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WHERE IS THE MONEY BEING INVESTED THAT WILL BE LOST

Get ready to see a lot of people lose huge amounts of money in the land of dot-coms. Until recently Web companies could count on.their backers to keep pouring in more money whenever the coffers ran dry. Now that party is suddenly over, and Web investors are begining to understand that they don't understand the E-commerce business and they are on the look- out for losers and cutting off their cash. Violet.com, an online retailer in San Francisco, learned the new rules the hard way. The company got $3 million in an initial round of fund raising last October to help build a Web boutique stuffed with fancy, beaded purses, orchid-oil lamps and other retail rarities. Founded two years ago by former Apple Computer Inc. engineer,Amy Barnett and marketing specialist Bonnie Cohen, the site featured a search engine that claimed it would let shoppers pick gifts based on their mood. That initial funding didn't last I.ong and by March, as the Intternet-stock selloff was under way, Violet was asking venture capitalists for more..No way, said its backers, who ,tried to arrange a sale of the company to another retailer. When a promising deal fell through, the-company's lead investor stepped back and let Violet fold.

It closed its doors last month, Today, all that is left on its Web site is a short note thanking visi-tors and urging them to "continue to seek out unique and interesting items that bring inspiration to the things you do every day." In just the past week, nearlya half-dozen dot-com gone bankrupt, many of them quite suddenly.

Barrons magazine this month published a list of 200 dot com companies they they predict won't be around six months form now. While e-commerce isa valid concept for industrial manufacturers doing B2B business in OEM products it just doesn't apply to B2C businesses and hundreds of other poorly conceived applications of the Web and Internet to human activity. It is the lack of expertice with the difference between good and bad e-commerce ideas that is going to cost a lot of money to those who buy shares that are not an investment at all. High-end fashion retailer Boo.com collapsed earlier this month after spending much of its $135 million in seed capital on lavish marketing and advertising campaigns promoting its plan to dominate global online sales of Donna Karan, Helly Hansen and the like. Its investors, which included French entrepreneur Bernard Arnault and Italy's Benetton family, failed to find a buyer-for the company, and Instead put it up for liquidation.

Walt Disney Co. recently shut down Toysmart Inc., an online toy start-up in which it owned a majority stake. CraftShop.com , a Connecticut-based retailer of craft-supplies, sought bankruptcy-court protection May 24th after its backers, led by Brand Equity Ventures of Greenwich, Conn., decided to withhold a promised second round of funding. And one of the most closely, watched experiments in online entertainment, Digital Entertainment Network, shut its doors after a long stream of bad publicity - including the resignation of a co-founder amid allegations of a sex scandal - soured investors on its prospects. That co-founder, Marc Collins-Rector, has denied the allegations.

Could some big-name Internet highfliers be next in line? Auditors at both CDNOW-com Inc. and drko@op.com Inc. have expressed doubts about the companies viability. CDNow says it expects to sign a merger or investment transaction by the end of the second quarter. Drkoop.com says it has slashed expenses and retained Bear Stearns Cos. to help it explore strategic financing options that could include the sale of the company. In the meantime, even relatively successful Internet companies are postponing their initial offerings, following the stockmarket slump. AltaVista Co., a unit of CMGI Inc. that operates a popular search engine, postponed its IPO until September or October, when the company expects to be closer to profitablillity. Others are doing some vigorous cost-cutting. Living.com, an, Austin, Texas, furniture e-tail-er, last Monday laid off 50 people, or 13 percent of its staff, to streamline its operations.

Some venture capitalists see the spreading turmoil as a natural shakeout of marginal Internet companies, many of whom, they say, would never have been funded wi thout an overheated IPO market that made cashing out early investments far too easy. The fallout could easily continue through the Christmas season and into next year.

As those companies are locked out of money, they're faced with the alternative that they either shut.their-doors or find a buyer or take cash at any price, For investors it comes down to this question: Which of our our investments do we try to save and which do we refuse to continue to put more money into and let die? Many requests for additional rounds of capital will increasingly be denied. Without more cash those compnaies will be dead.

