Failures in B2C Companies; Two Examples and Lessons for New Players

This paper considers the path from formation to failure of two Internet start-up companies in the context of the work of numerous academic researchers in the field of corporate financial distress and bankruptcy. In the 1990s, several authors found evidence that small, young companies are particularly prone to failure, especially if they are in a high technology field. These authors commonly found failing companies experienced problems with management, profits, cash flow and liquidity. Two decades earlier, Argenti (1976) had set out a typical path from birth to failure of a dynamic company that behaved in a manner reminiscent of many Internet firms. Argenti’s work highlighted the importance of both injections of capital and withholding of capital in the life cycle of many companies. This paper’s comparison of two business-to consumer (B2C) Internet start-ups with the model derived from academic research suggests some Internet start-ups of this sort may be inherently predisposed to failure. A crucial factor would appear to be that these firms have elected to retail goods that are simply unsuited to being sold via the Internet. This means that revenues are always going to be small and this problem is exacerbated by the fact that Internet start-ups have excessive expenditure in the development phase followed by fairly limited options for funding when under pressure, having no recourse to debt financing or liquidation of assets. Combine these factors and it is clear to see that the probability of failure is very high.