Webvan Awaits Wall Street Ride

Picking up momentum since mid-September, the Internet IPO market once
again is running at full throttle.
This week alone there are about 10 ‘Net offerings slated to debut.

The most high profile of the bunch is online grocery service Webvan,
which was founded by Borders Group co-founder Louis Borders and whose
Web site was open for customers only this summer.

Webvan is the latest and most ambitious player seeking to cash in on the
assumed vast market for online grocery shopping.

The company seeks to raise $300 million in an offering of $25 million
shares, though don’t be surprised if shares are priced above the $11-$13
proposed range. At $15 per share, the IPO would pull in $375 million.

What Webvan needs the money for is to set up the kind of huge
distribution system required to make a nationwide online grocery service
efficient enough to attract customers, ensure same-day delivery, build
revenue and return a profit. As earlier online grocery entrants have
found out, it is a task easier said than done.

Rival Peapod, which went public in June 1997, has not been able to
increase revenues over the last five quarters. The company’s Q2 revenue
of $17.1 million is below the $17.5 million for the second quarter of
1998, and below sales in each of the first two quarters of 1999. Peapod
also has been unable to cut losses to much below $5 million per quarter.

Peapod’s stock price has reflected this sluggish performance. Shares
have traded below the $16 offer price for the past year, reaching as low
as $2.69. And while PPOD has nearly doubled in the past month (selling
Tuesday afternoon at $11.44), shares are still well below the offer

Another company that sells groceries online, Boston-based
Streamline.com, also has proven to be a tough sell on Wall Street. The
company went public on June 18, offering 4.5 million shares at $10 each.
Shares closed at $7.63 in their debut (a 24% loss) and were selling
Tuesday afternoon at $9 apiece.

Webvan plans to surpass those rivals such as Peapod, Streamline.com and
WebGrocer by installing a high-tech system of 27 distribution centers
around the country, thus the huge offering amount. It is a bold plan
backed by an A-list group of investors, including lead underwriter
Goldman Sachs and venture backers SOFTBANK, Sequoia Capital and
Benchmark Capital Partners.

But like all bold plans, there are genuine dangers. One is the company’s
rapidly increasing accumulated debt, which was $50 million through June
30, of which $35.1 million was incurred in 1999 alone. As the company
ramps up operations and launches marketing campaigns, debt will continue
to mount. With an admittedly untried business model, investors are being
asked to take a giant leap of faith.

And some will. Because of the buzz around this IPO, it probably will do
well, and Webvan, a company with virtually no revenues, will find itself
valued somewhere north of $4 billion.

To me, that makes Webvan a risky investment at any time, but with the
number of other Internet IPOs to choose from now and in ensuing weeks,it also represents an unnecessary gamble.

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