TAKE DOWN-2 Thump! Hey Mr. Burns, you heard of these folks Loislaw.com, a Van Buren,Ark.-based company?: "If investors lose their appetite for Internet IPOs, some companies now
planning to go public may have to make quick decisions about alternative
sources of capital.
At least four Net companies nearing their IPOs have less than six
months' cash on hand to cover what they're spending on operations and
start-up costs, according to recent SEC filings examined by
TheStreet.com.
The trend is one more indication that some of the Internet companies
heading public now would still be seeking venture-stage investments if
times were different, according to some Wall Streeters. Going public
with a minimal cash cushion is bound to raise tough questions about why
companies haven't raised more money privately, says one venture
capitalist.
And a delayed IPO could be a real possibility for Internet stocks, given
the weak performance of recently public Net stocks. Last week, for
example, six companies, including high-speed-access company DSL.net and
software firm Braun Consulting, delayed their IPOs, though not all
blamed market conditions.
If these companies can't raise money through an IPO, they may have to
raise it elsewhere soon. For example, Loislaw.com, a Van Buren,
Ark.-based company that provides legal information to lawyers over the
Internet and on CD-ROMs, had $3.3 million on hand as of June 30. That
was equivalent to three months' worth of cash, based on what it used up
in operations in the first half of the year, according to its latest IPO
documents. That spending doesn't include the cash Loislaw.com invested
in its database, property and equipment, which it reported separately;
if Loislaw.com kept on spending at the same rate for the second half of
the year, the company then only had about 1 1/2 months' worth of cash on
hand.
Other firms going into their IPOs with less than six months of cash
include e-commerce software company InterWorld, business-to-business
e-commerce marketplace developer PurchasePro.com and email direct
marketer yesmail.com.
In comparison, other Net companies large and small have gone out with
greater cash cushions. Before Latin American portal StarMedia Network
(STRM
<http://quote.thestreet.com/cgi-bin/texis/tools?tkr=STRM&SearchBy=Ticker
&DataChoice=StockQuotes> :Nasdaq) went public recently, it had enough
cash to cover a year and a half of spending. On the eve of online video
retailer BigStar Entertainment's (BGST
<http://quote.thestreet.com/cgi-bin/texis/tools?tkr=BGST&SearchBy=Ticker
&DataChoice=StockQuotes> :Nasdaq) IPO, it had enough cash for a year.
And way back in May 1997, when Amazon.com (AMZN
<http://quote.thestreet.com/cgi-bin/texis/tools?tkr=AMZN&SearchBy=Ticker
&DataChoice=StockQuotes> :Nasdaq) went public, the bookseller wasn't
even losing cash, unlike all these other companies; its cash from
operations actually grew during the first quarter of that year.
Running on Empty
Company Cash
(in millions) Monthly burn rate Months to cover
InterWorld $7.1** $1.6 million 4.4
Loislaw.com 3.3* 1.1 million 3
PurchasePro.com 3* 716,666 4.2
yesmail.com 3.5* 733,333 4.8
*As of June 30. **As of March 31. Source: Company reports.
To go public without a comfortable cash position isn't necessarily bad
news, says Steve Brotman, managing partner of New York-based venture
capital firm Silicon Alley Venture Partners. Brotman says he pays more
attention to whether companies going public have been able to raise
successively larger rounds of capital from their private investors.
But having a small amount of cash is bound to raise difficult questions
among potential IPO investors, he says. They're likely to ask why a
company didn't raise another round of private money from its venture
capital investors. "Why wouldn't you want to cover your bases so people
won't ask that question?" says Brotman, who was formerly CEO of
privately held Internet classifieds company AdOne Classified Network.
Potential investors might ask, "Is this the last gasp for cash?" says
Brotman. "You want to squash that."
The public markets will likely not think well of a company if they
believe it is desperate for money, Brotman says. "Traditionally,
companies that have had to go public or they would go out of business
have been lousy investments," he says.
If companies are rushing public earlier and with less cash on hand, that
suggests that public-market investing is getting as risky as
private-market investments, says Steven Schuster, partner in hedge fund
Gemina Capital Management. "The public is taking on the role of venture
capitalists," he says.
"In generic terms, two quarters of cash on hand sucks," says Schuster,
though he adds that the pedigree of management and backers is more
important than cash on hand in pre-IPO investing. "The balance sheet
should give you some comfort that there's enough skin in the game --
that it's not only my money keeping this afloat. You'd like to see
there's plenty of cash in the coffers keeping this thing afloat," he
says.
Of course, once a company is able to go public as planned, the amount of
pre-IPO cash may be moot. If, for example, Loislaw.com raises the $75
million it hopes to raise from selling stock to the public, then it
would have more than five years of cash on hand to cover its current
negative operating cash flows.
And one former Wall Street analyst, now running an Internet start-up,
says one shouldn't conclude that these companies are in trouble, or
can't raise money elsewhere. "While the health of the IPO market may be
weakening ... there's still a significant amount of venture money out
there," says the former analyst. If companies have to wait six months to
go public, says the source, management will be able to raise more money
through an additional private financing: "It's not the end of the
company. It just means the founders will only have one jet instead of
two." |
