With some exceptions, those dot-coms still feeding off venture capital funding and limping toward profitability are likely to be providing a service- or information-based product as opposed to bringing fresh peaches or Barbie dolls to your doorstep, a la Webvan.com (formerly homegrocer.com) or eToys.com two of many high profile web e-tailers that fell victim to the tanked tech market over the last year. The implication is that e-tailers simultaneously overspent and underestimated their customers’ need to touch and smell a product before they buy it. But when it comes to information on products such as mortgage loans, or those offering some kind of service, it appears as if more and more of those customers are relying on Web-based entities for help. Direct your Internet browser to www.disobey.com, click on “ghost sites,” scan the growing list of defunct dot-coms and it’s clear the fever-pitch drive to get on the dot-com gravy train has ground to a halt. Venture capital for Internet startups is generally unheard of these days, unless the company is linked to a well-established brick-and-mortar entity right out of the box, or is within spitting distance of an initial public offering. For instance, Woodland Hills-based WMC Mortgage Corp., is a local success story, albeit a success story with a twist. Last year WMC shut down all 38 of its brick-and-mortar shops and hit the information superhighway (remember that term?) as a re-invented wholly Internet-based lender. The move allowed the company to cut staffing by 66 percent, shrinking operating costs and increasing revenues. And because WMC went on line with an off-line company already in place, it did not have to create a customer base out of thin air. “We had people two months after we did this saying, ‘You guys are idiots,”‘ said James Walker, WMC’s vice president and chief technology officer. “In fact, they said worse than that. But what the Web-based model has done is it’s made us a more nimble company. It cuts down the communication lines and increases the accuracy.” WMC reported record sales for August at $130 million and a 7-percent increase in loan applications, representing $465 million in business. Sales for the same month in 2000 were $24.5 million, representing $185 million in business. Walker said his customers used to wait three or four days for approval of a loan application. Using an online underwriting program and the new e-business model, the wait today is often more like 10 minutes. “The old business model required a significantly higher number of sales reps, who all did less business than our Web-based sales reps,” said Walker.” “Our Web-based model does upwards of four times what we did under the traditional model.” Kim Pillon, an Internet analyst with Nielsen/Net Ratings in Milpitas, which partners with Media Research and AC/Nielsen to track Web domain traffic, said, “What we are finding is that it’s really all about convenience. Instead of waiting three or four days for shipping of a product to the doorstep, we are seeing that a huge number of users are going on line to do their research for retail items, then going out and buying them in person.” Pillon said for every retail dollar spent on line during the month of July, 99 cents was spent off line as a result of online browsing. Among the top dot-coms Pillon tracks is a very busy Westlake Village-based Homestore.com, an Internet real estate services company, which her firm has identified as the leading Internet company in the homes and real estate category for the last 23 consecutive months. Click count for Homestore in July was 3.3 million, compared to 815,000 in July 2000. “What is driving that site is the fact that they have an important service to offer, which has helped them create a strong brand name and build up strategic partnerships (and funding) to support the business model,” Pillon said. But unlike the heady days when dot-com fever seemed to mean an online concept scribbled on a cocktail napkin was enough to get a VC to whip out his or her checkbook, today most business plans that do not have a built-in customer base simply won’t be taken seriously. “What I’ve seen is that during the course of the last 18 months the bar has been raised for everyone in terms of what a company needs to already have accomplished before obtaining funding,” said Peter Hartz, founder of Woodland Hills-based FortuneLab, LLC, which funds and acts as an incubator for small startups. Hartz said he’s received many applications for funding from dot-com startups since his company opened in July of 2000, but so far he’s stayed away from them. “We looked at 420 deals before we picked our first one, including a ton of dot-com ideas,” said Hartz. “But the ones that are of particular interest to us are those that have a natural customer base. If they use the Internet at all as part of their business model, it’s only being used as a tool. The Internet just can’t be relied on as the primary engine. Those days are over.” Brian Napack can relate. The founder and president of Glendale-based ThinkBox Inc., which runs ThinkBox.com, a children’s educational web site, said his company, which did business strictly on the Internet when he started it in 1998, has had to get creative to keep its funding coming because of the shift in attitude toward online ventures. “Our initial investors won’t even think of funding us now,” said Napack. But because ThinkBox creates online educational playgrounds for children using popular animated characters, the site has what Napack called an “emotional pull.” And because the company is educationally driven, it has a core of customers, parents and educators, and has managed to attract a new breed of online investors. “We’ve gone to the source of our audience for capital, a large educational company (which he wouldn’t identify), where we know there is going to be both an interest in the business as an investment, but also a willingness to make a commitment to our goal. “We are not yet profitable, which has a consequence in that we continue to need the benevolent application of capital, or, plainly put, we need dough,” said Napack. “But traditional VC monies are almost gone for companies like ours. They are being made, but they are being made at a company’s later stages.” During the height of the dot-com gold rush, traditional VC’s didn’t bat an eye at a 20-percent return on their investments. But given the initial returns dot-coms paid, largely because of IPOs, they now expect much more. Recently they have come to expect closer to a 1,000-percent return on their initial investment, said Napack. As a result, many online companies that looked promising simply couldn’t manage to generate returns fast enough to keep the funding coming. “Consequently, what’s happened is I’ve seen little companies all over the Valley have to shut down, even though they were good companies,” said Napack. Dave Berkus, of Arcadia-based Kodiak Ventures, is one of ThinkBox’s private investors. He also invested heavily in the now defunct Sherman-Oaks-based Word of Net.com, an online Web traffic tracking service that closed in June. Berkus said ThinkBox was an excellent example of an online venture that, from the start, stood a strong chance of success because it had a natural customer base getting off the ground: parents and children, and it provides a tangible service with market credibility that those customers need and respect. He said Webvan and eToys failed because they built out too quickly and couldn’t support the weight of their own infrastructure once they were in full swing. Instead of creating an online entity from the ground up, Berkus suggested Webvan and other failed e-tailers would have done better to partner with brick-and-mortar companies offering related services or products. “Had Webvan had a partnership with someone like a Safeway, for example, where it used the warehouses and the delivery trucks already in operation, they would have had a stronger customer base out of the box,” said Berkus.
