SAN FRANCISCO – When e-commerce companies began to evaporate this year, Silicon Valley venture capitalists Brad Garlinghouse and Joanna Strober paid a visit to Productopia.com to deliver a pep talk to the troops.
The investors told the employees not to fret about surviving the dot-com shakeout. Productopia was a viable company with a sound business plan, they insisted.
Employees left the early summer meeting believing their product review Web site had received an vital vote of confidence from the very people who had already poured $22 million into the company.
Just a few months later, however, Productopia’s once-friendly financiers decided that even if Productopia became profitable in 2001, it would never make enough money to justify an additional investment.
So they cut the financial cord.
Shorn of their backers’ deep pockets and unable to find a buyer, Productopia had little choice but to shut down on Oct. 2.
The cold-hearted financial reckoning that doomed Productopia is occurring throughout the Bay area and Silicon Valley as venture capitalists turn their backs on online retailers they embraced just a few months ago.
And the trend may well accelerate after the holiday shopping season weeds out another batch of underperforming e-commerce companies.
Garlinghouse, a partner at CMGI in Menlo Park, and Strober, a general partner for Bessemer Venture Partners in Menlo Park, declined to be interviewed for this article.
But other Silicon Valley venture capitalists said the two were merely doing their jobs.
“Their allegiance is to their investors,” said Wes Raffel, a general partner at Advanced Technology Ventures in Palo Alto. “It’s naive to think they are going to keep throwing money after bad. This is about business. This isn’t about friendship.”
Other venture capitalists say they are trying to find more humane ways to put struggling e-tailers out of their misery.
Accel Partners, for instance, recently arranged to merge one of its unprofitable ventures, Homewarehouse.com, into Walmart.com, a larger, more stable company in its investment portfolio.
“There are some firms that think they should pull the plug right away when they determine a company isn’t going to ever generate good returns,” said Peter Fenton, a principal at Accel. “But we don’t want to strand our companies. We figure we are on the hook to help them get to a safe harbor.”
The cash crackdown represents a dramatic shift from a year ago, when financiers routinely invested more money into staggeringly unprofitable e-commerce businesses. In most cases, they didn’t flinch because a receptive stock market yielded lucrative jackpots for online businesses making initial public offerings.
Today, Wall Street has virtually no interest in buying the stocks of unproven e-commerce companies.
“Venture capital was pretty easy until recently because the stock market covered up a lot of mistakes. Now you have to bite the bullet and make the hard, tough decisions,” said Rick Kimball, a general partner with Technology Crossover Ventures.
E-commerce and online content companies nationwide received $7.7 billion in venture capital during the three months ended Sept. 30, a 26 percent decline from the prior quarter, according to Venture Economics, an industry research firm.
Most analysts expect an even greater decline this quarter.
In this new get-tough era, it’s no longer enough just to show a profit. Venture capitalists want a business to prove it can produce a 10 percent profit margin on a consistent basis before they will invest more money into the company, Kimball said.
That attitude disillusioned several of Productopia’s laid-off employees.
Rosie Passantino, former director of product management, has vowed never to work for another company backed by CMGI or Bessemer.
“I hold them personally responsible for misleading the workforce of Productopia,” she said.
Others, like former Productopia associate editor Roman Loyola, are less disappointed.
“I kind of understand that they’re in the business of making a boatload of dough and aren’t interesting in funding companies that might only make a little bit of money,” Loyola said. “They are called venture capitalists for a reason.”