Give Me Your Tired.Com, Your Poor.Com
Scott J. Hyten is known for roughing up Net startups, so you might expect entrepreneurs would run when they see him coming. In fact, Hyten, managing partner of the venture-capital firm Eco Associates, is a popular man these days. Eco specializes in investing in startups that are out of money and nearly out of time. In the past five months, he has received several hundred e-mails from frantic Internet entrepreneurs begging for his tough love. "I am the last resort," he says. "When there are no doors left to slam in your face, you come here."
Sounds risky, but Hyten believes the time is right for bottom-fishing. The eight-month-old Austin (Tex.) firm has raised $100 million to put into once promising startups felled by an unforgiving stock market and their own recklessness. So far, Eco has made six investments, totaling $30 million, including stakes in California golf gear e-tailer Chipshot.com, New York music and news Web site operator Urban Box Office, and drkoop.com Inc. In August, Eco and a group of California investors bought a 70% stake in the Austin health-information Web site for $27.5 million.
Cutting fat is Eco's specialty. The firm looks for dot-coms with an established brand name, a busy Web site, and bloated expenses. After Eco enforces a strict weight-loss plan, its goal is to sell off its newly lean acquisitions to deep-pocketed, established companies that are looking for an online outlet. Finding waste was particularly easy at drkoop.com, where the bill for on-site massages totaled $9,000 a month and catered lunches on Fridays cost $15,000 per week. Eliminating those perks, firing 42 workers and the entire senior management team, and renegotiating money-losing partnerships have brought as much as $30 million in annual savings, says Hyten. He plans on selling the company soon.
DISCIPLINE WELCOMED. Doing business with Hyten is no gentle experience for the once high-flying entrepreneurs, but they're willing to put up with it. For the executives at Mall.com, a struggling Austin-based online shopping center, relinquishing power was more a relief than a sacrifice, says Pete Freix, the company's newly promoted CEO. After blowing millions of dollars on misguided marketing attempts, including NASCAR race sponsorships, the company's Web site was still unfinished. Says Freix: "Everything was out of control. We were a company in need of discipline."
That's exactly what Hyten gave Mall.com. After investing $5.8 million in November, he chopped the staff from 55 to 15 and slashed marketing to the bone. Instead, the company lured shoppers with coupons and other promotions. The result: The monthly operating loss--previously $1.1 million--was axed by 65%, and the Web site is averaging 1.2 million visitors per month, compared with 200,000 in July.
Hyten is a relative newcomer to both the venture-capital game and the art of cost-cutting. A former senior vice-president at tech consulting giant Computer Sciences Corp., he helped launch Austin venture-capital firm Interfase Capital Partners in 1998, focusing on Internet startups. But when the dot-com meltdown came, he and his partners decided to hedge their bets with the Eco fund. Hyten predicts Eco will enjoy a rate of return of more than 100% over three years.
There are plenty of skeptics. Peter J. Nolan of Leonard Green & Partners, a Los Angeles buyout firm, has looked at hundreds of Web businesses but hasn't found one worth rescuing. "The business models just plain don't work," he says. Hyten, however, is convinced that some of these companies are salvageable. And if Eco can resuscitate drkoop, it will have gone a long way toward proving there's still life left in some of the seemingly terminal dot-com cases.