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 and 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, 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 web address now has a holding page with a strapline teasing, ‘The boo is back!’ and ‘a new site will be launched in 2006.’ 2019 UPDATE: The address now auto forwards to

The founder of another flop – online health and beauty site, 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 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.

Judgment day

The flotation of on 14 March 2000 amid much controversy over its valuation (nearly £600 million) rang the bell for the top of the London market just a couple of days after the tech-laden Nasdaq index in the States had burst from its bloated maximum and was deflating at an alarming rate. By November 2000, was able to report one closure a day, 75 per cent of which were business-to-consumer or e-commerce ventures.

‘Somebody woke up one day and said “the Emperor’s wearing no clothes!” and it all fell down with a nasty thud,’ sums up KBC’s Hart. is one site that managed to extract some of the last vestiges of dotcom hope, with a popular website to link buyers and sellers of businesses. Spun out as a subsidiary of publishing company Dynamis, with Tory MP Francis Maude as chairman, it raised £1.7 million of seed capital from angel investors in February 2000, just as the crescendo of incredulity around was building.

Chief executive at the time Leigh Nissim says that hints were given to some investors (‘Not by us!’ he insists), that the company would shortly float on AIM and that they would quadruple their money. ‘Then came the crash and everything changed. One week you were the most loved and the next you were the most hated. But we knew growth would take longer than people thought and we believed we’d be successful in the end, so we made sure we didn’t spend all the money!

‘In our situation, which was pretty typical, we believed in our business but once valuations collapsed we had shareholders who felt they were locked in and no one wanted to buy their stake. That wasn’t a huge problem for professionals but for private investors it was really bad news. Our investors created a lot of problems and spent a lot of time shouting! This took management attention away from the business.’

Eventually, directors who had lost interest departed and an experienced, new director was brought in. Within six months the business was profitable.

After the gold rush

After spring 2000, it took a long time for internet companies to re-establish themselves, with fundraising becoming difficult or nigh on impossible, says Hart.

‘The same applies to today’s market: if business owners put themselves in the position of needing further fundraising and then the market changes, they’ll find it difficult. Investors like success stories or potential winners. They’re usually unwilling to invest after your worth has dramatically crashed, as everyone likes to invest in companies and sectors on the up. That’s exactly what happened in 2000 – the music stopped and dotcoms couldn’t raise any more money.’

Seb Bishop and his school friend Daniel Ishag were one such example. ‘We couldn’t have picked a worse time to enter the internet game,’ laments Bishop. ‘It was like learning to ski on ice.’

In early 2000, Bishop and Ishag began a roadshow tour to raise cash for Espotting Media, a company they had formed at the tail end of 1999 to create, according to Bishop, ‘the very first pay-per-click marketing business in Europe.’ But nobody was interested by the time they came a-calling and friends and family were the last resort, providing a £100,000 cash injection.

As it transpired, the newly adopted, market frugality actually benefited Espotting. ‘As the online space went into recession, advertisers saw the advantages to our model. After we signed AskJeeves in 2001 we started to see a big adoption, with Lycos, then Yahoo! and AltaVista all signing up. And later that year we got £5.5 million of venture capital with Beringea as a lead investor.’

So, by the time Nasdaq-listed marketing services provider agreed to buy Espotting for $186 million in late 2003, their online venture was dealing with more than 850 million queries a month. The conglomerate then changed its name to MIVA to incorporate the various other businesses it had bought.

‘We were valued more or less on a par with traditional bricks-and-mortar businesses,’ insists Bishop, now a director and chief marketing officer of the enlarged group. ‘We were profitable and our turnover was more than $120 million.’

However, by comparison, US competitor devised the pay-for-performance advertising concept and floated in 1999 – ‘We weren’t aware of it at the time,’ admits Bishop – and changed its name to Overture before it was sold to one of its biggest customers, Yahoo!, for $1.6 billion in early 2003. ‘So, we could have got a bigger deal if we’d been earlier and launched in the US,’ observes Bishop, with a little regret.

The winners’ story

Among all the tales of woe, there were some for whom the dotcom shenanigans worked out well. George Coelho is one of the most respected luminaries in UK investment circles and someone who knows a thing or two about dotcom pioneers. Almost seven years ago, he helped lead the expansion into Europe of US venture capitalist Benchmark Capital, an investor in a range of internet ventures, including an embryonic online flea market you might have heard of: eBay. His team managed to make hay while others were caught in the downpour.

Coelho says, ‘To be honest, dotcom has worked for us. It’s the hallmark of our firm. When it all blew up, a lot of people were running away from the market, so we didn’t face much competition.’

Benchmark backed Betfair and merged it with a competitor in 2001 to create ‘the world’s largest exchange betting company’, which now processes more than $3 billion annually.

Coelho also cites examples of the trend for companies to ‘soldier on’ during the bust period, lingerie e-tailer being one of them. It was set up in 1998 and grown using the founder Daniel Nabarro’s own money and no venture capital until Benchmark met them last year and bought a 40 per cent stake.

Avoiding future follies

As for eBay, Coelho says, ‘It succeeded for a number of reasons, but primarily because it had good founding entrepreneurs and it was profitable even before we invested. They focused on getting it right in each area they tackled before they moved on to the next, concentrating on getting the technology functioning properly. Then they brought in a great CEO, Meg Whitman, and they had the luck of being in America when it was already a very wired country.’

Related: 5 business failures that prove an idea is only as good as its execution

This demonstrates one of the central tenets of Coelho’s investment theory and practice: it’s all about people. ‘When investing, we look for someone who can be a truly great entrepreneur, have pride in fostering the business and who wants to build something big, not get out after a couple of years. We want a partner who can captivate us with their ideas; our philosophy is not, “oh, it’s worth a punt just in case”.’

So, what’s the single most important piece of advice Coelho can offer anyone operating an internet company in Europe now?

‘Look at the US,’ he replies. ‘What is the competition over there doing? They’ve had much more practice, so look at what they do well and why. What’s their secret? Every business has a secret ingredient, and learning from the highs and lows of others is a tried-and-tested recipe for your own success.’

Remember these short-lived sites?

  • – upmarket gossip site backed by around £5 million worth of investment
  • Ebop – cult lifestyle magazine site backed by eVestment and, controversially, by former directors of AIM investment vehicle IEQ
  • – online community for teenage girls, backed by Unilever and Durlacher
  • Ready2 – a provider of shopping advice for ‘women with attitude’, fronted by the then-Daily Telegraph columnists Trinny Woodall and Susannah Constantine, now famous for their What Not To Wear TV show.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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