Deal in review: Crafting Some More B-to-C Carnage –

EAST NORWALK, Conn. – It wasn’t supposed to go down like this.

Less than one year after Angus Mackie decided to jump aboard the still-thriving business-to-consumer bandwagon with an online site for crafting aficionados, Craftshop.com Inc. found itself in an East Wilmington, Del. courthouse filing for Chapter 11 bankruptcy protection.

The move was not only a major blow to the psyche and career aspirations of Mackie and his cadre of crafting and publishing professionals, but also to an entire B-to-C market which saw, for one of the first times, that there isn’t necessarily a profitable light at the end of the silicon tunnel. Moreover, many probably saw their own reflections in the CraftShop.com court documents.

In fact, Craftshop.com is not alone. During the past few weeks, more dotcom fatalities emerged. Internet companies such as Boo.com, Digital Entertainment Networks, Net Imperative, RedRocket.com, Toysmart.com, Violet.com, WebGalaxy and most recently, APBNews.com. have all fallen by the wayside.

Indeed, CraftShop.com was like so many other e-commerce sites in that it seemed to have everything going for it. There was the underserved market that lacked a common destination for information and conversation – this time a group that included everyone from professional quilters to amateur greeting card makers.

There was an experienced management team led by Mackie, a publishing veteran who had already been involved in a pair of start-up companies. And, finally, there was $15 million in initial venture capital commitments from a group of institutional investors that included Brand Equity Ventures, CMGI @Ventures, Primedia Ventures and Andlinger Capital.

“I had spent a number of years working with crafting Web sites [in a consulting capacity], and some of them were good, but none of them were incorporating all of the things that I thought would make the perfect site,” Mackie said. “So I decided to do it since I really believed there was a need out there.”

Problems began innocently enough for the East Norwalk, Conn.-based company. When the Series A funding was drawn up, the $15 million capital pot was split into a pair of $7.5 million tranches, which were then again split in half. The deal was structured in a manner that the tranches would continue kicking in so long as Craftshop.com met certain basic performance criteria.

“It was pretty prudent on the venture capitalist guys’ part,” Mackie said. “I wouldn’t give anybody $15 million and say Have at it’ either, although now, I guess, I wish they had.”

Only the first $7.5 million of funding would ever get paid out. Although specifics of the VC agreement were not available at press time, suffice it to say that the company was battered by a wide array of competition that had sprung up since Mackie had originally thought up his idea.

“It’s kind of like when a movie studio comes up with a movie idea and everyone else follows suit, but you don’t really know who was first, or even which one is the best one,” said one venture capital source.

CraftShop.com then missed the ever-important Christmas shopping season when its launch date was pushed back to this January, a near-fatal event for a company that predicates its primary revenue stream upon e-customer transaction fees.

Restructuring Efforts

Those problems notwithstanding, however, CraftShop.com was able to receive bridge loan financing in the amount of $742,000 in February to help it survive the lean times while the company looked to partner up with a recognized bricks-and-mortar organization.

“There were several bricks-and-mortar development deals in the works, and we were pretty confident that we’d be able to get something done,” Mackie said. “The plan was to do a bridge which would take us through the notification process, and then we’d go out and do some restructuring in terms of financing.”

Hopes for such a refinancing, however, were killed off just weeks later when the public equity markets began to stumble and venture capitalists reacted by refusing to back the very type of e-commerce companies which they had funded into existence in the first place.

“I thought that, even in this environment, we could have carried on under a contained burn rate, but it became pretty obvious that the VCs were done with any more cash influxes, although they were pretty helpful getting our resumes to their other portfolio companies,” Mackie said.

“There’s no question that this particular space can support another dotcom, but we had really exhausted just about every play we had, even though we did do a lot of last-second hustling.”

He added that the venture capital industry reminded him of the music recording industry in that it seems to buy up talent and then shelve it if the popular mood shifts. “B-to-C will come back, just with a different set of conditions,” he said.

What will happen to companies like CraftShop.com, which were founded under slightly older principals and preconceptions, though, remains to be seen.

Jillian Aylward, an attorney with Curran, Coffey & Morran LLP, who is also serving as special counsel to CraftShop.com on its bankruptcy case, believes that the CraftShop.com example may only be the tip of the iceberg.

“The honeymoon is over for these companies when it comes to venture funding…I could see a lot more companies like that coming to us in the future,” she said.

If such an influx of “deal flow” does begin, it is quite possible that the courts will look to the results of the CraftShop.com case for precedents on what a dotcom’s assets are actually worth.

“This is uncharted territory because we don’t really have any way to value stuff like a domain name or a URL address,” Aylward said. “There’s already a substantial investment put into these sites, but we still don’t know if that investment adds relates to any particular value percentage.”

Complicating the matter further is that an e-commerce site like CraftShop.com has much of its customer information inextricably tied to its Web site address.

“My sense is that you cannot separate the personal information we’ve acquired from our customers from some of the assets we plan to sell off,” Mackie said. “That means that the business proposition of the potential buyer will probably help determine the final price.”

According to the minutes from a May 17 meeting of the CraftShop.com board of directors, existing investor Primedia Ventures has already expressed an interest in acquiring the indebted company’s assets, although no offer price information was available.

Primedia declined repeated requests for comment, as did fellow investors CMGI @Ventures and Brand Equity Ventures.