Bad news for Dot.coms and the building industry

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Posted at 11:07 p.m. PDT Saturday, October 21, 2000

Sad end to days of hope and funding

BY ELISE ACKERMAN Mercury News

Steve Peletz sits alone in his glass office in the center of a brick warehouse in San Francisco's Potrero neighborhood, wrapping up the details of his defunct dot-com. The cubicles where the 55 employees of RedLadder.com used to work are empty and dark. The receptionist's desk is abandoned. At the entrance to the building, someone has posted a sign complaining that garbage is piling up.

This is how the dot-com dream dies.

During the past year, more than 200 Internet companies like RedLadder.com were launched to help bring the nation's construction industry online. They dreamed of sharing proceeds of an $845.5 billion industry as they helped contractors become more efficient in their bidding, management and purchasing.

But now, all but a handful appear to be on the brink of bankruptcy. Firms like Heavyware and Collaborative Structures are going out of business from Cary, Ill., to Boston, casualties of the revolution they hoped to help ignite.

Two of the most prominent construction dot-coms in the Bay Area -- Bidcom Inc. and Cephren Inc. -- are expected to announce a merger next week. Another, Buildpoint Corp., recently sold a large chunk of itself to Old Economy publisher McGraw-Hill Cos.' Construction.com.

During the rise and fall of this sub-industry, venture capitalists and investors poured $1.43 billion into 243 construction-industry dot-coms, according to the Digit Group consulting firm. ``Half are in critical condition and won't last a year,'' says Paul Doherty, a Digit Group principal partner.

``It's almost over,'' says John Mumford, general partner with Crosspoint Ventures, which has heavily invested in e-business software and services companies.

As the fate of RedLadder.com shows, the same destructive forces that gutted hundreds of consumer e-commerce companies like Priceline.com and Petstore.com are also tearing at the business e-commerce companies: unrealistic expectations, excessive money and hype, neglected business basics. The failure of these companies show how even experienced business people could get swept away by dot-com euphoria.

Reasonable high hopes In RedLadder's case, there was plenty of reason to have high hopes for Peletz's idea. The son of a Bay Area contractor, Peletz understood the problems of construction firms because he had briefly run his own contracting firm from 1995 to 1997. Unlike better-funded competitors who spoke of using the Internet for everything from blueprint drawing to blue-ribbon cutting, Peletz decided to focus on solving a narrow problem: bid management.

He knew how time-consuming this task could be. As a young man working at his father's company, he had had the job of calling dozens of subcontractors, inviting them to bid and making sure that copies of the architectural drawings got into their hands.

That experience came to mind while Peletz was taking an entrepreneurship class for his master's degree in business administration at the University of California-Berkeley's Haas School of Business during spring 1999. A project for the class evolved into RedLadder.com's business plan. On the strength of his idea, a San Francisco venture-capital firm named 21st Century Internet Venture Partners provided initial funding of $3.1 million last November.

Slightly built and bespectacled, Peletz says he used the money to rent space in a former furniture warehouse and hire engineers, and marketing and sales people. For the first several months, he focused on getting the Web site up and running, relying on venture capital, rather than revenues, to fund the business.

In retrospect, he says, this was a mistake. After the company collapsed, Peletz, who has a fondness for business-school jargon, wrote a ``Lessons Learned'' memo to himself. In a section he calls ``Going forward'' he wrote:

``Don't use venture capital as a replacement for revenues.''

RedLadder.com wasn't ready to roll out its bid-management software until the spring. But by then, competitors like Bidcom and Cephren had announced they had raised more than $40 million. In April, another competitor, Buzzsaw.com, revealed it had raised $75 million. Peletz recalls a visit he had paid to one of Buzzsaw.com's early investors. ``Basically they were saying, `We are going to do the same thing, and we are going to squash you like a bug,' '' he says.

Nearly out of money, Peletz approached investors, but by April the investment climate had changed dramatically. A new lesson: ``Used to be that investors were incredibly patient. . . . Now investors are far more discerning and impatient.''

Though RedLadder.com was beginning to attract several thousand users, all the venture capitalists Peletz approached wanted to talk about was revenue. RedLadder had none.

In order to attract members, the company had been offering its service for free. ``Our original metrics were building a market and building a customer base and bringing them onto the system,'' Peletz says.

Hence: ``Overnight results required.''

Responding to investor concerns, Peletz scrambled to find ways that RedLadder.com could make money. He started to charge for certain types of searches of RedLadder.com's project database, and he asked his engineers to build an e-marketplace. Despite his efforts, venture capitalists still doubted RedLadder.com's ability to compete against better-funded rivals, Peletz says.

Another hard lesson Another hard lesson: ``You need a technology advantage in most cases.''

[SNIP]

Survivors of the shakeout Tough times could be in store for the survivors of the shakeout, Doherty warns. He says at least one leading indicator of the health of the construction industry bodes ill: The backlog on projects that architects say they have in the pipeline has fallen dramatically in recent months, plummeting from a 16- to 18-month backlog during the first quarter of 2000 to nine months this fall.

``You can always tell if there is going to be a slowdown,'' Doherty says. ``This is a staggering drop-off in just four months.''

Meanwhile, hope for the not-yet-bankrupt dies hard. In the Potrero warehouse, Peletz says he has received about a dozen inquiries from dot-coms interested in subleasing his space. ``I've got to laugh, at some level,'' he says. ``The famous last words from these people are, `Oh yeah, we are about to get funding.' ''

-- Deb Mc (vmcclell@columbus.rr.com), October 22, 2000

Answers

Thanks Deb-great article. Seems to me the cart-before-the-horse mentality is once again proving to be fatal. Greed and speed has been the downfall of the dot.coms. I hope this guy tries again. He's learned hard lessons but started out with some solid ideas.

-- poconojo (jberman478@aol.com), October 23, 2000.

Poconojo,

Thanks! AGreed - it's a little late now, that's for certain. What I found so interesting though is that it is reinforcing the danger signals that Cisco *must* be seeing. Now, with the potential split- up of AT&T, it could put the hurts on short-term future sales, exactly what Cisco, and the NASDAQ, doesn't need right now.

I think that we're no-where near done with the tech shake-down. Nov. and Dec. should also be big months. It's going to be a rough time, IMHO...

-- Deb Mc (vmcclell@columbus.rr.com), October 23, 2000.


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