The dream ends for software hopefuls

They might have become the next Autonomy, perhaps even an SAP. Or perhaps their founders would flash onto the society pages, having made several million selling their companies to Microsoft or Cisco.

But instead, the dream that their companies would become influential multinationals, or at least be bought for a fortune, ended for a string of European and US technology company executives, entrepreneurs and investors this summer. At best, their company’s assets were bought for a pittance, enabling some staff to stay in work; at worst, they simply shut down.

Top of the list were two high profile US companies, Scient and WebGain. Scient, a services company that now seems to have embodied the naive arrogance and worst excesses of the dot-com era, momentarily terrified established competitors such as Accenture and CSC.

In March 2000, Nasdaq-listed Scient, which specialised in building web sites, was valued at $130 million, and considered itself so hot that it lined its offices with fire extinguishers. But with revenues down by 60% for 2001, and losses mounting, the company filed for bankruptcy in 2002 and in July the remains were snapped up by a Utah-based services company, SBI. Scient’s chairman blamed the ‘big five’ consultancy rivals for dropping their prices too far.

Another US casualty: WebGain, a heavily backed software development tools company that was spun out of systems giant BEA to sell Java and web services development tools. In late 1999, BEA joined with venture capital company Warburg Pincus Ventures to create WebGain and fund the purchase of Symantec’s Visual Café Java tool for $125 million.

A string of further software acquisitions followed, and, at the end of 2001, according to IDC, the consolidated product, WebGain Studio, was the world’s best-selling Java development tool with a 22% share.

But that wasn’t enough. Economic conditions forced the cancellation of its IPO and the products were too cheap to generate enough cash flow. A move towards web services failed to generate enough new revenue. During 2002, WebGain has been selling off assets and products and a phased out shut down is planned. Some managers say its founding parent, BEA, should have helped more.

Europe has had its own casualties during the Summer of 2002. One of the most spectacular is Reef, the Brussels-based content management software company which burnt its way through $76 million (EU75.5m) of funding in less than three years. According to sources, it closed a $27 million (26.8m) third round as recently as March 2002.

Reef’s problem seems to have been its ambition. It developed a high-end, integrated line up of content management and integration tools, a strategy that pushed its prices up beyond many potential customers’ budgets and straight into competiton with established US suppliers such as Vignette and Interwoven. At the same time, it opened expensive offices across North America and Europe.

No less than three London Stock Exchange listed UK software companies effctively closed for business. One of these was InterX, which back in May sold its main assets to The Innovation Group. InterX was performing reasonably well as Ideal Hardware until 1999. Then its managers got the Internet bug: they sold off the hardware business and began trying to sell the BladeRunner content management and integration sotware. A string of strategic errors accompanied a dramatic revenue slump.

Izodia, formerly known as Infobank, also had a long history. For many years, it traded as a successful services company, eventually developing an enterprise class e-procurement software product. Founder Graham Sadd railed at the attention, and the valuations, that US rivals such as Ariba and Commerce One attracted.

Eventually, Infobank achieved its London listing, but the promised sales boom never materialised. In 2002, the management conceded that potential customers were choosing larger, more stable suppliers. Izodia, with some £40 million in cash at the end of 2001, has now decided to turn itself a cash shell and give up selling software.

At Knowledge Management Systems, executives had hoped that its ‘Universal Knowledge’ search and collaboration tool might turn it into the next Autonomy. Investors hoped so too: at one point, the company was valued at EU390 million.

But although it did manage to win some big customers, sales never lived up to the dreams and, by its final quarter, had all but disappeared altogether. In late August 2002, receivers were called in.

Industry analysts are not surprised by the failures. There has been a dramatic drop in enterprise software spending since early 2001 – and larger companies are taking a greater share of what is left as IT directors avoid suppliers that are perceived to be unstable.

Industry and financial analysts know there are more – perhaps many more – failures to come. Many suppliers have been been buffered from the worst effects of the recessions by the large cash injections they received from venture capitalists and from public offerings. But for many, this cash is running down.

Among the public companies whose situation looks precarious are once high flying network management company Orchestream; and encryption software specialist Baltimore.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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