boo.com's fall makes realism the fashion

You'd be forgiven for believing that the demise of boo.com was accompanied by an audible 'pop' as the dotcom bubble burst. The warm glow emanating from the 'I-told-you-so' brigade must have been felt up in the Mir space station.

And just days after boo.com's collapse, backers pulled the plug on UK net startup netimperative.com, blaming its end on over-ambitious expansion.

PricewaterhouseCoopers (PwC) predicts that one in four UK internet companies may run out of cash within six months. Surely the game is up?

The man charged with clearing up the boo.com mess disagrees, however. "To succeed in business you need good management, good ideas and sound finance. I don't believe dotcoms are different from any other business in that respect," said Mick McLoughlin, the KPMG partner heading the 20-strong corporate recovery team assigned to rescuing boo.com.

The reason for boo.com's failure is not complicated, said McLoughlin. "Management spent a lot of money setting up infrastructure, but sales weren't enough to cover expenditure. It's as simple as that."

Ecommerce firms agree, perhaps in the hope of boosting confidence. "It is difficult for dotcoms at the moment," said Adam Laird, managing director of Net startup Magicalia. "Press coverage predicts doom and gloom for all, but that's not the case. It's just that the basic principles of business management still apply to a dotcom - you have to manage cash flow with an iron rod."

Loadsa money
As of May last year, boo.com had received $120m in funding, the largest investment in any European internet startup. But by last month, gross sales were only $500,000 a month, and boo.com was spending $1m more than it was earning every week. Only $500,000 worth of that cash mountain is left.

What a far cry from the excitement of 18 months ago, when boo.com founders Ernst Malmsten and Kajsa Leander presented an innovative and technologically exciting idea, good enough to impress serious investors. JP Morgan, Goldman Sachs, the Benetton family and fashion guru Bernard Arnault's LVMH group are not organisations to invest unwisely. So was the idea of buying fashion clothes online a turkey?

Some say yes. "The boo.com concept is not something we would look at," said Nick Teunon, finance director of eSouk, an internet incubator working with dotcom startups. "I don't rate the idea. Boo initially had a policy of charging premium prices, which is not what I expect to see if I shop on the net. Also, fashion is a market where people want to touch and try before they buy." Ironically, just three days after Teunon said this, netimperative went bust. The company was backed by eSouk.

Teunon believes blue chip backers should share the blame for boo.com. "When we invest in a dotcom, we look for old economy skills in the management team, people who understand how to run a business and the importance of cash flow. The investors don't appear to have done that," he said.

A senior partner at a design consultancy that worked closely with Malmsten and Leander during boo.com's infancy, who does not want to be named, agreed. "The founders certainly enjoyed their funding, jetting all over the place and staying in the best hotels, but, to their credit, they did understand the importance of creating a strong brand. They are creative people rather than business people. They were given enough funds to employ 400 staff, which is more than Freeserve, yet their chief executive [Malmsten] was a poetry critic! In no other industry would that be allowed," he said.

Over-ambitious
Boo.com's business plan was probably over-ambitious. "No old economy retailer would have simultaneously opened for business in 18 countries," said Chris Blake, director of new economy investment company, Inflexion. "The cost of customer acquisition in boo.com's target market is very high; there are plenty of ebusinesses that don't have that overhead," he added

The website was advanced, but required high bandwidth and was too slow. Photographing products to create 3D images cost half a million dollars a month.

The company may have died, but the technology behind it is thought worth saving. "People have focused on the consumer business of boo," said Shaun O'Callaghan, partner at KPMG and ebusiness specialist. "It's built an advanced business-to-business infrastructure to support virtual trading, with a supply chain covering 18 countries and seven languages. In theory, you could put another website on the front end and use that back end," he said.

For those expecting the bubble to burst, boo.com is all the proof required. A more balanced view must be that dotcom realism is now the fashion.

Magicalia's Laird said: "The atmosphere in the investment markets has changed. The focus is sharper; people are looking for a track record in managing cash. This is a good thing. Businesses have always gone bust - it's hardly a new economy phenomenon."

Dotcom failures do not imply a fundamental flaw in the cyber economy. "In some sectors, too much money has gone in," said Inflexion's Blake. "But there are plenty of ebusiness companies moving into profit because they deliver customer value."

If more dotcoms recognise that basic business management principles are essential, regardless of the innovations brought by the net, then perhaps the headlines will soon read more like 'boo who?' than 'boo hoo'.