höher sein als in USA. Asia's Internet companies shift to survival mode as
funding falls off
By BELINDA RABANO
Ira Chaplain for Asiaweek.
Renren.com's Micheal Robinson.
Visitors to ActionAce.com's website can still get an eyeful of pages depicting Star Wars action figures and Supergirl dolls. But clicking the "buy" button draws no response from the Hong Kong-based toy e-tailer save a cryptic message saying the company isn't accepting orders these days. Instead, it's accepting bids for its e-commerce assets. Two-year-old ActionAce, among the first Asian ventures to try online sales, has ceased retail operations and "is currently under negotiations for sale," says Hanson Cheah, executive director of AsiaTech Ventures, a venture capital fund that sunk $4 million in ActionAce and is now trying to salvage its investment by turning the company into a purveyor of online gaming technology. "We were already starting to trim the e-commerce operations," says Cheah. "The whole market downturn simply accelerated the process."
With global technology markets in retreat and the window for initial public stock offerings nearly shut, Asia's Internet start-ups are discovering that raising cash was the easy part. Staying alive is a bigger challenge — one requiring a sober reassessment of business models bloated by overly optimistic expectations for Asian Internet commerce. As vultures circle once-profligate dotcoms such as U.S.-based Petstore.com and European clothing retailer boo.com, Asia's e-tailers and content companies are regrouping not for rapid growth but for survival. By conserving cash, laying off staff and milking what revenue they can from the Net, they hope to hold out long enough for theirs to become a viable business as regional Internet markets mature.
"There will inevitably be more consolidation and layoffs in the sector," says Steve McKeever, regional Internet analyst for Lehman Brothers. "Investors are more discriminating and funding is drying up for the weaker business models." A demise of ActionAce, analysts say, could be the beginning of dark dotcom days ahead. No longer able to raise funding from investors, Net companies must drastically reduce their "burn rate," the pace at which start-ups with little revenue eat up capital. That means an end to lavish spending that marked Asia's brief Internet mania. "I get a lot of proposals from distressed dotcoms running short of cash," says Lim Kia Hong, chief executive of Singapore's SiS Technologies, an Internet investor. "They have had their first few rounds of funding and have spent it on big salaries or cars or splashed it all on marketing in the hope of getting some advertising. With the door shut on listing, some of them are getting desperate."
Common sense, in short supply in the Internet arena a few months ago, is making a comeback. Fat salaries are on the way out. After Singapore portal Catcha.com scrapped plans for a May IPO, the company's chief executive agreed to work for no pay — he was slated to make $8,000 a month post-IPO — while other top officers took substantial reductions. Partly through a 15% staff cutback, the dotcom says it has reduced its burn rate from $405,000 a month to less than $289,000. Patrick Grove, the CEO, said in a statement the moves "prove that management is in it for the long haul."
Meanwhile, Planetarabia.com, which raised its first round of financing in September, decided to reduce its marketing budget by 20%, cut back on hiring and put off the opening of two new offices, says Ali Siddiqui, a Hong Kong venture capitalist and Planetarabia board member. Financial chatroom operator Shareinvestor.com in Singapore decided not to hire a marketing manager and has stopped recruiting altogether.
Even ventures that appeared to have deep pockets and a relatively promising advertising base are becoming more conservative. In late June SCMP.com, the online version of Hong Kong's South China Morning Post newspaper, let go 17% of its staff — 18 people — and shelved planned Chinese and English financial websites. The Post, the dominant English language newspaper in the SAR, expected to spin off its dotcom division in an IPO, but those plans appear delayed indefinitely. SCMP.com chief executive Kuok Koon Seng called the abrupt layoffs "a prudent response to the change in market conditions."
Larry Campbell, the former publisher of SCMP.com and among those issued pink slips, said expenses grew far faster than anticipated as headcount increased from 24 in October to 108 in June. "The cost overruns were a direct result of an Internet company being managed by people with no Internet experience," says Campbell, who estimated about $9 million was sunk into the site in the eight months prior to June. "That's a mistake a lot of companies in Hong Kong are making, especially old-school ones that are migrating to the Internet."
The cutbacks are a precursor to outright failures expected to come over the next 12 months. A majority of Southeast Asia's dotcoms raised money during Asia's Internet short-lived start-up boom. "Funding from the good times is keeping these companies liquid," says Richard Winter, managing director at Deloitte & Touche Corporate Finance in Hong Kong. But most Internet ventures are not expected to be profitable for at least two years. Chief executives face a difficult decision on what to do with existing funds: keep spending to beat the competition to market share, risking glorious burnout; or throttle back to conserve cash.
