And Now Vulture Capitalists Swoop In

Updated: Apr 30 2002, 05:30am hrs
Not everyone lost money in the dotcom bust over the last two years. Internet scavengers are, in fact, still thriving on it. Since January 1, 2001, they have spent $ 44 billion to take over more than 1,600 net-related operations. Many clean-up companies have earned fat margins crafting liquidation deals. While these are the companies who profit from your lack of profits, the more important question is: how can you profit from these vulture capitalists

You dont need to love them, but you certainly need to make their acquaintance. For, these are the companies you will have to turn to when you finally accept that your brilliant 100-page business plan isnt going to work at least, not just now. That realisation, especially in the case of dotcom startups, doesnt come easily or early. Revenues remain stagnant, costs keep ballooning, and despite the bottom-line sinking, there is always the hope that just one more quarter, and your company will turn the corner.

The turnaround doesnt happen, but it does create a vicious vortex. As the barometer sinks, you focus on raising yet another round of funding to bankroll operations for the next few months. As a result, less effort is expended on improving operational income. Venture capitalists smell the decay from afar, and do the prudent thing: they stop returning your calls.

What does a strapped entrepreneur do once he accepts that his dreams of an IPO are never going to happen Say goodbye, venture capital; hello, vulture capital.

The vulture capitalist model is quite simple: pick up bargain deals at fire-sale prices, turn them aroundand sell them off. If that sounds distasteful, its because it often is. These investors dont have romantic notions of giving the kiss of life to cute Net plays; they are looking for the skeletons that still have a glimmer of life in them.

However, if your company is deep in the red, you really cant afford the luxury of being mawkish. The decent thing to do especially if you care a whit for employees whom you lured away from other companies by promising them fat stock options is to cut your losses early enough while there is some net worth to squeeze out of your companies balance sheet. Vulture capitalists help you do that.

Usually, these liquidity engineers will charge a fee depending on the kind of bail-out services they provide. What they will bring to the table is a brutal but frank assessment of what your strengths and weaknesses are and, pick out the juicy bits that can be leveraged to raise cash.

If you are truly lucky, you will find a salvage firm that offers sound management advice on how to restructure your activities to make them more attractive to potential bargain-hunters.

Often, this means bidding farewell to the business plan which you have jealously been guarding through months of trouble.

A scavenger is not looking for a long-term turnaround, but just quick, smart ways to make your company look more attractive in the short term.

Once the company is up to some kind of speed, the vulture capitalist will activate his network to strike a deal. Sometimes, he will find an acquirer for part or all of your business. At other times, he will connect you to a merger partner in such a way that one plus one at least equals three. Or he may even find a new investor who is willing to back the profitable portions of your business.

All of this of course, assumes that you were brave enough and bright enough to cry for help before all hope was lost.

Even vulture capitalists have principles. Some look for a robust business plan that is only suffering due to industry pressures; others look for strong fundamentals even if the cash-flow is in the red, and still others insist on three to six months of liquidity before touching the bleeding company. In other words, even a vulture capitalist will not touch you if you are clinically dead.

For those unfortunates who leave it until it is too late, there is one last category of scavengers: companies who specialise in selling the assets of defunct companies. Beware: there is a time line here too.

Of the intangible assets of a dotcom, most lose value fast if your business is going under: the domain name, the business plan, and even the trademarks are only as good as the business behind them. And what are the chances of being able to get a buyer to pay for goodwill when it is a firesale

Choosing when to die is a tough choice to make but a critical one. As an entrepreneur-promoter, you did not choose a business plan that will fail. But it did. Now you can choose how to end it so that life after death becomes possible.