Is Venture Capital Dot-Com Poison?

Don't look now, but a host of dot-coms that never took a dime of venture capital are now turning a profit. That's right. Not mid-2002. Now -- before the end of the year 2000.

These companies don't have household names, their sales numbers don't inspire gasps of awe, and they're light years from even being able to joke about initial public offerings. But they may offer a lesson in how best to grow a business. These companies avoided venture financing because they didn't want to surrender control. And now they're reaping the benefits.

No doubt, many of the companies in this category could have landed a big piece of venture capital pie, back when the cash flowed unabated into dot-coms of all stripes. Small e-tailers like Shoebuy.com and Overstock.com would have had big-name financiers clamoring for a stake.

All they had to do was ask. But these companies knew that venture capital came at a price.

Hands Off

Take a VC's money and you're going to cede some control over how you run your business. Take enough of it and you'll have to give up a seat on your board of directors. Either way, the final say in how your startup grows and takes shape is no longer your own.

Plus, few companies take a single bite of the VC apple. And each time they return for another chomp, the venture firms can ratchet up their control a little more.

And while you may honestly be thinking about building a company "for the long run," chances are the venture firm that echoes such a sentiment is doing so with its fingers crossed behind its back, or at least a tongue firmly lodged in cheek. After all, the job of a venture capitalist is to make money on that investment -- preferably sooner rather than later.

As Shoebuy.com president Scott Savitz put it the other day, "With venture capital funds, we could have made bigger mistakes."

Magnifying Glass

Which is not to say that Savitz and his team didn't stumble along the way. They undoubtedly did. But those problems might not have been scrutinized and publicized as widely as they would have if venture cash were part of the picture.

Of course, smart companies can and do put venture cash to good use and keep steering their firms on the right track. And there are fields where heavy duty venture funding is absolutely necessary -- anyone in the fiber optics field needs big up-front money to build networks and products.

Additionally, venture capitalists do bring more than just cash to the table. They bring connections to the other firms in their portfolio, which could turn into potential customers or business partners.

But for many dot-coms, the venture capitalists often provide more distraction and temptations than anything else.

Upside, Downside

How many companies have thrown big bashes with their cash hauls, only to shut the doors weeks or months later for good? How many of the companies that appeared during the Super Bowl last year now wish they could have that advertising money back? How many sales offices have been opened before the market, or even the product to be sold, was fully developed?

There's also always the threat that investors will stop being willing to pay. Many a dot-com has experienced this dynamic first hand in the past several weeks: The same venture capitalists who couldn't wait to invest nine months ago are suddenly not returning phone calls. Or when they do, they've got a specific plan in mind for cutting workers, shelving products or otherwise retooling in order to bring a company to profitability.

Counting Lifeboats

Then there's the risk of hitching your wagon to a star in danger of burning itself out. That happened to NationStreet. While not a dot-com per se, NationStreet filled what seemed to be a very vacant niche in e-commerce. It handled delivery and setup of items too big to ship the traditional way, such as furniture and appliances.

The company was growing nice and steadily -- but its main investor, the troubled Internet Capital Group (ICG), has been forced to pare its holdings. Without ICG's backing, NationStreet decided to shut down late last week. The niche, in other words, is vacant once again.

Small and Happy

To be sure, the VC-free companies may never break through to the big time. And by growing slowly, they risk getting overtaken by companies with deeper pockets and more aggressive ideas about grabbing market share.

Then again, the small companies might become desirable takeover targets. After all, most e-commerce companies of any size know the value now of having even a small subsidiary that is in the black.

After all, profit is profit. Amazon would do cartwheels to put just a few measly dollars worth on their books. And if you can do it after losing just a couple million dollars, or even less, doesn't that make a lot more sense? The companies that have spent a few hundred million and still can't see the profit finish line on the horizon probably think so right about now.

For most of this year, e-commerce was all about bravado. Suddenly, it's the humble and meek who seem poised to inherit the online earth.

What do you think? Let's talk about it.