CommunityWeb: an Internet firm's fight to survive *.

Dan Pale, the 30-year-old CEO of http://CommunityWeb.com, faced the most important decision of his business career. After more than a year of operation funded by $1.6 million in start-up capital, his Internet company faced mounting financial pressures. Weak cash flow and rapidly increasing debt were immediate threats, while potential legal problems loomed on the horizon. Sitting at his office desk in Seymour, Indiana, on June 8, 2001, Pale pondered whether to sign an agreement with Wall Street Venture Capital that seemed to offer a way out of his dilemma.

Starting http://CommunityWeb.com

Dan Pale had explored the idea of a localized Internet portal for many months before concluding that the concept was technologically feasible. In the fall of 1999 he met three times with Jim Mack, owner of a financial planning firm in Seymour, who agreed to join the venture. Pale and Mack then arranged for the Information and Communication Sciences' Applied Research Institute at Ball State University to conduct further research on the concept. In March 2000, CommunityWeb was incorporated with Jim Mack as CEO and chairman of the board and Dan Pale as president and chief operating officer.

The Founding Team

Dan Pale's business career began at the age of 23 when he founded a clothing store that grew quickly to more than $1.2 million in annual sales. He also was part owner of his family's True Value Hardware store and Just Ask Rental Center. In 1998 he had taken over management of WKBY-AM radio in Seymour. Within two years he had increased WKBY's revenue by 600% and positioned it as the largest talk-format station in southern Indiana.

Jim Mack was a certified financial planner and registered financial consultant with 13 years experience in the financial services industry. He was co-founder and president of a financial planning firm in Seymour and had clients in 17 states. Mack hosted a weekly program on WKBY and was contributor to The Roaring 2000'S Investor's Guide, a New York Times business best seller.

The rest of CommunityWeb's management team was young and energetic. Most of them were recent college graduates. Detailed information on Pale, Mack, and the other managers is presented in the business plan (Appendix A).

Building the Organization and Its Product

The company's basic concept was to localize the Internet through a Web site that would allow users to narrow information found on the Web to a particular locale. The Web site would generate advertisements specific to each user's local area. Pale's idea was to contain these capabilities within one national Web site at http://www.CommunityWeb.com. The site also would enable users to interact with the site and each other by posting stories about local sporting and news events.

Dan Pale recruited a young team to build CommunityWeb. For several months they used in-house software to locate, capture, and categorize an extensive database of URLs and build a model for taking their product to market. Mack and Pale planned to franchise the exclusive rights to sell http://CommunityWeb.com advertising (banner, pop-up ads, and e-mail marketing) in territories populated by approximately 100,000 people, while retaining for the company the rights to the 50 largest metropolitan markets in the United States. Mack and Pale would use the franchise fees ($35,000 per territory) to fund the company's further growth.

The partners initially estimated that CommunityWeb would need $2 million in start-up equity. Raising so much money for an Internet start-up, especially one based in a small Midwestern city, was no easy task. Jim Mack tapped his extensive client base to raise nearly all of the company's early capital, but these efforts proved expensive and time consuming. By mid-January 2001, the company had raised $1.6 million in amounts averaging between $25,000 and $50,000 per investor and had sold two franchises.

Pale and Mack developed the CommunityWeb business plan (see Appendix A) in January 2001 for the sole purpose of attracting investors. The company's business model seemingly changed weekly, with accompanying changes to its financial projections, but very few changes were ever made to the original business plan. The first pro forma financial statements had shown revenues exceeding $1 billion with two years. After consulting venture capitalists and other dot-com companies that already were in operation, Pale and Mack reduced CommunityWeb's estimates to a more conservative level: third-year revenues would be just over $160 million. By June 2001, an addendum to the business plan (Exhibit 1) showed a further scaling back of projected earnings since the original plan. Because CommunityWeb's financial statements had not been audited to that point, the company experienced difficulty in communicating with institutional investors and venture capitalists.

The Internet Business Environment in 2001

In 2001 more than 160 million Internet users worldwide spent an average of more than 18 hours per month connected. The Internet had become an important force in the U.S. economy as monthly Internet sales approached $4 billion, an average of $270 per user. (1)

Economic conditions during 2001 made it especially difficult for young Internet-based companies to obtain funding. The Internet boom of 1999 and 2000 was a thing of the past, and most venture capitalists had gone back to business fundamentals in making investments. They now considered only companies with sound business models and business plans. Private investors were more cautious following the "tech wreck," the plunge in value of NASDAQ stocks. Since its peak of 5,132 in March 2000, the NASDAQ index had declined to 2,160 by June 2001. (2) More than 555 Internet businesses worldwide had closed in the first half of the year.

Internet firms such as http://citysearch.com, http://localbusiness.com, and http:// cityworks.com made major cutbacks or completely ceased operations. Double Click, the largest online ad broker, continued to lose more than $100 million per quarter. Most companies, including dot-coms, were cutting advertising budgets across the board. Competitive Media Reporting estimated that advertising spending across all media in 2001 would fall more than $102.4 billion from the year before. (3) While there seemed to be interest in specialized and localized Internet ads, John Groth, CEO of BeaconVentureCapital in Bethesda, Maryland, observed that the capital markets were looking unfavorably on firms that drew most of their revenues from Internet advertising. (4)

By June 2001, CommunityWeb faced numerous competitors and yellow pages Web sites. Pale and Mack believed, however, that none of these sites truly provided local information across the country. They contended that these sites were geared toward larger cities or restricted to very small regions. Therefore, CommunityWeb never viewed any of them as major threats to its own success. Sites such as http://DigitalCity.com and http://citysearch.com, however, were engaged in significant national advertising campaigns and had already established name recognition with end-users. (5) CommunityWeb considered its main competitors to be local newspapers and radio stations.

http://CommunityWeb.com in Operation

The http://CommunityWeb.com Web site was launched on January 23, 2001. Visitors to the site could read and post local news and sports stories, check the weather forecast, and search for URLs tailored to specific locales and business categories. The URL searches on the site used CommunityWeb's search tool and database, which by April included more than 200,000 addresses. In its first few months of operation, CommunityWeb established partnerships and alliances with several prominent companies, including AT&T, http://Infospace.com, and Perkins Communications. These relationships, however, ended for various reasons. The AT&T and http://Infospace.com relationships were dissolved because CommunityWeb could not meet the monthly financial demands of its contracts with the two firms. Likewise, CommunityWeb did not have the capital to further pursue the set top box technology that it had initially explored with Perkins Communication.

CommunityWeb struggled to get its business concept off the ground. Tony Baker, director of franchise sales, had sold only two of a first-year target of 100 franchises by March, 2001, leaving Pale and Mack with the need to take other steps to generate positive cash flow within the next two or three months. The company's workforce had peaked at approximately 175 employees and a monthly payroll of $200,000 in March. Running short of funds in April, Pale and Mack cut the workforce to only 15 key employees and a monthly payroll of about $75,000 (see Exhibit 2). They saw these cuts as critical to keep the company alive. With no revenue, mounting debt, and a failing business model, they decided that across-the-board cutbacks were their only option.