting with the words, “I’m not interested. Sorry for my bluntness, but I think you’re going to be out of business by Christmas.”

Boo.com officially launched on 3rd November, 1999, after a six-months delay. The homepage was featuring Miss Boo, as planned, but the user experience of the website turned out to be disasterous: slow site browsing, poor navigation and irritating technology.

ZDNet created a report of their experience of using the Boo.com. They describe an example search for product information, which took five user actions, including escaping past annoying animated graphics, to reach the desired location. “With products zooming all around the page, customers practically have to play target practice in order select the product they want” (ZDNet, 29th November 1999). The FT reported that one customer had been advised by Boo to “limit the amount of transactions they made, to three per twenty minutes” (Financial Times, 4th November 1999). There were also other problems. Studies sponsored by KPMG, Hewlett-Packard and VNU Publications (Computing, 30th November 2000) show the three main reasons for web purchases in the European market (UK, France, Germany) as “Ease/Convenience”, “Better Prices” and ‘Speed of Process’. Boo.com seemingly failed on all three dimensions.

A quick glimpse inside boo.com reveals some of most fundamental underlying problems, which were to affect and become critical in the post-launch period (as they did). These included unrealistic revenue projections, ambitions to immediately start globally, excessive employment benefits in pre-launch period and luxurious spending.

Few months after the launch, sales results were disappointing in some regions with US sales accounting for 20% compared to the planned 40%. The management team felt that further investment was required to grow the business from a presence in 18 countries and 22 brands in November to 31 countries and 40 brands the following spring.

The end of boo.com came on May 18th 2000, when investor funds could not be raised to meet the increasing marketing, technology and wage bills (and projected expenses for business expansion). In May 2007, Boo.com re-launched as an online travel community and review site under new ownership by Web Reservations International (WRI), unrelated to the original Boo.

Written by Hayk

October 5, 2008 at 10:11 am