That doom befell Violet, which was one of Angel Investors LP's portfolio companies. Many investors in Violet thought highly of Barnett and Cohen, and believed it was meeting the financial benchmarks used to judge a company's performance. Violet's founders agreed to consider a buyer, and started soliciting interest among prospective "white knights but none of the deals worked out. Effots ultimately failed because one of Violet's chief assets was its brand, which would inevitably be submerged after a merger. The value wasn't worth the transaction cost of relocation. Other venture capitalists were reluctant to sink more money into online retailing. Silicon Valley lawyers expect many more such failures. Bankruptcy-law firms are staffmg up.

Fallout from the Intemet-stock turmoil has extended even to some would-be dot-com landlords in Silicon Valley. Realestate agents who not long ago demand-ed start-up equity for office space are now instead Asking Internet companies for six months of advance rent, a three-month security deposit and a one-year letter of credit. Many even want to see extensive documentation, including executive biographies, profit-and-loss statements and recent bank statements.

Palms & Company offers its services to "Angels" and VC companies forced to look for corporate buyers. We can advise portfolio companies on their options, help them compile a list of potential suitors and act as an intermediary.

Selected Internet companies that have gone out of business recently:

O'Boo.com (apparel retailer) Date of closing: May. Backers: French entrepreneur Bernard Arnault, Italy's Benetton family and J.P'Morgan

Toysmart (online toy retailer) Date of closing: May. Backers: Disney

Violetcom (specialty retailer) Date of closing: April. Backers: 21st Century Internet Venture Partners

epatients (patient community) Date of closing:January. Backers, Saratoga Ventures, Morgenthaler Ventures, New Enterprise Assoc., Prospect Venture Partners

CraftShop.com (hobby, craft supplies) Date of closing: May. Backers: Andinger Capital VII, Brand Equity Ventures 1, CMGI Ventures, Primedia Ventures

Digital Entertainment Network Date of Closng: May. Backers Microsoft Corp and Dell Computer Corp.

See Barrons for predictions of next 100 bankruptcies.

SO WHAT ARE THE DOT COMS DOING TO FIND WAYS TO RAISE MONEY

Amid the rubble in "dot-com' stocks, hundreds of upstart companies are being forced to find ways, other than initial public offerings to get financing

Instead of struggling to get large numbers of investors to buy shares in their IPOs many are trying to raise money from private investors. The 1POs can come later, if at all.

It is clear why companies that once would have been able to move steadily through their financing life cycle, from seed capital to venture capital funding , and ultimately, an IPO, now must reconsider. The IPO window has nearly closed since April's mauling of technology stocks; and even before April, new issues of Web-site operators and other dot-com firms were already being shunned by investors. And so, investment bankers that only weeks ago were organizing pre-IPO roadshows now are concocting priva;e investments for the same clients instead. The, trend also to publiclytraded companies that recently did 1POs and already need more cash. These companies are known as "orphans" in Street parlance, because they have been abandoned by the stock markets and thrown back on their own financial resources.

Private placements are investments made by a handful of institutional investors, wealthy individuals or a single strategic investor, as opposed to 1POs that are marketed to the general public and trade on exchanges. Private placements can be done both for already public companies, or for private ones.

An IPO can become a way for earlier private investors, such as venture capitalists, to "cash out" their profits. Since a private placement means much less marketing investment banker's fees are less than 7% of proceeds charged for doing most IPOs, ranging anywhere from 1 percent to 5 percent depending upon the transaction's complexity

Basically, nearly every IPO is sudderdy turning into a search for private capital, for a private placement.

In earlt May investors were still eager to put that money to work at the lowest valuations some have seen in more than a year. There are now a whole set of public companies who may be managing their business just fine, but now trade 80 percent, down from their highs, Technology Crossover Ventures, a venture fund- that invests in both public and private comparues, has just agreed to invest $27 million in eloyalty Corp., an online consulting firm in Chicago. The company went public in February at $35 a share, but prior to the TCV investment traded as much as 71 percent below its IPO price.

