Intensive care for startups
August 26, 2001Intensive care for startups
Published: Monday, August 27, 2001
Not all struggling startups will succeed, but consulting firms can help determine final prognosis
By STEVE TANNER
These days, the chance to rethink a business plan or even leverage a promising, but orphaned, technology is a golden opportunity for investors when compared with the heartbreaking, and increasingly familiar, task of selling a company for parts.
Sometimes a closer look reveals a second shot at a potential upside, as was the case with Palo Alto-based VocaLoca Inc., a 2-year-old Internet startup that trimmed back to a skeleton crew, relocated its facilities to a Palo Alto accelerator and hit the ground running with a new business model.
CEO Jaggi Ayyangar, who admits that he often feared the company would go belly-up, now expects VocaLoca to break even in a few months.
But turnarounds like VocaLoca are rare. Often scrutiny and analysis of what a faltering company is worth will turn up a variety of previously unforeseen assets.
"I think one of the fallacies of this boom-bust cycle is that these companies were no good," says Jon Fisher, San Francisco-based partner with The Recognition Group. The firm, with headquarters in New York and an office in San Francisco, helps and invests in distressed startups.
One client, which Fisher describes only as "a leading e-music company," had a strong technology and business model, but the regulatory limbo with the major record labels hampered its success. Eventually it had to be shut down.
Recognition Group [now known as Recognition Group] partner Kaleil Isaza Tuzman, who was the starring entrepreneur in the 2001 documentary "Startup.com," says New York-based CyberSites was a popular consumer site that hosted self-published Web sites for a variety of niche interests.
The site generated hits, but little revenue. With a high burn rate, CyberSites was held together with several bridge loans; this made the liquidation process potentially sticky, since so many investors and lenders were involved.
"It was something we see all the time; but for the people involved, it was quite scary," Tuzman says.
After sorting out who owned what and who was owed how much, CyberSites was taken off the original server and posted on a password-protected Web service called Web Re Co (Web Recycling Company), owned by the liquidation consultancy Gordon Brothers Group (through this, prospective buyers are able to review CyberSites and other liquidated Web properties for consideration).
"The key to these transactions is to avoid Chapter 7 [bankruptcy protection]," Tuzman says, which usually involves more lawsuits.
Pacific Technology Partners, based in San Rafael, takes a similar approach. While the focus is on liquidation, managing partner and CEO Dean Scott explains that not all of the companies his firm helps out are destined for the dust bin.
"Typically, we get hired by VC firms to go into their portfolio companies and see where the value is," Scott explains. "But it doesn't necessarily mean that we have to go in and shut them down."
Sometimes, he says, intellectual property, technologies and even key personnel will fit neatly within another company. Unfortunately, though, Scott was unable to comment about specific clients of Pacific Technology Partners.
"The VCs and clients aren't necessarily proud of the position they're in," he says.
Scott claims that the firm is completely swamped with business, with 70 percent of its clients located in Silicon Valley.
For startups that have made that crucial decision not to continue charging ahead toward a diminished goal, these firms are available to help determine a company's liquid value and the course of a company's endgame. In short, to provide a soft landing.
"Sometimes it takes an outside eye to realize why it didn't work," Scott says.
And sometimes a startup will reinvent itself with its existing assets, a trimmed-down staff and a new focus.
With a little help from Palo Alto-based accelerator Launch Power, VocaLoca, a startup that used to give services away for free to consumers, now delivers revenue-generating goods for the corporate market.
"We were in the wrong space, in that we expected dot-com advertising would support us," admits CEO Ayyangar, citing an infamous lesson. "The positioning was all wrong, but the technology was strong."
The company, founded in 1999, provided streaming media services to consumers. The idea was to facilitate peer-to-peer, audio communication over the Internet, but revenue was solely banner ad-based. Last fall, VocaLoca was nearly out of cash and owed its creditors a lot of money.
"We realized that we needed to scale down to avert the impending demise of the company," says Ayyangar, who trimmed his staff of 35 down to 20 in October of last year, then down to just five in January.
With only a couple of executives and core engineers left, VocaLoca liquidated its excess equipment, shuttered its own offices and entered the "intensive care ward" of Launch Power. Launch Power provided ready-made digs, accounting services and key contacts to help the company recover and refocus.
Given a second chance as a born-again startup, VocaLoca now counts Cisco Systems Inc. and Oracle Corp. among its corporate customers. The new service is an interactive streaming presentation platform which allows a CEO, for example, to broadcast an audio clip to any number of receivers.
"We're not out of the woods yet, but this is a good position to be in," says Ayyangar.
Few distressed Internet-based startups can claim such a turnaround, but all can benefit from a little guidance when the day of reckoning comes.
"Probably the best we can say is that there's nothing to be ashamed of, and there's nothing wrong with getting some return on your sweat equity," Pacific Technology Partners' Scott says.
Steve Tanner is a Biz Ink reporter.
You can reach him at stanner@svbizink.com.