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Tuesday, 1 August, 2000, 15:27 GMT 16:27 UK
Dot.com money too tight to mention

by BBC News Online's Orla Ryan

Three days before payday, up to your overdraft limit and not even your mother will lend you a fiver.

Many people experience regular brief credit crunches but somehow manage to muddle through to their next pay cheque.

But stomachs must be sinking fast in dot.com companies' throughout the UK, as the realisation dawns that they have been living beyond their means and that lenders are shutting their doors to them.

Online health and beauty company Clickmango has decided to fold as it has run out of cash and no one is prepared to supply fresh funding.

Joanna Lumley, a Clickmango investor
Joanna Lumley was one of the original investors in Clickmango
The only surprise expressed by analysts is that this hasn't happened to more companies.

Money to burn

The first warning of cash burn-out of UK dot.coms was served in May.

One in four UK internet companies would burn through - use up - their cash reserves in the next six months, said a gloomy report by consultancy PricewaterhouseCoopers.

It surveyed 28 listed UK internet companies. The majority of them would run out of money within 15 months, it said.

Internet companies have especially high cash burn rates, where cash operating expenses exceed gross profits.

There are two reasons why their burn rate is so high.

The first is the need to spend a lot of money quickly to get in there first and gain the 'first mover' advantage. A large amount of money can be spent in a short space of time on building the technology platform.

Yet more money must be spent on marketing.

Some argue that dot.coms with a high marketing budget could always cut their marketing spend, which is not a fixed cost.

But as PriceWaterhouseCooper's John Soden points out, this could be a dangerous gamble.

"It is a fine balance. If they don't [spend on advertising] they may not establish themselves," he said.

The need for e-tailers to gain public trust is crucial.

"People will not trust companies where they might lose their money," he added.

Closing doors

In a sense the problem is not so much that they will run out of cash but that no one will lend them any more.

"As positive as the mood was a year ago, it is negative now," Robert Zegelaar of Atlas Ventures, Clickmango's chief investor said.

"I have never seen such negative financing climate in internet retailing. There will be many more failures to come," he said.

Companies that thought they had their second-round funding in the bag now find that it is disappearing.

One analyst likens the dot.com sector to the biotechnology sector a year ago, where initial strong enthusiasm for the industry quickly faded.

Like biotechnology projects, internet firms rarely generate substantial income before the second or third round of funding is in the bag.

Red flag

Some potential business failures could be avoided, if companies raised the red flag earlier and found a company working in a similar field to merge with.

"This does reflect real market nervousness about dot.com companies. It is probably unfair in the same way that they were overhyped three months ago, the balance has now swung the other way," PriceWaterhouseCooper's John Soden said.

"If something is a good business proposition, it should be able to raise funding," he added.

One option for such companies is to link up with established retailers that do not have an online presence.

"We'll see more 'clicks and mortar' companies in the market," Sarah Skinner, internet analyst at Durlacher brokers, said.

PriceWaterhouse Cooper's John Soden added:"It would be very logical (to see more mergers). What is surprising is that it hasn't happened so far....They have good traditional management but may want dot.com help."

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See also:

30 May 00 | Business
Dot.com gold rush ends
31 Jul 00 | Business
Clickmango folds
18 May 00 | Business
Top web retailer collapses
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