The bankruptcy rolls will be long no matter what. "I would say at least 50% of companies in Asia, but particularly in greater China, could run into financial difficulties," says Daniel Mao, chief operating officer of Chinese portal Sina.com. China's Ministry of Information Industry chief Wu Jichuan is more pessimistic, saying 70% to 80% of the mainland's dotcoms will close down due to high start-up costs and lack of ad revenues. According to official figures, China has about 16,000 websites. "In Asia ex-Japan, out of hundreds and hundreds of portals that exist today, we believe no more than five or six will survive in the long run," adds Sunil Gupta, regional Internet analyst at Morgan Stanley Asia in Singapore. "The dotcom deadpool in Asia will only grow."
There is a third option: sell out while you can. In what is becoming a "survival of the fattest" scenario, companies that went public when share prices were soaring are sitting on piles of money. A strong cash position improves balance sheets and underpins the price of company stock, enabling a fortunate few, such as Chinadotcom and Pacific Century CyberWorks, to swallow up struggling competitors at depressed valuations. In essence, they can buy the cash flow of others, thereby improving their own revenue growth numbers and easing investor concerns about future profitability. "There's a lot of pressure on start-up companies to produce revenues and cash flow," says Winter, "especially listed ones that have made their plans public."
Michael Robinson, chairman of Renren.com, says his Chinese/English portal is among those that are expanding more quickly than before. "Instead of looking for a new business plan, we decided to use this time to move faster," he says. Renren, which has cash in excess of $30 million and backing from Australian media giant News Corp., bought up four Chinese sites recently and is looking for more.
Chinadotcom is also on the prowl, for deals in Korea, Japan and China. Leading Chinese-language portal Sina.com has more than $130 million in cash following its Nasdaq listing in April, a third of it earmarked for acquisitions, says Mao. "I don't rule out that in the course of the next few months we could start announcing things that we wouldn't have if the market hadn't corrected," says Alex Arena, managing director of Pacific Century CyberWorks. "You can find very good companies that through an accident of fate didn't tap the equity markets when they should have." Among PCCW's recent investments was an $18-million stake in Australia's financially troubled Spike Networks.
In the long run, the coming shakeout should make for a healthier industry. Already, "the number of new competitors springing up has been cut down," notes Robinson, adding that he is finding it easier to keep his staff from bolting to other dotcoms. But for all save a few players, the transition will be as distressing as a canoe trip across the River Styx. "Six months from now, we're going to start to see a wave of consolidation and companies going under," says Cheah of AsiaTech Ventures. "The percentage of dead bodies is going to be higher than in the U.S." Getting there is not always half the fun.
— With reporting by Assif Shameen/Singapore
Write to Asiaweek at mail@web.asiaweek.com
www.cnn.com/ASIANOW/business/
funding falls off
By BELINDA RABANO
Ira Chaplain for Asiaweek.
Renren.com's Micheal Robinson.
Visitors to ActionAce.com's website can still get an eyeful of pages depicting Star Wars action figures and Supergirl dolls. But clicking the "buy" button draws no response from the Hong Kong-based toy e-tailer save a cryptic message saying the company isn't accepting orders these days. Instead, it's accepting bids for its e-commerce assets. Two-year-old ActionAce, among the first Asian ventures to try online sales, has ceased retail operations and "is currently under negotiations for sale," says Hanson Cheah, executive director of AsiaTech Ventures, a venture capital fund that sunk $4 million in ActionAce and is now trying to salvage its investment by turning the company into a purveyor of online gaming technology. "We were already starting to trim the e-commerce operations," says Cheah. "The whole market downturn simply accelerated the process."
With global technology markets in retreat and the window for initial public stock offerings nearly shut, Asia's Internet start-ups are discovering that raising cash was the easy part. Staying alive is a bigger challenge — one requiring a sober reassessment of business models bloated by overly optimistic expectations for Asian Internet commerce. As vultures circle once-profligate dotcoms such as U.S.-based Petstore.com and European clothing retailer boo.com, Asia's e-tailers and content companies are regrouping not for rapid growth but for survival. By conserving cash, laying off staff and milking what revenue they can from the Net, they hope to hold out long enough for theirs to become a viable business as regional Internet markets mature.
"There will inevitably be more consolidation and layoffs in the sector," says Steve McKeever, regional Internet analyst for Lehman Brothers. "Investors are more discriminating and funding is drying up for the weaker business models." A demise of ActionAce, analysts say, could be the beginning of dark dotcom days ahead. No longer able to raise funding from investors, Net companies must drastically reduce their "burn rate," the pace at which start-ups with little revenue eat up capital. That means an end to lavish spending that marked Asia's brief Internet mania. "I get a lot of proposals from distressed dotcoms running short of cash," says Lim Kia Hong, chief executive of Singapore's SiS Technologies, an Internet investor. "They have had their first few rounds of funding and have spent it on big salaries or cars or splashed it all on marketing in the hope of getting some advertising. With the door shut on listing, some of them are getting desperate."
