The Dot-Domino Effect

Behind every dot-com failure lies a host of unhappy creditors. Here's how the happy few have managed to mitigate the risk.

SLEEPING WITH THE DOT-COMS

That’s not good news to companies like DoubleClick Inc., a New York­ based online advertising firm. Until spring 2000, its media division received 60 percent of its revenue from pure-play dot-com clients, according to Glenn Robertson, who is the vice president of finance, global media, at DoubleClick.

“For the first three years of DoubleClick,” he says, “the venture capital money was flowing. If customers didn’t pay, we thought, ‘Who cares?’ There was someone else right behind them.” Even then, DoubleClick saw about 6 percent of its revenues go up in bad-debt smoke. But the March 2000 tech-stock crash was a wake-up call to tighten credit policies, or face even higher bad-debt write-offs.

The company has always employed a due-diligence process for new customers, which includes analyzing credit reports and financials for revenue and profit trajectories. “But since there’s not a lot of profitability out there in the dot-coms, we also look at cash-burn rate,” says Robertson. DoubleClick examines news reports, and it considers the timing and source of venture capital funds. “Even if they don’t look financially viable, that’s not necessarily a deal breaker,” he notes. “We determine whether they have a good business model with large market and growth opportunities.”

Based on these findings, a customer is classified as an “A” through a “D” credit risk, says Robertson. “A” companies are blue chips to which DoubleClick is willing to extend credit. Those companies generally pay on their own terms, although DoubleClick’s standard terms are within 30 days. “B” companies also get credit, but are considered a higher credit risk. “We have the ‘B’ class so a company can either be upgraded to ‘A’ or downgraded to ‘C,’ which triggers a dramatic change in treatment,” says Robertson.

That change, implemented in March 2000, requires “C” companies to prepay a portion of their orders. If they can’t prepay the predetermined amount, DoubleClick won’t take the business. “D” companies get even harsher treatment–they prepay 100 percent, or no ad. The change in policy did not go over well with DoubleClick’s sales force, and caused a hit to revenues.

“The first thing that happens when you tighten your belt is the ad revenues start to go away,” says Robertson. “Our salespeople were saying, ‘This stinks. Why are you doing this right as things are slowing down?’ But it’s because of our credit tightening that our bad debt isn’t worsening. It’s stayed the same, which for us is a huge win.”

Clearly, DoubleClick and the entire advertising industry face a far larger threat from the overall decline in online advertising sales than they do from uncollectible accounts receivable. In fact, DoubleClick and its rivals, Engage and 24/7, all recently announced layoffs that they attribute to the general industry slowdown. But today, DoubleClick’s media division obtains only 50 percent of its revenues from pure-play dot-com businesses, and Robertson is more confident in the revenues that he is booking.

Discuss

Your email address will not be published. Required fields are marked *