More than 210 Internet companies called it quits or filed for bankruptcy protection last year. Others frantically retooled their business strategies -- often to no avail. But all roads can lead to the same end: the dot-com fire sale.
And that's good news for some. For businesses that specialize in liquidating other companies or selling off assets, these are boom times. One such company is Bid4assets, an auction Web site that is based in Silver Spring, Md. and liquidated 15 dot-coms in 2000, charging commissions for selling everything from computers and pool tables to source code and domain names.
Tom Kohn, the 39-year-old CEO of Bid4assets, isn't relying strictly on failed dot-coms to fuel his business. His 34-employee company also auctions high-value property seized by the government and pools of nonperforming loans. The tally so far: 1,200 auctions since February, 1999, involving property originally valued at more than $1 billion. Still, Bid4assets has one thing in common with many of its dot-com clients: The venture-backed company has yet to turn a profit. Kohn, who declines to divulge sales figures, says that should come in March, 2002.
Business Week Online Reporter Julie Fields recently spoke with Kohn about the online auction business, and the outlook for dot-coms and other Internet companies in the year ahead. Here are edited excerpts of their conversation:
Q: Are you seeing any signs that the dot-com downturn is slowing down?
A: No, we actually think it has just begun. Unfortunately, for the employees and founders of the dot-coms, I think we're just seeing the tip of the iceberg right now.
Q: What makes you say that?
A: You need to have a solid revenue model. And the people with the solid revenue models are going to win.
Q: So you expect to see an increase in bankruptcies and closings over the next six months?
A: Absolutely. We think that the failed dot-com phenomenon will probably last for another 18 to 24 months.
Q: And how is the downturn affecting Bid4assets?
A: We've never seen more calls coming into our company from venture capital firms, accounting firms, law firms, bankruptcy trustees, and anybody else that has a vested interest in the failed dot-coms. These companies have their backs up against the wall. They're either in bankruptcy or facing bankruptcy.
Q: What kind of volume are you expecting in dot-com liquidations this year?
A: We could do 15 a month....We actually have three dedicated employees focused on dot-coms, and we're feeling the need to add a couple more.
Q: In hindsight, your company's timing was pretty good. Was it founded on the premise that the Internet's wild ride wouldn't last forever?
A: I would give ourselves a little bit of credit for foresight. But I'd also be arrogant if I didn't think that some of it was just luck. We didn't just sort of jump on the failed dot-com bandwagon in an opportunistic way. We set up our company in February, 1999, when the economy was great, when every dot-com CEO was going to be a millionaire. We were set up to handle any distressed company, or any distressed industry. It just so happens that failed dot-coms are sort of the distressed industry du jour.
Q: What type of assets do failed dot-coms typically have?
A: It's primarily computer equipment, office equipment, furniture, telecommunications equipment, fax machines, photocopiers. But then, also, we've had things like an entire staff's Palm Pilots, a billiards table, Herman Miller Aeron chairs -- those are worth about 1,500 bucks. And we've had a lot of intellectual property.
Q: What type of intellectual property?
A: We've had source code, patents, and trademarks, and many domain names.
Q: What's the market for domain names like these days?
A: Well, we had a domain name we thought was worth about $4,000 -- planetrock.com -- and we sold it for $28,000. But that was before the bottom dropped out. The domain names aren't fetching what they used to.
Q: What types of dot-com assets fetch the best prices online?
A: It's mostly computer equipment and office furniture because there are other companies that are just starting up. And, as they say, why buy retail?
Q: Are there any assets that you turn down for auction?
A: If someone gave us a $700, 1977 Ford Pinto, we'd turn that down. We're focusing on high-value distressed assets.
Q: How do you guard against fraudulent bids?
A: At a minimum, the bidder and the seller have to give us their credit-card numbers so we can do a credit card authentication. Secondly, we're part owners in a product called edeposit. We strongly recommend sellers use this. A potential bidder has to put a deposit down before he or she can even bid. They put their deposit into an interest-bearing account. Security is extremely important to us, but we've really had no problems.
Q: One article that mentioned your company -- along with several others -- ran under the headline: "The Vultures Are Circling." How do you feel about being called a vulture?
A: Talk to the various VCs, and law firms, and accounting firms, and management that we've helped and see if they think we're vultures. I feel very good about what we do, because we present an alternative to what they have now. So you wouldn't believe how many thank-you notes and referrals we get from CEOs of companies or venture capital firms.
Q: If the IPO market improves, will your business suffer?
A: We'll just go on to the next distressed industry. When we started our company we didn't say, "Boy, oh boy, the dot-coms are going to fall flat on their face and we're so well-positioned." We said to ourselves, "Look, the asset-disposition business is good even in good times." Personal bankruptcies were increasing at the end of 1999, so there are always bankruptcies. There's always a distressed company. There's always a distressed industry.
Q: So what's the next wave? Which Internet or technology sector will be the next to experience a lot of bankruptcies and closings?
A: Well, the B2B [business to business] and content sites were first. And now, all of a sudden, they're out of favor. So I think it's logical that B2Bs would be next. But also, when you read about who's getting funded these days, it's infrastructure, broadband, real technology. But...a lot of those companies are going to fail, too. There are too many companies getting funded that are in the same niche. It's Darwinian. Only a few are going to survive in each niche.