Read how dead and dying dot-coms are selling off pieces of their technical architecture—cheap
Learn why the technology is worth nothing without the people who built and maintained it
Opportunity often requires one to act first, think later. On a pleasant Thursday afternoon last spring—May 18, 2000 to be exact—executives at Bright Station consulting received a call from officials at KPMG. The Big Five company was beginning to liquidate the assets of high-profile fashion e-tailer Boo.com, which its founders had decided to shut down only the night before. Would Bright Station, a London-based e-commerce provider, be interested in acquiring Boo’s back-end e-commerce platform?
Bright Station executives had no idea. But since their office was just around the corner from Boo headquarters in tony Leicester Square, they figured they’d pop ’round to have a look. By Friday morning, May 19, with scarcely enough time to peel back the covers on the system, an offer was on the table. Soon afterward, Bright Station agreed to acquire Boo’s homegrown message-brokering architecture and package tracking system, which Bright Station planned to adopt as an e-commerce platform for its customers—companies that were looking to expand into the European market. The price was 250,000 pounds (just over $374,000 at today’s exchange rate)—less than 1 percent of the 35 million pounds (over $52 million) Boo spent to develop the system. A bargain indeed. (Fashionmall.com bought Boo’s brand and front-end user interface.)
But the glory of the moment soon evaporated. Back in their office later that Friday afternoon, Bright Station executives suddenly realized the technology would be worthless in the absence of the people who understood it. “We realized we were really after the people—a lot of what we wanted was in their heads,” says Eric Goldstein, executive vice president of Bright Station. “We thought that if we got the technology and didn’t get the people, we’d be lost.” Unfortunately, although Bright Station had asked KPMG to hold off on letting the 220 Boo employees go, all but 30 key personnel (who were kept on to ease the transition) had been “made redundant” by the end of the day. Going into the weekend, how would Bright Station reach Boo’s embattled technical team—44 people in all—before they departed on much-needed breaks or took other jobs? And if Bright Station was able to locate the critical personnel, would enough of them agree to come on board to keep the e-commerce system vital?
As the landscape becomes increasingly littered with the carcasses of e-tailers, more and more executives are likely to get a call like the one Bright Station received in May. In fact, it’s already de rigueur for viable retailers to purchase technology from their dead and merely moribund peers. For example, even as fiscal pressure mounts on eToys, last June the pure-play toy retailer purchased homegrown customization and personalization software from the eParties unit of eCompanies. (Though struggling, eParties was up and running at press time.) According to published reports, Jeanne Jackson, the new head of Wal-Mart.com, bought an e-commerce platform from now-defunct Homewarehouse.com. Former Toysmart.com CEO David Lord no doubt wishes he had sold off his company’s software, given the firestorm of disapproval that followed the announcement of his intention to sell the bankrupt retailer’s customer list. (Not surprisingly, many in Lord’s position, including Lord himself, declined to be interviewed for this story.) Some particularly survival-minded dotcoms decided from day one to license their technology to others. Mercata, for example, hosts its We-Commerce group-buying platform for the likes of Sun and Onvia.com.
As the Bright Station/Boo scenario shows, everything happens very quickly once a dotcom closes down. It helps to have a decision framework in place before you get the call. Proximity is the first consideration: The Internet has not completely erased the constraints of geography. If you’re not located relatively near the company in question, it’s unlikely you’ll be able to move fast enough. (Those considering buying technology from a going concern will likely have a bit more time.)
Geography is so critical because of the need to recruit the people who built the system. Those who have been there agree: Don’t even think about buying someone else’s platform unless you can get at least some of the key IT architects to come along. With the pace of life at startups, few bother to stop and document their systems thoroughly. The platform may work fine today, but once it breaks, it will be impossible to fix it without extensive documentation or people who know how it works. (It wasn’t so long ago, after all, that many companies couldn’t even fix a two-digit date field in legacy systems—much less understand the complex inner workings of those applications—because of nonexistent documentation.) Integrating a platform with your existing technical infrastructure will likewise be unworkable without help from those in the know. It is extremely rare for all of the variables to be in place for the situation to work. For Bright Station, however, the stars were aligned just so.
