May 29, 2009, 12:00 AM

Cold Cash

(Page 2 of 3)

Online retailers face another hurdle, Antisdel says, because much of what they’ve invested in-libraries of product descriptions, images of products taken from several angles, acquiring and editing customer reviews-are hard to put a value on. “These are valuable assets in the world of e-commerce, they’re mission-critical, but they’re not on the balance sheet,” he says. That means banks won’t lend against those assets, and only Internet-savvy venture capitalists will put much value on them when considering investments.

With private capital hard to come by, and the idea of going public largely foreclosed by the depressed stock market, Working Person has laid off some personnel and scaled back inventory expansion. It’s also put on hold a plan to complement its web site with a print catalog that construction managers could pass around to workers so they could select the boots and apparel they want.

Working Person is also considering other options, including the possibility of merging with another company. “The company has had merger discussions to see if that’s a path that makes sense, to align what Working Person is really good at, e-commerce, with someone with a complementary business model,” says Antisdel, who did not elaborate on who the potential merger partners might be.

Safety first

For, the aim has been to raise capital to grow, primarily by acquisition, says Michael J. Fox, chief operating officer. But he’s finding investors are risk-averse and taking a hard look at the company’s performance.

“There’s a stronger focus on your financials,” Fox says. “It’s not just do you dominate your space, but prove to us how you’re going to be able to grow substantially. It’s got to be not just believable but achievable-we’re hearing that same comment from everyone we’ve sat down with.”

Many investors also tell him they don’t want to take on the risk of investing cash in inventory that may not sell. That, he says, is an advantage for eImprovement, which primarily takes orders via the web and has suppliers drop ship the items.

At the same time, however, investors increasingly are trying to reduce risk by proposing to invest in stages, requiring the retailer to hit goals to get the full funding. “They say, ‘We’ll give you X today, and if you get to this point in six months, we’ll give you this,’” Fox says.

At, the difficulty in raising money has P. Scott Vallely, managing director, considering for the first time selling all or a majority share of the company to bring in fresh capital. The company, which sells stationery and other supplies largely to offices of doctors, lawyers and accountants, has been hit hard by the recession, and sales are down, though Vallely won’t say by how much.

All the traditional sources of funds, not just venture capital, are drying up, he says. The friends and family who often invest in start-up firms have lost heavily in the stock market and have less to contribute, he says. Banks have raised their rates and are demanding collateral equal to 125% or 150% of the loan amount. What’s more, some banks seek personal guarantees that would put a borrower’s own wealth and even his home at risk, Vallely says.

Unable to raise capital at acceptable terms, Vallely in the past year has reduced his staff from 25 to nine, reviewed every vendor agreement seeking cost savings and cut his marketing budget. “We’re doing okay, but it’s not sustainable three or four years out, and it’s not fun if you’re not growing,” he says. “That’s why I’m willing to look at a partner who can infuse a bunch of capital and grow the business.”


Even retailers not dependent on investor capital will find the cash crunch prompting changes in e-commerce technology vendors, especially relatively young companies that have relied on steady infusions of outside investment to cover their losses as they ramp up.

Many of these tech vendors found, as Working Person did, that their marching orders from investors changed dramatically when the stock market plummeted last fall, says Peter Horan, CEO of e-mail security technology vendor Goodmail Systems.

“Without warning it was a quick shift from spend, spend, spend, show momentum, hire-then, bang! baseball bat across the forehead-cut your burn, show me how you’re going to raise revenue, how fast can you get to cash flow-positive, demonstrate that your business model holds even in a bad economy,” Horan says.

Horan compares raising money late last year to “trying to pass a kidney stone the size of a bowling ball.” But Goodmail Systems, which could point to a 30-fold year-over-year increase in volume for its CertifiedEmail service, was able to make its case, and raised a total of $25 million from venture capitalists, including Bessemer Venture Partners.

David Cowan, a partner at Bessemer, says Goodmail was attractive because its service improves the effectiveness of e-mail, a low-cost communication vehicle that is especially appealing to marketers in a recession. And he says Bessemer seeks out companies, like Goodmail, that use capital efficiently. “We’re looking for Hondas, not BMWs,” Cowan says.

To prove it’s an economical little Honda, Goodmail cut its staff by 25% in November, renegotiated its rent and pushed back the development schedules for some new products, Horan says. “There will be a point when we have to catch up,” Horan says. “But the priority is to get to cash flow breakeven and profitability this year, and we’ll have to do that with the products we have.”

By the numbers

If the pressure is great on a company like Goodmail, which could demonstrate enough growth to raise $25 million in the middle of a deep recession, it’s even greater on many companies struggling to hit the milestones they’ve promised venture capitalist investors, says Miller of FitForCommerce. He says a vendor may be required to reach a goal, such as 20 deals in a year, in order to get more funding. That can lead them to make deals that are barely profitable.

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