Common sense, in short supply in the Internet arena a few months ago, is making a comeback. Fat salaries are on the way out. After Singapore portal Catcha.com scrapped plans for a May IPO, the company's chief executive agreed to work for no pay — he was slated to make $8,000 a month post-IPO — while other top officers took substantial reductions. Partly through a 15% staff cutback, the dotcom says it has reduced its burn rate from $405,000 a month to less than $289,000. Patrick Grove, the CEO, said in a statement the moves "prove that management is in it for the long haul."
Meanwhile, Planetarabia.com, which raised its first round of financing in September, decided to reduce its marketing budget by 20%, cut back on hiring and put off the opening of two new offices, says Ali Siddiqui, a Hong Kong venture capitalist and Planetarabia board member. Financial chatroom operator Shareinvestor.com in Singapore decided not to hire a marketing manager and has stopped recruiting altogether.
Even ventures that appeared to have deep pockets and a relatively promising advertising base are becoming more conservative. In late June SCMP.com, the online version of Hong Kong's South China Morning Post newspaper, let go 17% of its staff — 18 people — and shelved planned Chinese and English financial websites. The Post, the dominant English language newspaper in the SAR, expected to spin off its dotcom division in an IPO, but those plans appear delayed indefinitely. SCMP.com chief executive Kuok Koon Seng called the abrupt layoffs "a prudent response to the change in market conditions."
Larry Campbell, the former publisher of SCMP.com and among those issued pink slips, said expenses grew far faster than anticipated as headcount increased from 24 in October to 108 in June. "The cost overruns were a direct result of an Internet company being managed by people with no Internet experience," says Campbell, who estimated about $9 million was sunk into the site in the eight months prior to June. "That's a mistake a lot of companies in Hong Kong are making, especially old-school ones that are migrating to the Internet."
The cutbacks are a precursor to outright failures expected to come over the next 12 months. A majority of Southeast Asia's dotcoms raised money during Asia's Internet short-lived start-up boom. "Funding from the good times is keeping these companies liquid," says Richard Winter, managing director at Deloitte & Touche Corporate Finance in Hong Kong. But most Internet ventures are not expected to be profitable for at least two years. Chief executives face a difficult decision on what to do with existing funds: keep spending to beat the competition to market share, risking glorious burnout; or throttle back to conserve cash.
The bankruptcy rolls will be long no matter what. "I would say at least 50% of companies in Asia, but particularly in greater China, could run into financial difficulties," says Daniel Mao, chief operating officer of Chinese portal Sina.com. China's Ministry of Information Industry chief Wu Jichuan is more pessimistic, saying 70% to 80% of the mainland's dotcoms will close down due to high start-up costs and lack of ad revenues. According to official figures, China has about 16,000 websites. "In Asia ex-Japan, out of hundreds and hundreds of portals that exist today, we believe no more than five or six will survive in the long run," adds Sunil Gupta, regional Internet analyst at Morgan Stanley Asia in Singapore. "The dotcom deadpool in Asia will only grow."
There is a third option: sell out while you can. In what is becoming a "survival of the fattest" scenario, companies that went public when share prices were soaring are sitting on piles of money. A strong cash position improves balance sheets and underpins the price of company stock, enabling a fortunate few, such as Chinadotcom and Pacific Century CyberWorks, to swallow up struggling competitors at depressed valuations. In essence, they can buy the cash flow of others, thereby improving their own revenue growth numbers and easing investor concerns about future profitability. "There's a lot of pressure on start-up companies to produce revenues and cash flow," says Winter, "especially listed ones that have made their plans public."
Michael Robinson, chairman of Renren.com, says his Chinese/English portal is among those that are expanding more quickly than before. "Instead of looking for a new business plan, we decided to use this time to move faster," he says. Renren, which has cash in excess of $30 million and backing from Australian media giant News Corp., bought up four Chinese sites recently and is looking for more.
Chinadotcom is also on the prowl, for deals in Korea, Japan and China. Leading Chinese-language portal Sina.com has more than $130 million in cash following its Nasdaq listing in April, a third of it earmarked for acquisitions, says Mao. "I don't rule out that in the course of the next few months we could start announcing things that we wouldn't have if the market hadn't corrected," says Alex Arena, managing director of Pacific Century CyberWorks. "You can find very good companies that through an accident of fate didn't tap the equity markets when they should have." Among PCCW's recent investments was an $18-million stake in Australia's financially troubled Spike Networks.
In the long run, the coming shakeout should make for a healthier industry. Already, "the number of new competitors springing up has been cut down," notes Robinson, adding that he is finding it easier to keep his staff from bolting to other dotcoms. But for all save a few players, the transition will be as distressing as a canoe trip across the River Styx. "Six months from now, we're going to start to see a wave of consolidation and companies going under," says Cheah of AsiaTech Ventures. "The percentage of dead bodies is going to be higher than in the U.S." Getting there is not always half the fun.
— With reporting by Assif Shameen/Singapore
Write to Asiaweek at mail@web.asiaweek.com
www.cnn.com/ASIANOW/business/
