Dot-com Era Start-Ups Still Feeling Woes

New data shows accelerated rate of closure for the venture-backed companies of the late '90s.
Posted September 20, 2002
By

Michael Chait


According to new research released Friday morning, companies that rode in on the "dot-com boom" of the late '90s are still feeling the woes of the "dot-com bust" harder than their associates at more established companies.

The new report, issued by VentureOne, showed that venture-backed companies that received initial financing in 1999 and 2000 are going out of business at an accelerated rate, compared to startups initially funded from 1992 to 1998.

Twenty-two percent of the 1,842 companies first financed in 1999 have already gone out of business, compared with an average of 15 percent for companies started over the previous seven years. Of the companies initially financed in 2000, 18 percent are already defunct. In all, the amount invested in startups founded since 1999 that are no longer operational totals $15.3 billion.

"During the 1992 to 1998 time period it was a much more rational approach to evaluating companies and what was expected in terms of returns and timing of returns," said Paul Ritter, an analyst at the Yankee Group. "By 1999 it was a frenzy of funding activities, with many companies getting funded without much scrutiny and without much expectation for when payback periods would arrive."

According to the report, the sheer volume of funding during the so-called "dot-com boom" could be the major factor in the failure rate. The number of initial financing rounds grew steadily throughout the early '90s, but between 1998 and 1999 it almost doubled, and then grew by an additional 44 percent in 2000. Analysts agree that the market simply couldn't support this overabundance of companies.

"How many pet food companies can be sustained in an online market?" joked Ritter. "Very few companies have the potential to grow in size to be Amazon-like in revenue, but many companies had business models predicated on achieving that type of revenue and new customers. You have so many companies that need so many customers, but there's a limit to who is on the Web."

Products and services ventures, as one may have expected, fared the worst, with over 27 percent of companies receiving funding in 1999 and 2000 failing. Healthcare startups, though comparatively unpopular at the time, have fared better with only 9 percent now out of business, while 20 percent of Information Technology ventures from the period have shut their doors.

As one might expect, the earlier the vintage year, the higher the ratio of companies that have achieved liquidity to those still private. And between 1992 and 1998, this ratio changes at a relatively steady pace. But for vintage 1999 companies, the proportion alters drastically: only 18 percent have had a liquidity event, compared to nearly one-third of the vintage 1998 startups.

The good news isn't over yet, as the report notes that it is likely that the failure rate we've seen to date is probably modest compared to what's in store for the 1999-2000 crop of companies.

Ritter agrees with the studies prediction, noting that many of those companies have a tough road ahead, especially when factoring in current economic conditions.

"Those companies on the edge should look to improving their bottom line, but also look for strategic partners and buyout opportunities," said Ritter.

The VentureOne study, which takes inventory of all companies receiving initial venture financing during the past ten years, shows that $26.1 billion were invested in companies that subsequently went public, versus $26.7 billion in those that were acquired or merged. Venture-backed companies that are still private have raised $124 billion to date.






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