A new report by PricewaterhouseCoopers indicates that 25 of the 28 UK Internet firms it studied are likely to run out of cash within 15 months, with some burning out much sooner.
The report predicts that an increasingly short “burn rate” — the amount of time in which a company can operate before being forced to raise more cash — will leave many UK e-commerce companies vulnerable.
The research examined 28 companies listed on the London Stock Exchange and Alternative Investment market, and found that 25 of the companies had cash operating expenses that exceeded their gross profits.
“Many of these companies have very little time left in which to start increasing revenue or to raise new cash and there has been a recent correction in the equity markets with investors becoming much more selective about which Internet stocks they will back,” said researcher John Soden.
“Our methodology makes some favorable assumptions for these businesses’ revenue growth, but most have little room to maneuver in uncertain new issue markets,” Soden added.
First Sign of Trouble
According to PricewaterhouseCoopers, there is no clear correlation between share price performance and the length of a company’s burn rate — some companies have short burn rates and strong share price performances. Half of the companies covered by the research saw their share price grow by an average of 840 percent over the six months ending in mid-April, despite their cash flow problems.
“In our experience, remedial action needs to be taken by Internet companies at the first hint of business plans going wrong,” Soden said. “The earlier this happens, the more opportunity there is for raising capital, for a sensible restructuring of the business, or for finding the right merger partner to preserve value.”
Investors Wary of Startups
The report nearly coincided with the high-profile announcement that London-based e-tailer Boo.com would liquidate its assets.
Despite financial backing by such impressive names as Goldman, Sachs and Co., J.P. Morgan and Bernard Arnault, the fashion retailer failed to manage its resources efficiently and never quite lived up to advance billing.
Consumers Ready To Spend
While e-commerce companies are running out of the cash needed to keep their virtual doors open, online consumer spending in Britain, Wales and Scotland is expected to soar from $2.6 billion (US$) in 1999 to over $30 billion by 2005, according to Fletcher Research, the UK arm of Forrester Research.
According to a report titled “UK Online Retail: From Minority to Mainstream,” online sales in the UK will account for 7.5 percent of the UK retail market in 2005, a significant rise over a 0.25 online market share in 1999.
Many other industry analysts have also predicted that the United Kingdom and Germany will be central players in an Internet shopping boom in Europe over the next decade.