NEW ECONOMY - Salvaging the Tech Wreck
There's no market downturn that someone can't make money from. Savvy tech firms, lawyers and entrepreneurs are cashing in on dotbombs
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By Kathy Wilhelm/HONG KONG
Issue cover-dated December 7, 2000
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WHILE MANY INTERNET start-ups count the weeks their dwindling cash hoards will carry them, one-year-old Decide Interactive, an Internet consultancy in Sydney, is ringing up profits. "It's fantastic for our business," co-founder and strategic director Paul McCarney says of the harsh new market mood toward the Internet. "It's really brought the dotcoms to focus on returns." With expensive advertising now out of the question, Web sites are looking for other ways to attract visitors. Decide Interactive offers practical measures, like making sure that a site can be found by popular search engines. "We've doubled some people's traffic," says McCarney. Meanwhile, his own staff has doubled, to 14, over the past six months.
Not every business that relies on the Internet is feeling the sting of the global backlash against dotcoms, the label given to Internet retailers and portals. Some, like Decide Interactive, find their skills are just what the market wants, while lawyers and insolvency experts anticipate a field day.
Other e-businesses, including many dotcoms, are nimbly changing direction to go after customers who still have funds--chiefly bricks-and-mortar companies that are cranking up on-line operations. One way or another, the most agile players are finding a way to mine silver from the storm clouds.
Take techpacific.com. When it listed on Hong Kong's Growth Enterprise Market in April, it described itself mainly as a hi-tech incubator and manager of venture capital. Although it offered a wide range of services, from financial and management advice to Web design, these were pitched mainly to start-ups in which techpacific.com took stakes. Profits were to come from cashing out those stakes when the start-ups went public. As techpacific.com warned in its prospectus: "There can be no assurance that any of them will be successfully listed."
Indeed, there's now almost no prospect of any of techpacific's 35 invested companies listing in the near term. Moreover, Chief Executive Officer Johnny Chan says one or two look shaky, and attracting additional financing so the others can keep growing is much harder than before. So techpacific is marketing its services to a new set of paying clients--traditional companies that are building Internet operations. Chan says he's turned the in-house tech-support team into a 10-member e-services arm called tp Factory. And he's helping outside companies with mergers and acquisitions.
"Fund-raising has slowed down, and M&A has picked up. We reflect what the market is doing," says Chan. "We are still very focused on managing our portfolio," he adds. "But obviously this is a great cash revenue source for us."
Unlike in the United States, where enterprising Internet sites like f**kedcompany.com have sprung up to track dotcom failures, no one is keeping a tally of Asia's dotbombs. For one thing, most of the prominent sites have managed to stay alive by merging or cutting expenses. Joe Sweeney, a Hong Kong-based Internet analyst for the Gartner Group, says most outright closures have been of "companies you never heard of"--which is one reason they failed. Gartner predicted months ago that 85% of dotcoms without off-line revenues would merge or go bankrupt by 2002, and Sweeney says: "So far it's looking pretty much on track."
He and other industry watchers believe more spectacular failures lie ahead--spelling opportunity to come for undertakers. "The Hong Kong market is probably in more trouble than is apparent to the naked eye," says Joanne Oswin, a liquidation expert at PricewaterhouseCoopers in Hong Kong. "Advertising revenues aren't as high as projected; people haven't been able to go ahead with IPOs. There have to be a lot of people stretched for cash."
That's why PricewaterhouseCoopers devoted the last two issues of its Industry Watch newsletter to dotcom problems. "It's an area we're all watching closely should someone need our assistance," says Oswin. She says the newsletters triggered "a lot of follow-up calls, a lot of requests to speak to groups."
U.S.-based Baker & McKenzie, Asia's largest law firm, already is seeing a new wave of business advising dotcoms about lay-off procedures and performing due diligence for mergers and acquisitions, says Poh Lee Tan, a solicitor in the firm's Hong Kong office. Dotcoms' best assets are often intangibles like special on-line selling methods or software, but not everyone bothered to take out patents. Some didn't keep equipment inventories.
The more corners they cut at the beginning, the more work for lawyers now. "I had an example where we discovered the whole client database had not been behind a firewall," says Patrick Fair, of Baker & McKenzie's Sydney office. "There was no way of knowing whether that database had been copied by users. The purchaser immediately went back to talk about price."
A tidal wave of advice is being proffered to dotcoms: Establish cost controls, figure out what you have to offer that someone will pay for, and recognize that investors won't fund endless expansion without profits. Determined Internet players are taking the advice, and switching gears to find new ways of making money.
Hong Kong's AsiaMix.com is one such company. James Fong, a former investment banker, founded the site in April 1999 to sell digital downloads of Asian music at $1 or $1.50 per track. Although he reached agreement with artists and recording companies to distribute 6,000 tracks, sales never met expectations. Crunched for cash, he laid off 20 out of 25 employees, outsourced his tech support and diversified into a new, paying business--as a talent agency.
"It plays to our strengths," Fong says. "We're doing extremely well in attracting artists to our Web site. They can drop off their demos and we can assess them and forward them to the appropriate parties." How much of a deviation is that from his dream? "I think the dream was always to have a sustainable business and a steady cash flow," he says wryly. AsiaMix isn't out of the woods yet but it has a new lease on life.
Singapore's BIGontheNet isn't a dotcom but it almost made a common dotcom mistake--putting branding ahead of profits. When Viktor Cheng founded the software company in April, he planned to let some Web sites use his main product, a special search tool, for free in return for the publicity. The new market mood convinced him to go straight for the money. BIGontheNet snagged its first major customer, the Singapore Patent Office, in September and is working with half a dozen more. "We are cash-flow positive," Cheng says proudly.
BIGontheNet may benefit from the antidotcom backlash in another way, too: It may get venture-capital funds more easily, says Tang Juel Hoi, who manages the hi-tech incubator that is nurturing BIGontheNet at Singapore's government-funded Kent Ridge Digital Labs. Venture capitalists who were seduced by glamourous business-to-consumer sites a year ago now want companies with sellable technology. "They are running a fund, they need somewhere to put their money," Tang says.
Indeed, techpacific, which had $84 million in uninvested venture-capital funds at the end of the third quarter, recently invited Cheng and two of Tang's other start-ups to come and show their wares. Techpacific could invest in the companies, or its tp Factory e-services arm could buy rights to sell their software to its new bricks-and-mortar clients.
"There are a lot of dotcoms dying, but the tech sector is definitely not shrinking," Chan says. When one route to riches dries up, smart players find another.
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