Legendary Burn Rate
For Bright Station CEO Dan Wagner and his colleagues, there was a lot to like about Boo’s back-end systems. Following six months of fanfare, Boo.com finally launched its online athletic clothing shop in November last year to a torrent of criticism about problems with the user interface. Most users’ browsers were not configured to deal with the site’s sophisticated 3-D imaging capability, so they could not run the site’s animated mascot—Miss Boo—and watch her try on selected outfits. Those who could load Miss Boo complained it took too long for the images to appear. Shortly after launch, the retailer began to discount prices on its merchandise—contrary to plan—in an effort to step up sales. And it worked, to a point. According to Ascer Martensson, former Boo new market operations manager, by January the site was receiving one order every four seconds, fulfilling 99.9 percent of the orders itself. Despite this brief burst of positive activity, by that time Boo was burning through far too much capital (from an elite group of international investors) to recover. By late spring, Boo founders were left with little choice but to shutter the venture.
Wagner and Goldstein were not worried about the front-end glitches—it was the back-end systems that interested them. They were quite impressed with Boo’s publish-and-subscribe message-brokering architecture. Boo’s programmers had crafted the message-brokering system so that a supplier could exchange information with Boo’s platform no matter what kind of systems it had in place. “Boo could interface with everyone from a supplier running a sophisticated ERP system to a cool boutique that had to go down to the corner caf¿o get its e-mail,” says Goldstein. In addition, the system could accept payment in 18 different currencies and in seven different languages. These features would be a plus for Bright Station’s target customer group of e-tailers looking to expand into Europe. Goldstein did not think much custom programming would be required to adapt the platform for his clients’ use.
The Bright Station team was also impressed with Boo’s virtual inventory system and a homegrown package-tracking system that rivaled those of the big carriers. Indeed, many believe Boo gilded the lily in the extent to which it developed its own systems.
Part of the reason for that was the seemingly endless supply of money that flowed Boo’s way. Boo’s burn rate was the stuff of legends. Founded by the glamorous young Swedish duo of Ernst Malmsten and Kajsa Leander, Boo had been ultra-successful at attracting backers and investors from all over the world, including J.P. Morgan & Co. (which for a time was Boo’s investment banker), Benetton, Moet-Hennessy Louis Vuitton and Goldman Sachs Group. By the time it closed its doors last May, Boo had chewed through 175 million pounds (over $262 million), according to Goldstein, 35 million of which was spent on technology. What had first been too much (hype), too soon quickly morphed into too little (revenues), too late.
Right up until the fateful Wednesday night when Malmsten called the headquarters staff together to break the bad news, most Boo employees did not realize how dire the situation had become. By all accounts, the group was incredibly close-knit. An air of energy and excitement prevailed, recalls Martensson, a childhood friend of Malmsten and Leander. “Because of our Swedish background, we had a very flat hierarchy and a very open atmosphere,” says Martensson, now vice president of alliances for Sparza, the e-commerce division of Bright Station. “We genuinely enjoyed working together.”
Goldstein hoped to recreate that super-creative environment by hiring the entire Boo technical staff. But as almost everyone had been laid off by the end of the day on Friday, May 19, it was unclear how he would even be able to find people to make his pitch. Goldstein and Wagner spent the weekend at Boo’s office, which looked like an “abandoned ship,” according to Martensson. Says Goldstein, “We arranged flowers and cleaned up the office.” They also planned a party for ex-Booers to be held early the next week at a London nightclub. Goldstein and Wagner caught a lucky break: They were able to locate Nick Barth, the former head of IT for Boo, who agreed to attend the gathering. (Barth was one of the key people KPMG hired to stay on at Boo during the interim period.) Barth also agreed to call several of his former colleagues, who in turn called more colleagues. This “viral” recruiting effort paid off: More than 30 people turned up for the party.
