when the music stops venture backed flame-outs

When the Music StopsVenture Backed Flame-outs and Lessons

LearnedJanuary 25, 2015

1 www.acm-partners.com

• David Johnson is a founding partner of ACM Partners. His

advisory experience spans North America and ranges from

pre-revenue startups to Fortune 500 companies.

• David’s writing has appeared in several industry

publications, and he has lectured at the University of

Chicago, Northwestern University, the University of

Wisconsin-Madison, the University of Illinois-Chicago and

Loyola University Chicago.

• David earned his MBA from the University of Chicago. His

undergraduate studies were completed at Fairleigh

Dickinson University. David can be reached at

[email protected] or 312-505-7238.

2

David Johnson

www.acm-partners.com

mailto:[email protected]

Overview

• Fortune Magazine recently reported in “Age of Unicorns” that there

are currently 80+ private, venture backed companies with a

valuation in excess of $1 billion.

• This development raises the question of what happens next for

these companies, each of which has received considerable investor

support to this point.

• History teaches us that periods of high investor enthusiasm

inevitably end, and in that vein I have reviewed four cases (two from

the current cycle, two from a prior cycle) of well-funded venture

backed companies that nevertheless crashed and burned.


THE DEPARTED


“We are not always what we seem, and hardly ever what we

dream.”

- Peter S. Beagle, The Last Unicorn


6

Webvan

Named by CNET the “largest dotcom flop in history”, Webvan has become a poster child for over-expansion and a failure to appreciate the operating realities implicit in a business model.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-

40,000

80,000

120,000

160,000

200,000

1998 1999 2000

Gro

ss M

arg

in (

%)

Net

Sale

s (

$000s)

WebvanSales & Gross Margins

Financing Sources

Sources Amount %

Net proceeds from preferred stock 382,864 48.2%

Net proceeds from IPO 402,648 50.7%

Other financing cash flows 8,531 1.1%

Total Sources 794,043 100.0%

Company Name Webvan

Founded 1996

Amount Raised $800 million (approximately)

Peak Valuation $4.8 billion

Outcome Filed for bankruptcy in 2001


7

eToys

During the 1999 holiday season, eToys generated

more web traffic than Amazon.

Nevertheless, the company was unable to fund

persistent operating losses, filed for bankruptcy in

March 2001, and sold its intellectual property and

assets to KB Toys for $8.75 million.

Company Name eToys

Founded 1997

Amount Raised $375 million (approximately)

Peak Valuation $8 billion (public)


-

40,000

80,000

120,000

160,000

1998 1999 2000

($000s)

eToysSales


8

Fisker Automotive

Company Name Fisker Automotive

Founded 2007

Amount Raised $1.4 billion

Peak Valuation $2.2 billion (private)


“Fisker spent a stunning $900,000 for each vehicle it produced, then they sold them to dealers for an invoice price of just $70,000.”

- Sam Hamadeh, PrivCo Chief Executive


9

Fab

Poor management and marketing costs that reached 35% of sales prevented the company from building a profitable business around the “flash sales” model that powered the company’s rise.

Company Name Fab

Founded 2010

Amount Raised $336 million

Peak Valuation $875 million

Outcome Sold for $15 million (Nov 2014)

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

($000s)

FabCumulative Funding


LESSONS LEARNED


Agility

• Prevents a company from

being able to adapt quickly

to market changes

• High cash burn startups

almost never survive down

rounds

11

The Downsides of High Funding

Efficiency Exit

• Pushes companies to hire

aggressively rather than

operate efficiently

• Creates the illusion that a

company has succeeded

• When the market turns, big

companies stop buying

startups


Key Lessons Learned

1) Growth Does not Cure all Ills

2) High Customer Acquisition Costs can be Fatal

– In its final year of operations, eToys’ sales and market expense was nearly 80%

of revenue

– For Fab, the high point was 35% of revenue

3) Operational Challenges Kill

– Webvan and Fisker were both ventures that entailed considerable operational

complexity, and in both cases that complexity was a factor in the ultimate failure

of the venture

4) Investor Support is Fickle

– Each of the companies reviewed raised considerable capital from investors, but

each reached a point at which investor support suddenly evaporated

– High valuations did not save any of these companies


Denouement

“Only when the tide goes out do you discover who's been

swimming naked.”

- Warren Buffett

“The combination of sky high valuations, equally high burn rates,

and a disappearing IPO market is not a pleasant one.”

- Fred Wilson, Union Square Ventures


• ACM Partners is a boutique financial advisory firm providing due

diligence, performance improvement, restructuring and turnaround

services.

• David Johnson can be contacted at:

– Email: [email protected]

– Ph: 312-505-7238

• For more information visit: www.acm-partners.com.

14

About ACM Partners


mailto:[email protected]

http://www.acm-partners.com/

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