Last week Pandora was the newest (of what I like to call) “app” companies to plan an IPO (initial public offering) for 2011. Regulatory filings showed the company hope to raise $100 million from its IPO. If you are not familiar with Pandora, it is basically a radio for the internet. Users can select a genre of music and listen for free (with the occasional ad thrown in). I use it quite a bit on my iPhone and it is consistently listed in iTune’s top downloads. While I am a fan of Pandora, I don’t believe a company that streams music over the internet is worth $100 million.
In fact, with the news of Facebook, Twitter, Groupon, Zynga and LinkedIn planning their IPO’s, I am getting a sense of deja vu:
A core lesson from the dot-com boom is that even if you have a good idea, itâ€™s best not to grow too fast too soon. But online grocer Webvan was the poster child for doing just that, making the celebrated company our number one dot-com flop. In a mere 18 months, it raised $375 million in an IPO, expanded from the San Francisco Bay Area to eight U.S. cities, and built a gigantic infrastructure from the ground up (including a $1 billion order for a group of high-tech warehouses). Webvan came to be worth $1.2 billion (or $30 per share at its peak), and it touted a 26-city expansion plan. But considering that the grocery business has razor-thin margins to begin with, it was never able to attract enough customers to justify its spending spree. The company closed in July 2001, putting 2,000 out of work and leaving San Franciscoâ€™s new ballpark with a Webvan cup holder at every seat.
Another important dot-com lesson was that advertising, no matter how clever, cannot save you. Take online pet-supply store Pets.com. Its talking sock puppet mascot became so popular that it appeared in a multimillion-dollar Super Bowl commercial and as a balloon in the Macyâ€™s Thanksgiving Day Parade. But as cuteâ€“or possibly annoyingâ€“as the sock puppet was, Pets.com was never able to give pet owners a compelling reason to buy supplies online. After they ordered kitty litter, a customer had to wait a few days to actually get it. And letâ€™s face it, when you need kitty litter, you need kitty litter. Moreover, because the company had to undercharge for shipping costs to attract customers, it actually lost money on most of the items it sold. Amazon.com-backed Pets.com raised $82.5 million in an IPO in February 2000 before collapsing nine months later.
The shining example of a good idea gone bad, online store and delivery service Kozmo.com made it on our list of the top 10 tech we miss. For urbanites, Kozmo.com was cool and convenient. You could order a wide variety of products, from movies to snack food, and get them delivered to your door for free within an hour. It was the perfect antidote to a rainy night, but Kozmo learned too late that its primary attraction of free delivery was also its undoing. After expanding to seven cities, it was clear that it cost too much to deliver a DVD and a pack of gum. Kozmo eventually initiated a $10 minimum charge, but that didnâ€™t stop it from closing in March 2001 and laying off 1,100 employees. Though it never had an IPO (one was planned), Kozmo raised about $280 million and even secured a $150 million promotion deal with Starbucks.
For every good dot-com idea, there are a handful of really terrible ideas. Flooz.com was a perfect example of a â€œwhat the heck were they thinking?â€ business. Pushed by Jumping Jack Flash star and perennial Hollywood Squares center square Whoopi Goldberg, Flooz was meant to be online currency that would serve as an alternative to credit cards. After buying a certain amount of Flooz, you could then use it at a number of retail partners. While the concept is similar to a merchantâ€™s gift card, at least gift cards are tangible items that are backed by the merchant and not a third party. It boggles the mind why anyone would rather use an â€œonline currencyâ€ than an actual credit card, but that didnâ€™t stop Flooz from raising a staggering $35 million from investors and signing up retail giants such as Tower Records, Barnes & Noble, and Restoration Hardware. Flooz went bankrupt in August 2001 along with its competitor Beenz.com.
eToys is now back in business, yet its original incarnation is another classic boom-to-bust story. The company raised $166 million in a May 1999 IPO, but in the course of 16 months, its stock went from a high of $84 per share in October 1999 to a low of just 9 cents per share in February 2001. Much like Pets.com, eToys spent millions on advertising, marketing, and technology and battled a host of competitors. And like many of its failed brethren, all that spending outweighed the companyâ€™s income, and investors quickly jumped ship. eToys closed in March 2001, but after being owned for a period by KayBee Toys, itâ€™s now back for a second run.