Dotcom babies

There was a time, as the new millennium hove into view, when anyone with a dotcom suffix attached trailer-like to the back of their business imagined their fabulous future was assured. Raising money was easy even without a business plan, as business angels, venture capitalists and investment banks fell over themselves to stump up bundles of cash with the hope of backing the next worldwide web sensation.

The burgeoning popularity of American sites such as Travelocity.com and Amazon.com led to equal excitement on this side of the pond. The inchoate internet provided a cheap and easy means of turning ideas born in a bedroom into a trading business, and a stock market listing or trade sale proved to be a relatively undemanding road to riches.

When Yahoo! raised $33.8 million upon floating in 1996, its shares soared 270 per cent on its first day on Nasdaq. The subsequent flotation of Amazon in 1997 at a valuation of 20 times its $15 million annual sales further fuelled investor enthusiasm.

As we now know, it was not a period synonymous with caution and sense. Plenty of cash was thrown at dotcoms without particularly plausible or workable propositions, which brings back painful memories for many investors. Bill Brown, long-time manager of the AIM VCT (venture capital trust), and now boss of its new manager Bluehone, admits, ‘There was a lot of puff and a lot of hope pinned on what people were trying to achieve. The prevailing notion was that companies just had to be in the right area and they would take off and make lots of money with no real hard work.’

Adam Hart, head of business development at KBC Peel Hunt, with a healthy dose of hindsight, agrees: ‘The level of investment was driving prices beyond people’s comfort zones even though at the time everybody slightly believed the basis of valuations was wrong. But people got more comfortable with them and at one stage we thought it might even be a paradigm shift in company valuations.’

Classic case
Chris Hunt had the idea of streaming classical music concerts, opera and ballet over the internet, a dotcom proposition he composed and turned into a company within a few months. It was floated on AIM as Online Classics back in 1999 and the share price scaled from its 45p float price to more than £1 at the close of play on the first day, and to £1.81 six months later.

‘When we floated there was incredible optimism about our idea that I don’t think we’d get now,’ admits Hunt. ‘In 2000 we had three-quarters of a million people watch a concert on 56k modems for free, but, because of the supposed notion of democratisation and freedom of the web at that time, when it came to asking people to pay they just weren’t interested. And there was no mature advertising model then, so we had no viable alternative revenues.’

That unwillingness to pay and flaccid penetration of broadband prevented the concept from taking off. As Hunt explains, ‘When we launched, BT said broadband would be in 85 per cent of homes by the following Easter – laughable now, I know – and by 2001 it became clear how bad the situation had become and that, as things stood, our venture really wasn’t going to work.’

The company made a sideways acquisition in November 2000, purchasing Iambic Productions, a producer of television programmes about the lives of classical composers. The company, now newly monikered as DCD Media, has recently become profitable at the operational level following the purchase of three more bricks and mortar acquisitions. ‘But the original streaming proposition is a sensible one,’ insists Hunt, ‘as long as there’s a broadband customer base out there. We’ve had the model packed away and now we can brush the mothballs off and look at rebuilding it.’

Boo founders make a boob
Another name forgotten by most, if you’ve even heard of it, is Boo.com, a firm that was equally frustrated by BT’s broadband failures. But Boo became more famous for its monumental mismanagement and left only the legacy of a reputation for lavish spending, even at a time when extravagances such as on-site masseurs were de rigeur.

Originally set up by Swedes Ernst Malmsten and Kajsa Leander to sell fashion brands, the founders spent an astonishing $130 million of investors’ money on a website that, although it looked good, was criticised for its poor usability and was slowed by its complicated, data-sapping design. Tales of lavish champagne-fuelled parties, bodyguards, trips abroad and a management team generally over-reaching itself, were readily lapped up by the tabloid press.

As was the chance discovery of a cupboard filled with about three hundred Palm Pilots (at a time when they were a very expensive rarity) and no one knowing how or why
they were there. This, more than anything, captured the absent-minded extravagance of the time. Malmstein left his unpaid employees and suppliers with a message ending, ‘I'm sorry that in the end we couldn't turn things around and maybe that was my fault.’

Intriguingly, the Boo.com web address now has a holding page with a strapline teasing, ‘The boo is back!’ and ‘a new site will be launched in 2006.’

The founder of another flop – online health and beauty site Clickmango.com, which blew much of the £3 million raised through a stock market flotation on a pink inflatable boardroom – is now back in the dotcom saddle. Toby Rowland (son of the late Tiny) has raised C34 million from Apax Partners and Index Ventures for already-profitable gaming site King.com. With nothing pink or inflatable in the boardroom this time, Rowland boasts that around 40 million games are played on the site each month and that inroads are being made in the US with the launch of the first online, paid-for Sudoku game.