It is not so long ago that an information technology (IT) entrepreneur could postulate an optimistic plan to an eager-for-bonanza venture capitalist. The business "plan" did not have to envisage profits for many years. But who cared? After all, many well-established IT companies still weren't making money. And there was always the distinct possibility that the company, with a technology often not fully understood by its venture capital backers, would be taken over, at a huge multiple to turnover.
Hopefully those unsustainable days are over. And last week's disclosure of job cutbacks at a number of IT companies, and the pulling of the plug at Ebeon, which was aspiring for a share flotation in the first quarter of this year, are a pointer to the future.
A year ago this column on the IT industry had a heading "caution advised for investors in e-commerce" and opined that jubilation, tears and numbness would epitomise the industry. These emotions will still prevail but a greater sense of reality is now descending on the industry. The wise (or once bitten) venture capitalists will now scrutinise projects more closely. After all, how could they justify investing, say £50 million, in a project that subsequently goes belly up?
It would be very wrong, however, to conclude that last week's job losses are a prelude to a decline in the IT industry. Its progress since 1996 has been exceptional. IT is now an integral part of industry and will remain so.
But with the fall in Nasdaq, IT companies seeking seed capital will have to be prepared to sell part of their companies at lower multiples. And venture capitalists will be seeking an annual net increase in values, of 20 per cent to 30 per cent, with an exit mechanism in year four or five. The decision of Fyffes to scale back on the development of its international fresh produce portal, worldoffruit.com, with the loss of half its 20 staff, illustrates the increased caution of venture capitalists. The portal is understood to have almost achieved its targeted sales of €250 million.
However, most of this was with existing customers; getting external customers was crucial but this would have entailed substantial further investment, estimated at €100 million. Outside investors balked at the idea. Analysts had been predicting the portal could have been valued at €600 million to €1 billion if floated. It will now be an inconsequential appendage of the group.
The scaling back followed the collapse in September of Efdex, an online market for the food and drinks industry which spent $60 million in two years. It was Europe's first large business-to-business (B2B) failure and analysts expect further B2B failures.
Ebeon, now in liquidation, also had its eye on a stock market flotation but it ran out of cash. Eircom, which owned 51 per cent of the company, said it had pumped £21 million into the company and "couldn't bankroll the firm any longer". It said Ebeon had sought a further £2 million and Eircom agreed to fund it on condition the other shareholders matched it but they failed to do so.
Without historic and projected figures from Ebeon, it is not possible to express a view of its future. However, there is often a very thin line between success and failure of emerging IT companies; according to one venture capitalist, there are plenty of cases of companies in existence today because they got that extra round of funding, but others have failed despite the extra cash.
What is extraordinary about the failure of Ebeon is Eircom's role. It had a controlling 51 per cent stake, yet it did not have control of the board. And more important is its admission that it had no idea of the state of affairs at Ebeon even though it had two representatives on the board. That situation cannot go unchallenged.
