|
How WAP startup failed
|
 |
December 4, 2000: 1:13 p.m. ET
Collapse of pan-European wireless city guide has founders locked in battle
By Dianne See Morrison
|
SAN FRANCISCO (www.redherring.com) - Suicidal entrepreneurs or greedy venture capitalists? Who's to blame for the swift demise of Citikey, the promising pan-European wireless city guide that went bankrupt 12 days ago?
At first glance, Citikey, Europe's first wireless company to go under, seems to auger tough times for startups in the sector.
But while Citikey's case hasn't been helped by the slow uptake of phones based on the wireless application protocol (WAP) in Europe, the real reason behind its decision to file for bankruptcy liquidation is much more complex.
The tale is one that pits venture capitalists against entrepreneurs in a fight for control of a startup. That battle ended in disaster not only for 26-year-old first-time entrepreneur Ziad Ismail and his original startup team, but also for the VCs.
Lead investor Crescendo, along with Atlas and Kennet, together put $11.5 million into the startup in February.
Citikey's story has grown increasingly acrimonious, with accusations of mismanagement, deception, and dishonesty from both sides.
And at a time when Europe's markets are down, startups are running out of cash, and VCs are increasingly cautious, the story flags a problem sure to surface again: who controls the company when VCs and entrepreneurs get into such a heated dispute? Is it the investors? Or is it the entrepreneurs who "broke their backs" trying to build it, as Sushant Gupta, head of business development and an original shareholder in Citikey, puts it?
VC-Entrepreneur troubles start early
Citikey first ran into trouble in late September, when the company realized that its remaining cash wouldn't last until January 2001 -- the point when it planned to raise a second round of funding.
Ismail recalls that on October 20, Crescendo pulled investors together for a $3.75 million bridge loan for Citikey until it could raise its second round. The loan gave Citikey an implied valuation of $50 million to $75 million, says Ismail. All shareholders agreed to the loan.
Later, however, the value of Citikey plummeted to less than $500,000, its founders claim. The decline occurred after November 1, when Kennet withdrew from the bridge funding round.
Michael Elias, a partner at Kennet, says his firm believed that consumer interest in WAP-enabled phones was moving too slowly, which would delay Citikey's ability to bring in revenues.
Crescendo and Atlas quickly came back with a new offer the next day. It's this offer, a $3 million rights issue, that's at the heart of the argument between the founders and the VCs. Crescendo and Atlas claim that the founders blocked the approval of the financing, which then forced the company into bankruptcy on November 20.
Entrepreneur Ismail, however, disputes this point, claiming that a majority of shareholders (eight of 13) blocked it, not just the founders.
Ismail and Gupta say the financing was rejected because of the crippling terms it imposed on the company's original investors and shareholders.
The two, who have documents to support their statements, claim that the rights issue valued the company at a meager $450,000. That meant that Ismail's stake was worth $60,000, while Gupta's stake was worth $20,000. Meanwhile, Kennet, which had originally invested $3 million, was now holding a stake worth $67,000.
"That's a draconian dilution," says Gupta, who sarcastically calls his $20,000 stake for helping build the company from its infancy a "huge reward." Gupta served as interim CEO as well as head of business development at Citikey.
The fire-sale reduction is all the more peculiar when you consider that Atlas and Crescendo planned to raise $10 million for Citikey at a $20 million pre-money valuation in January, according to Ismael, who says he has the old term sheet, dated Nov. 14 -- four days prior to Citikey's closure.
Graham O'Keefe, a principal at Atlas, won't confirm the numbers, saying that "a bridging loan does not imply any form of valuation." But he defends the dilution of the stock of the original shareholders by stating that they had not "purchased their shares." He adds that it was the VCs who assumed the risk in the deal. "If we did this round, we would have still been down,". O'Keefe says. "We're not the bad guys here."
Ismail counters that he could have secured financing from outside sources, claiming that he had several offers that valued the company higher. But he needed one week to push through the legal paperwork.
On Nov. 20, at a shareholders' meeting, Ismail says he was given five hours to sign those investors. The next day, after the financing offer was rejected, the board voted unanimously to declare bankruptcy.
Grinding salt into the wound
A VC familiar with the story points out that it's not just VCs who submit to greed; it's also entrepreneurs.
"There's a whole generation out there who haven't seen a downturn," the VC says. "We've all been guilty of having unrealistic expectations, of succumbing to get-rich-quick schemes. And, as a result, there are people out there with unrealistic expectations."
Another VC close to the story called the actions of the shareholders who blocked the financing "a bit suicidal."
But Ismail and Gupta say one only needs to look at competitor wCities, which has been on its own roller-coaster ride of survival, to see that they were indeed being reasonable. Says Gupta, "Two days after this whole sad end, wCities got $15 million in funding. It was like grinding salt into the wounds."
What's equally bittersweet to Mr. Ismail and Mr. Gupta is that 26 companies have approached them, offering to buy the company outright, or its technology, or parts of the company. The suitors include Vindigo of New York, Europe's Airflash, Mviva, and wCities. Citikey has offices in London, Stockholm, Paris, Berlin and Rome. "Practically every company in this space has approached us," Ismail says.
He adds that he wants to take time to think the offers through. Gupta, also somewhat dazed, says he wants to start another company soon.
"For those who bent their backs to build this company to have to walk away from it because of three weeks of backbiting and financial wrangling -- it's a very sad and very painful story," he says. "Everyone's a loser in all of this. And it teaches everyone a lesson that it's all about building companies, not about the opportunity to build stakes." 
|
|
|
|
|
 |
|