But despite copious food and drink, the ex-Boo attendees were far from relaxed. “They were very skeptical, and they were already being recruited like mad,” recalls Goldstein. Wagner took the floor to make an impassioned appeal that if they joined Bright Station, they would have the chance to continue the project they started while at Boo but with more financial control and discipline. “We said, ’It’s unfortunate that the [Boo] dream had to die. But the technology doesn’t have to die,’” says Goldstein.
Within a day or two, there were signs the Boo alumni had bought the pitch. “Wagner is an enormous visionary,” says Martensson. For his part, Goldstein rang Martensson every day for three weeks until the latter agreed to come aboard. “That sort of encouragement is nice,” says Martensson.
Martensson believes Bright Station has succeeded in reviving Boo’s spirit while carrying on its high-octane technology. In fact, months after Bright Station took over Boo’s technology, more former Boo employees are still joining the company. (Boo alumni meet socially every month or so, and the Bright Station converts have succeeded in persuading many of their former colleagues that Bright Station is for real.) To date, more than 40 ex-Boo technical personnel have joined Bright Station.
Goldstein cautions anyone considering this sort of move not to discount the importance of proximity. It will be nearly impossible to hire a critical number of the failed company’s employees unless you are close enough to its operations. Martensson confirms that most Boo alumni were committed to staying in central London. In late July, Goldstein and other Bright Station management paid a visit to the Silicon Valley offices of Pandesic, an Intel-SAP application service provider joint venture that ceased operations at the end of the month. The purpose of the trip was to investigate the situation at Pandesic and determine whether there was anything worth acquiring. But the distance proved too far and the value proposition not compelling enough. “The developers were out there in California. It was too difficult,” says Goldstein.
The True Asset: People
Goldstein isn’t the only one who believes that the value of a technical platform depends on the ability to keep the people who built it. Steven Sprague felt the same way when his company acquired a struggling dotcom in August. President and CEO of Wave Systems, an e-commerce and security software vendor, Sprague was initially interested in just licensing an electronic shopping interface from IShopHere.com (owned by Indigo Networks). “But it became clear that their ability to raise capital and remain viable was a risk to us. So this was a way we could acquire the technology and the people and keep them within our control,” says Sprague from Wave headquarters in Lee, Mass.
When the sale is complete, Wave will subsume between 10 and 12 Indigo employees into its organization. For the moment, Indigo and IShopHere.com will continue to operate under their own identity, although that could change. One notable contrast between buying technology from a dead versus live dotcom: price. Wave paid $7.2 million in a pure-stock deal to acquire Indigo—hardly a fire sale.
Sprague believes acquiring an e-commerce engine from a going concern is less risky than trying to develop your own. “At the end of an in-house development process, you might not like what comes out. This way, we had seen the technology in action,” he says.
In any case, Sprague would not have considered acquiring the technology without the people. “[Acquiring technology from a dotcom] is hugely different from buying a packaged application. If you buy a shopping interface from IBM, that means there’s continuous support from IBM. When you bring in technology from another company but you don’t keep the people in place, that technology quickly becomes a liability,” he says.
Sprague has seen this happen—albeit on a much smaller scale—in his own company. A developer wrote a slick demo for a Wave product. When he left the company to go back to school, however, no one could figure out what he had done and the demo unfortunately had to be scrapped. “If you don’t have the guys who wrote the technology, you have zero ability to recover if the thing breaks. And it will break,” he says. So much innovative software is built on a cool idea someone had at 2 a.m. If no one bothered to write down the idea—and no one does—it will vanish along with its author.
Where the circumstances—including proximity and people—are right, the payoff of acquiring innovative technology at a bargain basement price can be huge. Several months after the purchase of Boo’s technology, Bright Station had not yet seen a return on its investment, but CEO Dan Wagner expected this to occur by the end of the year. In addition, Bright Station was able to hire a highly skilled technical team in one fell swoop, during a staffing shortage to boot. But for most CIOs, this celestial turn of events will remain firmly out of reach.