"Of course, a lot don't look attractive even 80 percent below their highs Then there are other investors that do not yet realize they're not there are not going to be the kind of market darlings that there were a few months ago, and who have to wake up to the new realities. The irony is that the companies that have been quickest to face the music are those companies whose stocks fell out of favor earliest, that have suffered most and that are most in need of cash. They are also the least likely to get a deal on favorable terms, if at alL

Take online grocer Peapod Inc., of Skokie, 111. Last month, even before the market sell-off in mid-April, the company was down to its last $3 million in cash. Bankers were ready to pull the plug, and potential private investors backed off, making the company appear uninanceable on any terms. At the last minute, the giant Dutch Royal Ahold N.V. stepped in, paying $73 million for 51 percent of the company paying $3.75 per share for newly issued series of convertible securities. The stock, which went public in June 1997 and traded as high as $16.3875, now trades at a mere $2.8438 per share. Other embattled companies ranging from drkoop-com to flower retailer FTD.com are still looking for cash. The IPO for furniture retailer Fumiture.com is still in registration with the Securities and exchange' commission, but people familiar with the deal say the company has quietly abandoned that plan and instead is negotiating another round of venture capital. Potential venture investors who have been approached by the firm and its bankers say the deal, if it is completed, is likely to come at a lower valuation per share than Furniture.com's last venture-cap- ital round. The company declined to conunent.

Business models still forming

There are a lot of companies where there's uncertainty about how much more cash it's going to take for them to become profitable, or even being cashflow positive Their business model is still forming. That's why they should be financed by private capital, even though the public markets until now have been eager to do the job.- Meanwhile, the new group of private investors is looking at a much broader range of ways to eventually sell its investments - in Wall Street jargon, its "exit strategies.' These investors aren't in the game to become long-term operators of companies; they want to cash. A quick IPO just isn't an option. The pace of mergers and acquisitions willexpand as finance-hungry companies merge - to create a larger entity that potential investors may find more appealin. And mergers like that could replace the IPO market as the exit strategy for private investors of all kinds.

SO WHO WERE THE LAST COMPANIES IN MAY 2000 TO RECEIVE VENTURE CAPITAL MONEY

MedManage raises $10 million MedManage, a Bothell developer of an online prescription sales tracking service for pharmaceutical com-panies, has raised $10 million in first round funding. Investors were Prism Venture Partners and Tredegar Investments.

PaymentOnline.com a Seattle online portal for businesses and a maker of Internet payment software, has raised $1.7 million through a limited public stock offering to individual investors. Proceeds will be used for growth, product development and marketing.

Enthuslasm.com a Seattle provider of event-centered online content, has raised $1.2 million in seed funding. Investors included The Opportunity Fund of Olympic Capital Partners, efund and angel investors.

XML Fund, a Bellevue venture capital fund run by DataChannel founder and chairman, David.Pool, announced -ast week that it was participating in the Bellevue company's $45-million mezzanine round of funding. The amount invested XML Fund was not disclosed.

'Friedman, Billings, Ramsey Group of Arlington, Va., and entrepreneurs --David Billstrom and William Neuhauser launched a new venture firm in Seattle and Portland last week: FBR CoMotion Venture Capital. The group's first fund is expected to close at $50 million.

Service Inte1ligence.com has secured $6.25 million in venture funding from Austin,Ventures and Prism opportunity Fund. Austin Ventures led the round with $4 million. Seattle-based Service Intelligence.com is .developing technology that manages customer service in realtime and provides training to refine the skills of front line employees.

Seattlq-based FizzyLab, which is developing personalization,software for online advertisers, has closed its second round of financing for $9.5 million. San Francisco-based- WaldionVC led the round.

SEATTLE - Voyager Cap a three-year-old Seattle venture capital firm looking to compete with Silicon Valley's elite, is betting that bigger doesn't mean better when it comes to returns. Voyager this month raised $215 million for its second fund,four times the size of its first ,though smaller than the $1 billlion funds raised recently by some California firms. It also opened a Palo Alto, California office to be led by Curtis Feeny former executive vice president of Stanford Management Co. Since Voyager was formed in 1997, venture capital spending in the Northwest jumped about 16-fold, according to figures released yesterday by PricewaterhouseCoopers. , In the first quarter of 2000, the region attracted $800 million in venture capital, up from $257 million a year earlier and $48 million in 1997's first quarter. Voyager's first fund returned more than 100 percent annual-ized after expenses. Out of 13 investments, three were sold - NetPodium, Amplitude Software, and Tegic communications, and one went public, Avenue A Inc. Another, ClearCommerce Corp., filed in March to sell shares. Voyager is betting its connections, with established Northwest technology companies and individual investors will give it an edge.

