Business Transaction: Innuity, Inc.

Innuity, Inc.
1712 Hopkins Crossroad
Minnetonka, Minnesota 55305

(A story like many others)
Innuity, Inc. is an Internet business services company organized in 1995, as a C Corporation. Innuity functions in an industry that provides software, design, marketing analysis, and other services to businesses which use the Internet in their operations. This history, as outlined in the Innuity Chronology of Events, is fairly typical of what happened in the market for these types of companies. The economic expansion of the 1990s created a favorable economic environment for all commercial enterprises, but one of the fastest-growing was the ecommerce sector. Increasing acceptance of the Internet by both businesses and consumers created an economic revolution potentially comparable in historic magnitude to that brought about by the steam engine in the 19th century.

Investors, eager to realize the benefits of the "new economy," flooded the markets with capital to supply these start-up companies with the resources necessary to establish themselves and their products. The U.S. stock market soared to record highs in 1999. However, most of these businesses were years away from generating the profits envisioned by the investors. Investor disenchantment produced a widespread sell-off in the stocks of these types of businesses during March of 2000. Prices of Internet-related stocks could not be sustained without earnings. By the end of 2000, tech stock values had plummeted and the recession of 2001 sounded the death knell for many of these ecommerce companies.

Inherent in the rush to realize profits was the risk of losing&everything. Conservative investment became a thing of the past, risk was idealized, and companies rushed to go public without a business plan or the financial backing to do it. The .com mentality affected the individual and corporate investor alike: our overconfidence seems amazing in hindsight. Many venture capitalists felt entitled to a high yield despite the risks they were taking. Everyone wanted to be on the bandwagon, to cut costs, to save time, and to have a piece of the market growth. No one wanted to miss the boat.

"As the rapid growth of the Internet has fundamentally changed the way that businesses communicate and transact, Web content has increased dramatically in both volume and importance. Web content, including graphics, audio and video clips, hyperlinked text and executable software, is the basis for every Web page and most e-commerce applications. International Data Corporation, or IDC, estimates that the number of Web pages will grow from 925 million in 1998 to 13.1 billion in 2003," Intranet Solutions, March 9, 2000. So far, so good for Innuity.

With the growing use of the Internet, business-to-business e-commerce began attracting investors with multi-billion dollar market capitalizations, large revenue opportunities, and completely new business models, easily adopted by the less fickle and business minded buyers and sellers who were willing to exploit the technology to cut transaction costs and save time," E-commerce in the New Millennium, May 2000. Start-up companies proliferated to develop and exploit myriad new Internet-related technologies and business models. However, the seemingly endless flow of capital fueled competitive pressures among industry participants (which were positioned in promising segments of the industry), and many had hopelessly flawed business plans. By March of 2000 many investors began to lose interest in "high technology" companies. The December 18, 2000 issue of Business Week magazine reported, "The great pools of money that fueled the tech-buying binge-the market for initial public offerings, the debt market, and corporate earnings-are starting to dry up."

Prices of Internet-related stocks which had been pushed up by investors' hopes could not be sustained without earnings. While e-commerce was projected to redefine business standards in the future, the potential of the industry to generate profits was questionable especially in light of the tragic events of September 11, 2001. Even prior to such time the flow of capital into Internet-related businesses had declined, making it much more difficult for industry participants with immature or unprofitable businesses to sustain their operations. A Reuters story, "Dot-Com Carnage Continues as 55 Firms Close" posted on the Yahoo! Internet News website on May 1, 2001, reported that, "The carnage in the Internet industry continued in April as 55 dot-coms shut their doors, up from 44 in March&" The story went on to report that, "In the last year capital has dried up, leaving many Internet companies struggling to meet Wall Street's calls to make money as they run out of cash and advertising spending-a major source of revenue for many-dries up."

Growing economic uncertainty has also exacerbated the situation. At least 435 Internet companies have folded since January 2000. The IPO.com database indicated that during 2000 there were 193 IPO filings for Internet services companies and 58 filings for Internet software companies. During the first four months of 2001 there were no new filings for Internet services companies and only one IPO filing for an Internet software company. There have been no additional IPO filings for .com businesses since then.

The story of Innuity, Inc. clearly parallels what has happened in the marketplace. See the chronology below.

At the end of 1999, investors and the company itself believed it had a market value of between $150 and $200 million. The company originally believed it could do an IPO in the spring of 2000. At that time, the company had not shown a profit and had negative equity.

In February of 2002, the majority of Innuity's core business was sold to Website Pros, a Florida-based company, with Innuity shareholders originally getting a 49% interest. Records indicate over $70 million was invested into Innuity over the years by venture capital concerns and investors like you and me. The company has never shown a profit. At the end of the day, the company had negative equity of over $9 million and common shareholders may get very few shares in the new entity (Website Pros); based on the agreements, most of the shares will go to the preferred Series C class holders.

Who is responsible? Is it the company for its failure to execute on their business plan, or is it the venture capitalist with sacks full of money who can't resist the lure in spite of the risk, or is it the shareholders who unquestionably accept the information they have been given?

We are all responsible: management, employees, venture capitalists, investors, and valuators. We all left basic valuation principles on the shelf one day and went searching for new models which were capable of creating the illusion of instantaneous value. The tried and true theories still work and do not create illusions. Let's bring them back.

Innuity Chronology of Events 1995-February 2002

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