Publicly traded UK Internet companies could be headed for the financial rocks because of the high cost of expansion and marketing, according to a new study released Wednesday.
According to professional services firm PricewaterhouseCoopers, one in four listed startups could run out of cash within six months, with the majority set to come to the end of their funding within 15 months. The firm believes investors are largely unaware of this situation, and that funding issues could lead to massive changes in the Internet industry over the next few months.
"The vulnerability of many Internet companies is likely to act as a catalyst for consolidation in the dot com sector over the coming year," the firm said in a statement.
The findings, similar to research that rocked the US high-tech sector a few weeks back, are based on an examination of 28 Internet companies listed on London markets, including techMARK and AIM. techMARK and AIM, in particular, harbour many of the young startups that have received so much attention and venture capital funding over the last few months.
Based on current rates of spending, 25 of the companies were set to run out of cash in an average of 15 months. Ten of the companies could see their funds dry up in 12 months.
The situation could be particularly grim at the moment because a depressed stock market would make it difficult for high-tech companies to raise more funds. "There has been a recent correction in the equity markets, with investors becoming much more selective about which Internet stocks they will back... many of these companies have very little time left in which to start increasing revenue or to raise new cash," stated PwC partner John Soden.
High rates of spending on advertising -- all those Tube posters and TV adverts -- are sapping startups' resources, but it's not a simple matter of cutting marketing costs, according to the firm. "Cutting marketing spend can have a catastrophic effect on the revenues and longer-term market position of dot coms as they seek to establish brand leadership in very crowded markets," Soden stated.
A few weeks ago there was a flurry of commentary about the significance of the stock market crash(es) on the viability of emerging dot com business. Well that was all about paper money, but it has now had a knock on effect on the real world, as increased suspicion about the future of the dot com has made investors less keen to part with their money. Read the news comment from Tony Westbrook at AnchorDesk UK.
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