Securing Financing - Impact Of The Dot.com Fallout On Venture Capital

IMPACT OF THE DOT.COM FALLOUT ON VENTURE CAPITAL

When dot.com upstarts—many of them funded by venture capital firms like Benchmark, Softbank, and @Ventures—saw their stock prices tumble in 2000, funding sources began to run dry. This posed a major problem for the dot.com, most of which had been counting on additional capital for expansion. Many were forced to shutter operations, which drove the stock prices of the remaining Internet players down even further. Recessionary economic conditions compounded the problem, making venture capital firms increasingly leery of investing in new Internet ventures. As a result, venture capital funding by the middle of 2001 was less than half of what it had been during the first half of 2000. In the third quarter of 2001, only 540 companies had raised $6.7 billion in venture capital funds, compared to the 1,634 companies that raised $23.9 billion during the third period of 2000.

One group of e-commerce players who continued to secure funding after the dot.com meltdown were the online merchants peddling luxury items. According to a September 2001 article in E-Commerce Times, "venture capitalists are willing to bet that the upper class is still going to spend online for the things they want." For example, Blue Nile.com was able to secure a total of $7 million in funding from Bessemer Venture Partners, Kleiner Perkins Caulfield & Byers, and other venture capitalists in 2001. The jewelry etailer targeted professional men likely to purchase a diamond engagement ring or to make some other major jewelry purchase; working in the firm's favor was the low cost of shipping for objects as small as rings. Winetasting.com also secured financing in 2001, obtaining a $5 million round of funding from William Hambrecht in September. The site's narrow focus—specialty wines not easily found elsewhere—was credited for keeping the firm afloat while rivals like Wine.com went bankrupt.

Many analysts predict that even if the North American economy rebounds in the early and mid-2000s lenders will likely scrutinize the business plans of Internet-related ventures requesting financing far more closely than they did the dot.com business plans of the past. As stated in a November 2001 BusinessWeek Online article, "So here's how it works these days: The right company with the right technology and management in a potentially hot market is going to get a reasonable amount of money—but probably not much more than it needs to achieve lift-off. That's venture capital today—the way it was before the Internet bubble began to inflate."