High marketing and expansion costs could drain most of the UK’s floated internet companies of cash within fifteen months – and in some case by the year end – according to a report from professional services firm PricewaterhouseCoopers.
PwC will today publish research claiming that at present rates of expenditure 25 out of 28 listed dotcoms could exhaust their cash resources by August next year - well before most projected break-even points. According to PwC, one in four companies has less than six months cash left, mirroring recent similar research in the US where the report sparked a mass sell-off by investors.
Many online businesses – particularly those selling to consumers – do not yet earn enough to cover their marketing and technology costs, which can account for 50% or more of the cost of the goods they sell. Their cash plight is likely to be exacerbated by the general wariness of by investors, who are increasingly reluctant to fund further share offerings in the hi-tech sector.
Says Kevin Ellis, a partner with PwC's business recovery services: "The cash burn rate of these companies is often not very transparent. "We found very little relation between the burn rate and a company's performance which suggests shareholders have not yet woken up to its importance. There does not seem to be any particular sector which is better or worse affected, although a business-to-business stock is much more likely to get re-funded. It's questionable whether dotcoms will be able to reduce their marketing spend, particularly as bricks-and-mortar brands spend more on attracting online customers."
Despite having an average of only eight months' worth of cash left, half the web companies surveyed had seen their share price grow by an average of 840%.
News source: Financial Times