FUNDING PICKS UP FOR ‘NET FIRMS
Byline: Valerie Seckler
NEW YORK — Is the chill in the Internet financing climate giving way to a mid-winter thaw?
If the chill hasn’t yet turned to a thrill, though, a number of dot-coms nonetheless have done deals during the past eight weeks or so that have brought them a flurry of fresh funds, signaling there are at least a few financiers still willing to place a bet on the much-maligned business-to-business and business-to-consumer sectors.
The funding picture continued to percolate Wednesday, when The Thread told WWD exclusively that management consultant Kurt Salmon Associates had purchased a “small” equity stake in the privately held, B2B fashion Web site, for an undisclosed amount of cash.
And in a concurrent development, Internet off-pricer Bluefly Inc. announced that the Nasdaq exchange has determined that the dot-com is now back in compliance with Nasdaq’s net tangible assets requirement that enables trading. The reason the Nasdaq staff has dropped a previously scheduled hearing on the matter: Bluefly’s closing on Feb. 7 of the second phase of its investment agreement with affiliates of George Soros Private Equity Partners. As a result of that transaction, approximately $20 million in long-term debt was converted to preferred equity — representing roughly 73 percent of Bluefly’s shares — at a price of $2.34 a piece.
There’s a bit more good news for Bluefly in the Nasdaq’s decision. The elimination of the delisting issue has cleared the way for the pure-play to list on the Nasdaq exchange its rights offering, which constitutes the third and final phase of the equity deal with the Soros group. With that offering, set to expire on March 26, Bluefly is aiming to raise between $10 million and $20 million in new funds, at a price of $2.34 per share of common stock. If Bluefly’s investors of record as of Feb. 7 buy less than $20 million of the company’s shares, the Soros group has agreed to make up the difference, up to $10 million, as reported.
Still, in the view of Ken Cassar, analyst at Jupiter Research, the current lending climate for e-commerce plays, whether B2C or B2B, is balmy at best.
“I don’t believe investors are beginning to seriously look at B2Cs yet,” said Cassar, who has closely followed the sector for the past few years and is now starting to focus on the B2Bs, too. “On the B2B side, the market has been tight as well. During the first and second quarters of 2001, I think we will see a lot more consolidation in e-commerce,” Cassar continued. “A lot more companies will go out of business, and a lot more companies will be seeking funds, at distressed valuations, before they go out of business.
“As dozens of struggling dot-coms scrape for funds at low valuations,” he added, “it’s got to make it difficult for the [venture capitalists] to make investments in the sector.”
The picture is likely to brighten in the second half of the year, however, Cassar forecast.
“I believe we will see a resurgence in Internet financing during the third and fourth quarters. There are still too many weak companies, but by the third quarter we will have worked through a lot of that, and people will start to realize there are some solid bargains out there.”
A less hopeful outlook for e-tailers was offered by economist Kurt Barnard of Montclair, N.J.-based Barnard’s Retail Trend Consulting.
“I don’t see improvement coming in the funding climate for B2C sites six months from now. It will probably become even more severe,” Barnard projected. “B2B is where it’s at — it’s where e-commerce is going.”
Not surprisingly, executives at the dot-coms that most recently have received funds were somewhat more upbeat.
“I think the financiers are a little less freaked out than they were before holiday,” said William N. Anderson, chief executive officer of The Thread, in a phone interview from Las Vegas, where his New York-based company was exhibiting at WWDMagic.
“There’s only so long things can keep shaking out. The dot-coms have been so beaten down,” Anderson observed, “there are funds being formed to take advantage of the overly pessimistic mood out there.”
For his part, Bluefly ceo Ken Seiff said: “I do think the financing market is loosening up. In the near term, it won’t return to the heyday of 1999. But the valuations of dot-coms have gotten so much lower that many of these companies are now actually good investments.”
Commenting on the recent financial developments at Bluefly, Seiff stated: “It’s great to have money in our pocket, with the second phase of the Soros financing complete, and not to have to worry about delisting from the Nasdaq. Now, we can refocus on running the business,” he added. “We spent a lot of time during the last six to nine months on non-operating issues.”
The new financing arrangements at Bluefly and The Thread follow other signs of investor interest stirring in some B2B and B2C apparel plays, including:
The just-launched Studio Direct Web site, a B2B backed by a $140 million investment from Hong Kong trading firm Li & Fung Ltd., a sum that accounts for 70 percent of the $200 million funding the project, according to Studio Direct’s ceo John Suh.
RetailExchange.com, the Gordon Bros.-backed B2B closeout exchange, which managed to secure $25 million in a third round of financing, concluded in December, from American Express Financial Corp., and venture capital house 3i, among others.
Fashionmall.com, the six-year-old online shopping destination that was recently courted by two groups seeking to scoop up the Web site at bargain-basement prices of $3.50 and $7 a share. The dot-com, which went public at $13 in 1999, rejected the respective offers from merger-and-acquisitions firm Narax and interactive advertiser GenesisIntermedia.
Despite these doings, Cassar pointed out that “there are still lots of weak players out there [online] with questionable business models. When it becomes clear who the stronger players are,” he added, “it will likely loosen the purse strings again.”
And while the ‘Net set might not yet have shaken the big chill among potential investors, Cassar noted Jupiter Research remains bullish in its outlook for online retail sales in the U.S.: The Internet consultant is projecting the figure will surge to $36 billion for the full year, up 50 percent over sales of roughly $24 billion transacted on the Web during 2000.