NextLink Communications Inc. (McLean, Va.) a broadband communications company founded by Craig McCaw, is getting an additional $400 million f r om Forstmann Little, which will buy NextLink convertible preferred stock at $63.25 per share. Forstmann in January put $850 million into NextLink. NextLink has also agreed in principle to buy several European fiber optic networks' for $306 million, roughly doubling NextLink's market.

Qpass (Seattle) has raised $40 million in its fifth round from J&W Seligman, BankBoston Ventures, The 'Zeron Group, Partech International, Comdisco Ventures, Andersen Consulting, Venrock Associates, Oak Investment Partners, RRE Investors, Integral Capital Partners and SeaPoint Ventures.

0esociety (Bellevue) closed its second round of $15.5 million from Technology Crossover Ventures and Comdisco Ventures.

Gear.com (Seattle) has raised $10 million from Madrona Venture Group, Kellett Investment Corp. and Nick Hanauer of Second Avenue Partners.

Syncronex (Bellevue) has received $5.25 million from Arch Venture Partners, Polaris Venture Partners and Staenberg Private Capital.

LiveListings.com Inc. (Seattle) has raised $5 million from Phoenix Capital and individual investors.

RocketVox (Seattle) has raised $2 million in seed-round financing from individual investors.

Glides Inc. (Bellevue) has raised $1.7 million in its first round from Lernout & Hauspie, PSINet and individual investors.

TelcoOnline (Seattle) has raised $1.6 million in its first round, led by Alexander Hutton Venture Partners.

Vulcan Ventures (Bellevue) has led an $18-million financing round in Redwood City, Calif.-based Myplay.

BELLEVUE - esociety Inc. closed its second round of funding yesterday and is leasing new office space in Seattle's Key Tower to accommodate its rapid growth. The Bellevue company raised $15.5 million from Technology Crossover Ventures (TCV) and Comdisco Ventures. TCV also invested in the company's first $3.4 million round in October. esociety opened its doors one year ago and has since grown to 1 1 1 employees. Company spokes- woman Rebecca Levy said the company is renting 23,000,square 'feet, the entire 53rd floor in Seattle's Key Tower on Fifth avenue to accommodate application services and marketing groups. Other staff will remain in the company's Bellevue headquarters for the time being The Broderick Group was esociety's agent in securing the space. esociety develops online portals in partnerslup with trade associations, such as the National Truck Equipment Association and the Northwest Venture Group. Thecompany was founded by entrepreneur Preneur Fishmonger.com CEO Tom Poole in 1998, and has beqn led by CEO and president Anne Gordon since July 1999.

Lion Inc. the operating name of Renton's Plenum Communications has raised $3 million from Spokane's Hedge Funds managed by ICM Asset Management. Lion sells internet products to the mortgage industry.

Wolesale Portal a Seattle B2B online transaction service for wholesalers, has raised $4.4 million in its first round of Funding. Argentum Group of New York was the primary investor.

Tidemark Solutions, a Seattle-based developer of software for government agencies has closed its second round of funding with $5.5 million from Overland park, Kansas-based National Information Consortium, Jacksonville Fla based Chartwell Capital earlier invested $6.5 million

Claims Desk.com , a Seattle designer of Web Sites for property casualty claims adjusters has raised $2.5 million in initial round financing led by Voyager Capital. Staenberg Private Capital and angel investors also participated.

