The failure of Pets.com

Pets.com

Pets.com was a short-lived online business (business to customer companies) that sold pet accessories and supplies direct to consumers over the World Wide Web. It launched in August of 1998 and went from an IPO on a major stock exchange to liquidation in 9 months.

After its start by Greg McLemore, the site and domain was purchased in early 1999 by leading venture capital firm Hummer Winblad and executive Julie Wainwright. Amazon.com was involved in pets.com's first round of venture funding. Pets.com would eventually buy out one online competitor Petstore.com.

Pets.com brought rival Petstore.com in June and announced plans in September to move some of its staff to the Midwest to cut costs. Despite these moves, the company's stock price has been mired below the $1.50 level for months.

Trading in Pets.com stock was temporarily halted Tuesday. When trading resumed, the price promptly plunged to 22 cents from 66 cents, a one-day decline of 67 percent. Volume topped 4 million shares.

After trading as high as $14 this year, the rock-bottom stock price values the entire company at about $6.4 million. The month before it went public, the company spent almost half that amount on 30 seconds of advertising during the Super Bowl.

Marked initially for its fierce, well-financed competiton, the online pet supply market has since been beset with consolidation and collapse. In addition to Pets.com's purchase of Petstore.com, Petopia, backed by offline pet supply giant Petco, laid off 60 percent of its staff last month.

Despite all the initial hype and funding--the four largest players each raised more than $50 million in private financing--pet supplies are not a natural e-tail market. Pet owners are less likely than others to shop online.

Additionally, the e-tail pet stores have not offered a compelling reason to shop online. Although delivering pet food and supplies directly to consumers is a convenience, that benefit is outweighed by the fact that the consumer has to wait days to receive their orders. Considering that pet food is available at just about any neighborhood grocery, few people have a reason to shop online.

After bursting to life to deliver on the promise of e-commerce, Pets.com ( Nasdaq:IPET ) closed its business the same year that it went public. To quote Tichborne again.

The failure of Pets.com and other Internet-based companies affects us all in obvious if small ways, and also in ways that we'll never know. These failures not only leave us with fewer choices as consumers, but they make it difficult for today's new online-based enterprises to raise capital. Some of today's upstarts have excellent ideas that will never see the light of day because they can't get funding.



Why did Pets.com die?

Ironically, the eager venture capital investors who swiftly funded Pets.com might have made the company's failure almost inevitable. Pets.com raised millions with nary a sustainable advantage to its name (it was not a Rule Breaker), and the venture capitalists knew that most of the money would be blown on marketing. Then, Pets.com was able to go public without a penny of value creation, let alone meaningful experience, under its belt. Next, Pets.com was allowed to fail quickly without anyone giving it a long-term chance.

When the company went public on Valentine's Day this year, management knew that very soon it would need more money given its marketing spending plan. Pets.com counted on additional funds, most likely from a secondary stock offering (they were a dime a dozen back then), and the additional funds would largely be spent on still more marketing. They arguably had to be. Even a partnership with Amazon.com ( Nasdaq:AMZN) was not bringing the millions of customers that Pets.com needed quickly enough.

Relying on additional public capital to fund the long process of becoming a sustainable business with a meaningful customer base was a big gamble at Pets.com. It lost the gamble. In a different stock market (for example, if Pets.com had gone public in 1997), this bet might have actually panned out, but it didn't.