Hard choices help firm survive its dot-com meltdown

If the end of the "New Economy" taught us anything, it's that the old rules of profit and loss still apply. Here's a look at one dot com that learned that lesson and made tough decisions to stay afloat.

Two years ago, brothers Sean and Patrick Connolly had raised nearly $10 million from venture capitalists for, the brothers' startup ASP that provided users with a multiuser calendaring system. With clients including Earthlink, American General Insurance, and General Electric, and three separate “Best of the Web” accolades from Forbes magazine, the company seemed like a surefire hit. At its peak, had a staff of 65 and a posh 10,000-square-foot office in San Francisco.

Only one piece of the dot-com success puzzle was missing—profits.

“Our business model was to provide a totally customized, hosted solution for our customers,” said Sean Connolly, president and chief technology officer of the now revamped firm. “In doing so, we'd take a loss on the initial customization and make it up in revenues over the life of the contract.”

But for each successful business the company landed as a client, there were a dozen that failed, making it impossible for to collect owed revenue.

Three rounds of layoffs and two dashed acquisition bids later, the company has been stripped down to its two founders, an intern, and two salespeople working on a commission-only basis. The company has also changed its business model, reinventing itself as the software licensing firm Collabrio Technologies.

By making tough choices, the Connolly brothers were able to keep their company. We recently spoke with Sean Connolly about his company's transition from a seemingly successful dot com to a struggling business. Here’s a look at what the company had to do to survive and what you may have to do if faced with a similar situation.

First of two parts
In this article, we take a look at how one dot com changed to survive in a radically different market. In part two, we’ll examine what the company did to settle with creditors, how it handled the possibility of bankruptcy, and what its plans are for the future.

Know when you’re in trouble
Although had been working to obtain another level of financing since July 2000, by August and September of that year, the company began laying off employees in an effort to stay open. But the company also began courting other businesses to buy them.

“Effectively, we knew without raising more money—and continuing our current burn rate—it was close to the end of the life of the company,” Connolly said.

He suggested two basic questions that struggling businesses have to face:
  • What is the company’s current burn rate?
  • How much money is in the bank?

The sooner a troubled business makes difficult decisions, including laying off employees, the greater its ability will be to pay off creditors.

“If you wait until the last minute, you can’t,” Connolly said. “You’ll have no money to pay off creditors.”

Communicate with creditors
Hope for the company came in the form of two potential acquisition offers. At the same time, the company’s creditors wanted to know when they could expect payment.

“This was our last hope,” Connolly said. “We put all our eggs in that basket instead of looking for further financing because financing had become so difficult.”

As the company explored the acquisition route, it also tried to reassure creditors that was working on buyout solutions that could be derailed if disputes over outstanding debts made it to court. “We told our creditors that there was the possibility of an acquisition,” Connolly said. “The only thing they would have done by taking action against us would be to squash any potential acquisition deal.”

How do you reassure creditors not to close your doors if there’s a chance that an acquisition may keep you open? For, it was a delicate balance: Try to show a positive face to both employees and creditors in the hopes that things could get better while working desperately behind the scenes to keep the company alive.

“You do want to let them know what your situation is—both the good and the bad—as soon as you can,” Connolly said.

At one point, a potential buyer told and its investors that there was “99 percent” probability that the company would be acquired. However, the weekend before Thanksgiving 2000,’s hopes faltered when the buyer’s CEO halted acquisition talks, citing a low stock price.

Save what you can
When it became obvious that the company would not be bought, let its users know through a notice on the company Web site that it would soon be shutting down and that they needed to remove their data. However, found that many of its 600,000 users didn’t want to go elsewhere.

“There was a huge uproar from people who said, ‘I don’t want to go to another of these free club sites; you have something that is unique on the Internet,’" Connolly said.

So in an effort to try and make money from the technology that they helped develop, the company asked users if they would be interested in licensing the software. As a result, Connolly, who had led the company as a CEO, began doing sales.

For businesses trying to survive, even by the slimmest margins, this is when you begin asking:
  • Do you have anything of value, which if repositioned or retooled, could be sold into a different market or to a different value proposition?
  • Do you have the expertise to do it yourself, or do you have help that you can draw upon?

If not, then perhaps the best strategy is to call it quits.

As Collabrio Technologies, the Connolly brothers’ business shifted its model from being a hosted service to licensing their technology. In the aftermath of layoffs and with seemingly insurmountable debt, the company began licensing its code.

“Within one quarter, I generated more revenue than was generated by all of our salespeople for the previous two years combined,” Connolly said. “Out of necessity and a desire to make good on our debts to creditors, I turned our company from a service company to a software company.”

Be fair with employees
Staffing was stripped from a high of 65 or 70 to the Connolly brothers and an intern. But after the layoffs, the Connolly brothers let ex-employees use office equipment to send out resumes, access the Internet, and check e-mail.

Those same employees later helped the company when it ran into roadblocks while changing its business model. For example, when the company moved from its large offices to a much smaller space, it bartered with former employees who helped them set up a network in exchange for Web access. Other former workers updated the business’s code base

“You treat employees like you would want to be treated,” Connolly said. “People worked hard. This was the least that we could do.”

How did you handle your shutdown?
Chances are, a good percentage of TechRepublic readers have been touched by the fall of a dot com. Whether you were a CIO, a developer, or the administrator for a failed dot com’s data center, it affected you. How did you handle it? Post your comments below or send us an e-mail.

Editor's Picks

Free Newsletters, In your Inbox