How much was invested in Total

The amount of venture capital invested in U.S. companies increased dramatically for te first quarter of 2000, peaking at $17.22 billion Tech companies in Washington state raised $640.4 million this past quarter, cormpared to the fourth quarter of'1999, when local companies raised $,397.7,rriillion. Silicon Valley led the nation in venture capital funds raised for the first quarter of 2000, with companies there securing a total of $6.1 billion. A geographic breakdown showed firms in the Northwest placing seventh on the list of regions, with 65 companies in the Washington-Oregon-Idaho area bringing in $700 million. Ahead Of the Northwest, were Silicon Valley, New England, the Southeast, the New York metropolitan area, the Midwest and the Washington, D.C. "MetroPlex." Seattle-based TeraBeam Networks Inc led companies in this state in raising venture Capital funds this past quarter, landing $105 million TeraBeam's backers last quarter included softbank Venture Partners, Oakhill Venture Partners2, Madrona Venture Group, Morgan Stanley Dean Witter. Merrill Lynch IBK Positions, Fidelity Management and Research, T. Rowe Price Investment Services, Capital. Research and Management Co- and five major telecommunications carriers. TeraBeam's numbers drove the total dollar value of investments in Seattle companies to $294.4 ml on, almost twice as much as last quarter's $151.85 million. On the Eastside the total bumped to $265..38 million from $230.75 million in the last quarter. Among Eastside companies, Kirkland-based Rosetta Inpharmatics Inc. was the leading raiser of venture cap money, hav-ing secured $41.58 million in March from the Lombtwd Odier Immunology Fund Olympic Venture Partners, Perseus LLC, Tredegar Investments Inc. and Vulcan Ventures. Seattle-based Madrona Venture Group Was the most active venture fund in the,region, spreading $24.35 million among 15 companies. Startup and early-stage companies ate the biggest piece of the venture pie nationally, bringing in 43 percent. of total ftmding, or $7.75 billion.In Washington state, startup and early-stage companies accounted for 53 percent of venture cap money in the quarter. Telecommunications companies in the state accounted for $215 million.

The following is a lost of IPOs pending as of the last week of May 2000.

WHERE IS THE SMART MONEY BEING INVESTED THAT WILL KEEP THEIR CAPITAL AND EARN A PROFIT

In my opinion, generally speaking, there isn't any money to be made in .com stocks after July 2000, except for opportunities for well times short-selling. There are certain activities that provide clues to where the opportunities lie.

Prince Alwaleed Bin Talal, a nephew of Saudi Arabia's King Fahd, said he spent $1 billion buying shares in 15 U.S. companies, including Redmond-based InfoSpace Inc. and Seattle-based Amazon.com Inc. He also took stake in WorldCom Inc., ebay Inc. and AT&T Corp. bought all these companies after their share prices had collapsed by as much as 70 percent. Prince Alwaleed said. 'We are not old economy, we are not new economy, we go everywhere there is value and growth potential." He may be premature about Amazon.com which in my opinion will drop significantly lower. Alwaleed, ranked No. 8 in a Forbes magazine list of the world's wealthiest people, regularly makes investments in companies with strong brand names and lagging share prices. The prince spent $200 million on WorldCom shares and $150 mflion on AT&T. The remainder was divided into $50 million portions and shared among Amazon.com Inc., EBAY Inc., Internet Capital Group Inc., Priceline.com, Infospace Inc. and DoubleClick Inc., as well as "old economy" stocks Coca-Cola, PepsiCo, McDonald's Corp., Walt Disney Co., Ford Motor Co., Gillette Co. and Procter & Gamble Co., "Between December 1999 and February 2000, everyone deserted old-world stocks and went into the Internet, causing all these old established companies to crash, and I emphasize crashed, so I bought slowly but surely," Alwaleed said. "In April and May, everybody abandoned the Internet stocks and went back into the old world. Then Internet shares crashed, so I went in there." The purchases increase the prince's technology, media and telecom portfolio to $7.8 billion, with technology amounting to $2.814 billion, media to $3.869 billioon and telecommunications totaling $1.115 billion. Since April 14, when stocks fell, Alwaleed, 43, has bought $700 million worth of Internet shares through a family trust, bringing his stake in America Online Inc., the world's largest Internet service, to $1.032 billion. "We screened 100 Internet companies and we concluded that the six companies we chose were here to stay," said Alwaleed. 'This bouquet of companies is on the side, to compliment, if you will, my $1 billion investment in America Online Inc., my main anchor Internet investment. I will have only one anchor company in the. Internet and all the others are to add value to that," he said. The Saudi prince's announcement, the second time in as many months he has Spent $1 billion on U.S. stocks, came hours before the Federal Reserve raised the ovenight bank lending rate to 6.5 percent.

For those institutional and acredit investors who want to talk to═Peter Palms, his telephoen is 1 425 828-6774.

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