hen the planned initial public offering of Wired Ventures stock crashed and burned late last month, the company put the blame on unfavorable "market conditions, particularly as they pertain to Internet-related companies."
This is complete nonsense. Wired's IPO died for one reason and one reason only: it was a mangy dog of a stock offering that deserved, if only for mercy's sake, to be taken out and shot.
To be sure, market conditions clearly have changed since last spring, when a number of "me-too" search engine ventures such as Excite and Yahoo went public with what can only be described as wildly-hallucinatory market caps. Since then, investors have sobered up enough to realize that, gee, even in cyberspace a business still needs a solid market opportunity, a sound business plan, a decent shot at someday turning a profit, and strong management.
But while perhaps less credulous than before, today's investors are nonetheless still willing to buy into Internet-related IPOs if these come from genuinely promising businesses. This was demonstrated--ironically, on the same day that Wired was cutting its offering price by 30 percent in a desperate last-ditch effort to save its IPO--when CyberMedia offered its shares to the public, and these were immediately bid up more than 40 percent on the first day of trading.
So why did CyberMedia succeed with its IPO, when Wired's crashed and burned? Here are three reasons:
Market opportunity
CyberMedia: The market for this company's technology is big, and if anything, getting bigger. It's a leader in the fast-growing market for software that fixes PC breakdowns and configuration problems.
Owing to the increasing complexity of PC hardware and software, and the fact that some 40 percent of PC sales are now going to novice users, approximately one-third of all computer buyers today cannot use their new PCs without extensive and costly help. Answering the estimated 200 million calls to technical support each year, however, is costing PC vendors about $4 billion annually. As Dataquest analyst Steven Clancy put it, "The PC industry can't keep putting head count on the phone. It's just sucking the life out of the industry's profitability."
Enter CyberMedia with a software program called First Aid. The first truly-automated PC self-help product--unlike old-style utility programs, CyberMedia's software requires no technical expertise to use--First Aid fixes thousands of PC hardware and software conflicts. Over 1.5 million copies of First Aid have been sold, and it consistently ranked among the top 10 business software sellers of 1996. A new Cybermedia product, Oil Change, uses the Internet to search out and automatically install on a user's PC the latest software upgrades and bug fixes.
Finally, the company has just signed a deal with Phoenix Technologies to incorporate Cybermedia software in Phoenix's next-generation system (or BIOS) software that could end up in as many as 17 million new PCs, and it has as a similar deal with Fujitsu for notebook PCs.
Other players in the PC service and support field, such as competitor SystemSoft, are also experiencing dramatic growth, as are companies in related fields such as help desk software, such as Scopus, Vantive, Clarify and Remedy.
In short, selling products and services that ease the PC support crisis, especially on the Internet, is a helluva business. To quote Sun's Chief Technology Officer, Eric Schmidt, "Customer support is the killer app of the Internet."
Wired: While the flagship operation of Wired Ventures, the print magazine Wired, has enjoyed phenomenal growth in circulation and ad revenue since its launch four years ago, it remains a gigantic money loser, swallowing cash at the rate of $11 million a year. Perhaps that's why the Wired Ventures' prospectus said the company's real future lies on the Internet, especially on its HotWired Web site.
Only problem is, HotWired is also an enormous revenue black hole. And with online ad revenues offering no realistic promise of putting HotWired in the black, the only hope is subscription revenues. Unfortunately, there are not likely to be any because, unlike the Wall Street Journal's web site, HotWired offers nothing that Net users would consider valuable or necessary enough to be willing to pay for.
The bottom line: Wired may be a terrific brand name, but apart from its traditional print magazine, where's its sustainable market opportunity?
Business Model
CyberMedia: As the market leader in consumer self-help software for PCs, the company already has a strong revenue stream built around well established retail channels. In addition, Net users have shown they are willing to pay subscription fees for value-added services like Cybermedia's Oil Change.
CyberMedia is thus built around a viable, well-understood business model. Revenues for the first nine months of this year were over $22 million, a 719 percent increase over the same period last year. And while the company is not yet profitable--few Internet-related startups are--analysts expect the company to achieve positive net income sometime in the next quarter or two.
Wired:Early hopes that a wholly advertising-supported business model could sustain the vast majority of Web ventures were wrong. There are simply not enough ad dollars on line.
The prospectus itself concedes that Wired Ventures has no idea if, when or how the company might ever achieve profitability--let alone support the nearly $300 million market capitalization it proposed.
Wired's revenues were $25 million for the first nine months of the year, a 50 percent increase over the same period last year. But the extent of its losses and debt is far more serious than CyberMedia's
Indeed, Wired showed a net loss of $42 million--almost 170 percent of its revenues--compared to CyberMedia's net loss of $3.5 million, or 15 percent of revenues. Even more disturbing, the prospectus revealed that Wired was in "financial non-compliance" on a $5 million bank loan, with no apparent means (other than an IPO cash infusion) of paying off that note. In other words, Wired is a badly-hemorrhaging operation with no clear path to paying its bills, much less profitability.
Management
CyberMedia: Here's another area where the company stood miles apart from Wired. Co-founders Unni Warrier, Srikanth Chari and Anne T. Lam have all had previous venture experience as founders and managers of NetLabs, a maker of UNIX network management products. Confidence in CyberMedia management is indicated by the experienced and notable list of early venture investors : Kleiner Perkins, New Enterprise Associates, Draper Associates, Thorner Ventures, Nazem & Company, and Suhas Patil, founder and chairman of Cirrus Logic, a $650 million PC microprocessor firm.
Wired: To put it bluntly, potential investors found Wired founder Louis Rossetto a rather less-than-reassuring CEO. He had no previous startup experience of any significance, and at least one major fund manager said Rossetto's performance during Wired's pre-IPO "road show" to investors revealed that "he is not a real businessman."
Finally, it's worth noting the possible role that the "subjective factor" played in the demise of Wired's IPO. Many investors, and many in the media, have become less-than-enamored of Wired's oft-repeated disdain for "old-style" media, "old-style" politics and "old-style" businesses. In its prospectus, Wired Ventures billed itself as "a new kind of global, diversified media company" and implied that it could somehow rise above the usual pedestrian requirements for success in the media business.
A trendy "post-politics" approach in editorial content is one thing; a "post-business" approach to building and managing a successful and profitable media enterprise, however, is quite another. Investors saw this as hubris, and decided not to buy. It's in some ways as simple as that.
