- The Washington Times - Thursday, June 29, 2000

The glory days of dot-com companies are gone.

Investors ended their love affair with Internet stocks two months ago, slashing them by as much as 50 percent, and now they are expelling their wrath in full force, pulling the plug on investments worth millions of dollars and forcing dot-coms to go belly up.

At least 18 companies have shut down and nearly 5,400 jobs have been slashed at dot-coms since December mostly over the past month according to a survey by the Chicago-based employment company Challenger, Gray & Christmas Inc.

The trend indicates a new stage in the short history of dot-coms, as Internet and technology companies are being forced to consolidate to survive.

"Dot-com companies are running out of money," said John Challenger, the company's chief executive officer. "The ones that have come up with viable products, but come in too late or such, often see cuts. Others may be created products or services, but were unable to generate revenue."

Major cuts in the dot-com industry began in December, with Charlottesville, Va.-based electronics retailer ValueAmerica slashing its staff in half. January saw small cuts, and February and March none. Then in April, three dot-coms closed and one laid off 10 percent of its staff.

Massive cuts surprised the industry in May, as six more dot-coms shut down and another 557 jobs disappeared. By yesterday, another six companies failed, and the cuts jumped to 3,189.

But Mr. Challenger said the cuts don't mean the fledgling industry won't survive. Instead, he referred to the cuts as "an inevitable step" and the result of the dichotomy created between the old economy traditional businesses and the new, technology-driven economy.

America Online's planned purchase of Time Warner is a perfect example of how the new companies ultimately cannot survive without the backbone of the old economy, Mr. Challenger said. AOL, the world's largest Internet service provider, had distribution outlets, but no content. So it bought Time Warner to fill that void.

"This next step is into the convergence of the two kinds of economies," Mr. Challenger said. "The old-economy companies are obviously very interested in building e-commerce strategies. One way to do that is to buy other companies and integrate them.

"AOL epitomizes the next wave. But there is all kinds of stock-swap deals going on among the dot-coms as well. And there is going to be much more of that."

Although jobs are being lost, workers are snapping up new positions. In fact, most employees never even have to look for work, since recruiters from old-economy companies contact them even before their current employers close.

"Five years ago, if you joined a start-up and it failed, it might be six months or so before you found a job," said Dee DiPietro, chief executive officer at Advanced-HR Inc., a Saratoga, Calif.-based company that tracks employment at Internet and technology companies. "But now, they have contacted and recruited them before the company is even finished, so the risk is minimized by the labor market."

For the past four years, the perception has been that any idea for a dot-com for the most part is successful. But the truth is, millions of business plans land on venture capitalists' desks and make it no further than the trash can.

"The rule of thumb is that for every 100 companies that submitted business plans, maybe 10 will get a serious look, and only one will get funded," said John Taylor, director of research at the Arlington, Va.-based National Venture Capital Association. "Once venture capitalists have selected a company and invested in it, they are very active with the company, and help take good ideas and turn them into good companies."

Venture-capitalist funds invest in start-up companies and make money through the companies' success. They act as advisers to start-ups, helping them with hiring, management and other new-business needs.

Although a company backed with venture capital has a better chance of surviving than one without such funding, that company won't necessarily prosper.

At Grotech Capital Group of Timonium, Md., for example, 80 percent of investments are successful. About 10 percent result in failure. Nearly 25 percent are in the "living dead" category, companies that could go either way, according to Frank Adams, founder and chief executive officer of Grotech. Ultimately, he added, half of these fail and the other half get bought by a bigger company, which brings value to the investment.

Investments by Grotech over the past three years illustrate the technology industry's changes. Today the fund is focused primarily on business-to-business dot-coms, whereas three years ago it favored business-to-consumer companies.

But money in the consumer-oriented field ran out fast, because those companies needed huge sums of money for advertising and supplies. Business-oriented dot-coms, on the other hand, were mainly introducing innovative services for business and could rely more on word-of-mouth publicity.

"Business-to-business working on the Internet [companies] tend to make business much more efficient, and therefore, they are welcomed by the business community and quickly adapted," said Stewart Frankel, partner and managing director at Grotech. "Now our screens are tighter than ever."

Grotech like most venture-capital firms is starting to frown upon dot-coms and beginning to invest more heavily in software and technology companies.

Among the industry's layoffs are 200 from entertainment site Reel.com and 170 from Toysmart. Included are also Amazon.com, which laid off 150 employees in January, and other companies such as KBKids.com, KB Toys' on-line toy store; Alta Vista, an Internet search engine; and DrKoop.com, a health-care Web site co-founded by former U.S. Surgeon General C. Everett Koop.

There are also the 400 jobs cuts created by the failure of high-profile Internet retailer Boo.com. The dot-com, founded by a Swedish couple, was the first start-up investment that J.P. Morgan & Co., a high-profile New York investment bank made since it backed General Electric more than a century ago. Other investors backed the site as well. A little more than a year later, Boo went out of business, having spent $70 million.

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