From CnetNews.com:
news.cnet.com
Andreessen's Loudcloud in IPO high-wire act
By John Borland
Staff Writer, CNET News.com
January 31, 2001, 3:30 a.m. PT
Heralded as the brainchild of celebrated chairman Marc Andreessen, Loudcloud was
thought to mark a coming of age for the 29-year-old wunderkind as his first venture
beyond the shadow of Netscape Communications.
Started with fellow Netscape alumnus Ben Horowitz, the company boasted a grand vision of
running the infrastructure behind much of the dot-com world. The company received instant
recognition and credibility with the mere presence of Andreessen, who gained fame as
Netscape's co-founder shortly after inventing the first graphical Web browser as a student in
Illinois.
But a little more than a year since its launch, Loudcloud has been forced from its lofty perch by
the sobering realities of today's high-tech slowdown. Like so many other Web service
companies, it has been torn by a decaying market, a quick cash burn and skittish partners
leery of the service company's ambitions.
"There's no way they can be
avoiding the problems other
service providers are in,"
said Carrie Lewis, an
analyst with The Yankee
Group. "All are struggling
with funding and revenue
models."
To the surprise of many, the
company launched in late
1999 with a far-reaching
plan about as far removed
from Netscape's consumer
brand as possible: It would
offer a new category of Net
infrastructure management,
a kind of around-the-clock
guaranteed protection for
companies that didn't want
the headache of managing their own sites.
However, that same ambitious scale has carried a high price--putting Loudcloud in the
unenviable position of requiring large sums of cash at a time when investors and financiers are
feeling anything but charitable. Already, proceeds from funding rounds totaling close to $200
million are disappearing quickly, being spent on network operating centers, engineering testing
facilities and other costs.
At many turns, Loudcloud has been forced to change its focus on the fly to protect its coffers
and satisfy financial backers. That has increased confusion on the part of many customers and
analysts who are unclear on exactly where the company fits into the industry's smorgasbord of
service providers.
The company filed to go public in September to raise another $100 million needed to support
its expansion. Because market uncertainty has kept the IPO on hold, however, Loudcloud is
scrambling to sign up non-dot-com clients to prove it has a stable long-term business, hoping
to rekindle skeptical investors' faith.
In the process, it has bumped against the interests of powerful hosting companies such as
Exodus Communications, which Loudcloud needs as partners for its service. Wary of
Loudcloud encroaching on their territory, these hosting companies have made clear that any
move by Loudcloud too far away from its original, high-end, niche market model won't be
appreciated.
"Nobody should be surprised if an expansive agenda by (Loudcloud) is reacted to
competitively," said one source close to a major hosting company.
Still, Loudcloud may have little choice but to seek revenue anywhere it can. In documents filed
with the Securities and Exchange Commission, the company outlined high and growing levels
of expenditures.
By the end of July, it had an accumulated deficit of $122 million, much of that from stock
liabilities. For the quarter ended July 31, it reported revenue of about $1.9 million, with total
costs close to $50 million. These costs would grow as it expanded its business, the company
warned in its financial statements.
A December amendment to that filing said that by October, Loudcloud had won contracts
worth $76 million, with an average contract lifetime of one and a half years. The company is
barred by federal regulations from commenting further on financial matters while it waits for the
IPO.
The need to support those daunting numbers, in combination with the disintegrating Net
business, has prompted the company to move away from its initial start-up customer base.
Adding even more urgency to this push has been the specter of Wall Street scrutinizing every
prospective IPO for solid proof of long-term revenue.
"It's a big concern with any Internet company what the viability of its client base is," said David
Menlow, president of IPO Financial Network. "This is a tenuous point for the marketplace. And
financially, this company doesn't meet the profile of the stronger companies."
All of these factors will play into investor assessment of the delayed IPO. Analysts say the
company is still a potentially attractive offering, with support from two of the most respected
underwriting firms in the business. But investor interest has been called into question as
companies in related areas, such as hosting firm Exodus and data center Equinix, have
suffered in recent months.
From start-up to pay up
For Andreessen, today's unforgiving business climate has been a rude awakening. Only a few
years ago he was hailed as the golden boy of technology after developing the seminal browser
technology known as Mosaic at the University of Illinois, a breakthrough that led to his
co-founding of Netscape at the tender age of 24 with Silicon Graphics veteran Jim Clark.
Based at the heart of Silicon Valley in Sunnyvale, Calif., Loudcloud tapped into an industry
when it launched that was hot at the time and is still believed to carry enormous potential.
Forrester Research predicts that this "managed hosting" business will reach $11 billion in
revenue by 2004. Even if smaller Web companies are going out of business, large old-world
companies are increasingly looking for reliable outsourced Web service, Forrester analyst
Jeanne Schaaf says.
Loudcloud gathered its first clients and publicity quickly, aided by the founders' well-known
history. That soon changed.
"When we started way back we had mostly start-up customers," Horowitz said. "But due to
the radical change in the financial climate, we've gone to the (large) enterprise market faster
than originally planned."
The number of recognizable corporate names on the client list is still small: Nike, Britannica,
Fannie Mae. The company is still touting new medium-sized businesses as clients, such as
storage networking company Brocade Communications Systems. But Horowitz said that
Loudcloud's revenue, about 30 percent of which came from large companies last September, is
on track to stem 50 percent to 70 from percent large customers in upcoming quarters.
Fallout from the bottom line
Loudcloud's moves have underscored a sense of desperation that has pervaded Silicon Valley
as companies fight to avoid becoming--or even being too closely associated with--the next
dot-com casualty.
Last summer, several of the large hosting companies that Loudcloud worked with to store
customers' data revolted, saying that Loudcloud was stepping too far into the
managed-services business that they wanted to be in themselves. Sources say those
companies are still keeping a close watch on Loudcloud, with a relationship that remains
tense.
On the other side, reports began coming in from smaller Net and technology companies that
Loudcloud wouldn't take their business. That has won Andreessen and Horowitz some vocal
enemies.
John Kaufman's Scopeland Software is one of those. Kaufman said his San Francisco
company tried to hire Loudcloud last year, after reading glowing press reports. What they got
was a meeting with a "condescending" sales team that indicated Scopeland had to measure
up to Loudcloud's high standards, not the other way around, Kaufman said.
"These were some of the most spoiled brats I'd ever come across in this business," Kaufman
said. After another inconclusive meeting with engineers weeks later, the company was told that
Loudcloud could not take it as a customer. "If you're not funded with $100 million and backed
by one of these top venture capital companies, then we're not interested," he said he was told
by Horowitz after calling to complain.
Horowitz doesn't deny that the company has turned potential clients away, saying it has done
so to keep Loudcloud's own bottom line in order.
"We've have always said (there is a minimum standard), although we might have strengthened
it a little," he said. "We have a credit analysis policy that prevents us from taking on
companies that we're worried might not have an ability to pay. It sometimes does make people
upset, but it's the right business decision."
The course has met approval from some Wall Street analysts, who say the delayed IPO might
even be a good thing for Loudcloud. The extra time may be just what the company needs to
strengthen its customer list and make sure it has its capital expenditures in line with current
market realities, said IPO Financial's Menlow.
Others would just as soon steer clear of companies like Loudcloud, wary of the hype that
preceded the industry's precipitous fall last year.
"We have always been skeptical of development-stage companies looking to tap the market,"
said Steven Tuen, a portfolio manager with the Kinetics Internet Fund. "It is probably something
that, if it does come to market, we would pass on." |
