Recently there was a wonderful editorial written in the Wall Street Journal comparing the box office smash movie "Cast Away", starring Tom Hanks as a latter day Robinson Crusoe, to the character of the same title from Daniel Defoe's classic novel. Apparently the two characters, although both ships were wrecked on a South Pacific Island, are very different indeed. Robinson Crusoe, a slave trader in the mid 1600's, was a handy hunter surviving on goats, turtles and birds for sustenance. He fought off cannibals, mutinous sailors, read the bible religiously, kept a journal and generally reflected on the state of his soul and G-d's divine reasons for saving him; Tom Hanks, who plays Chuck Nolan, a Fed Ex operative, is quite handy himself but does not have to endure any of the life threatening drama of his literary predecessor. He subsides on fish and coconuts and spends most of his waking hours pining for an ex-love and speaking to a volleyball. Emerging from 4 years of isolation, Nolan readjusts into society in short speed and seeks a new love; Crusoe, after 28 years, returns a changed and much better man. His soul redeemed, he found both a clear sense of religion and meaning to his existence. While Nolan may be our true latter day "everyman", true to our environment and forever seeking love and relationships, what lessons were learned? And what modern day lessons do we, the viewer get from this movie versus the oft-read, previously mandatory part of our school curriculum?

Since April of 2000, the venture capital landscape has been littered with e-commerce companies doomed after the capital markets closed. Resembling other marketplaces, investment trends change rapidly and after the crash in April only a few companies were given a second chance. The same rules apply to the VC community, where a significant shakeout should occur. In 2001, rare will be the triple digit returns amongst the East and West Coast VCs that became so commonplace in the late 90’s. Venture firms will have a harder time raising money from limited partners, pension funds, wealthy angel and institutional investors. The venture business was, until recently, about dreams and optimism; now it’s about fear, triage and cash management. With the IPO window slammed shut, nearly every VC is saddled with numerous questionable Net companies with either a very little chance of survival or those that are "on the clock…"

Two other stalwarts in the venture capital business will also come under serious scrutiny: The Megafunds that previously raised billions of dollars could be short-lived as hedge and mutual funds will probably come closer to equaling their potential returns. Many of these funds charged as much as 30% of the profits; limited partners are sure to renegotiate management fees and keep a greater percentage of the proceeds in the future. Then there are the incubators and Internet Holding companies such as CMGI, Internet Capital Group and Divine InterVentures. Those that are publicly traded have seen their valuations plummet while incubators have been riddled with enormous losses and layoffs. The investing public is no longer naïve about what the value and potential that these companies present. So, what lessons were learned?

In order to continue to thrive, VC’s had to come up with a new manner of investing. Towards the end of the year and into 2001, the venture capital community is playing with new rules: First, its about current and future sustainable profitability. It became less about the cost of securing a customer and more about when that customer becomes a profit center for the company; Second, cash is king. Those companies that were fortuitous to raise money before the crash and were able to sustain it by eliminating unprofitable development and long-term advertising deals, took an enviable position in the driver’s seat; and Third, together with the aforementioned clear path to profitability, number one or at a minimum second position in its market and a sustainable business model, that a major underwriter will take it public in 2001 or as soon as the public markets reopen.

Regardless of the environment, there are always good ideas, smart-management teams and market-niches to penetrate and invest in. With down rounds, collapsed valuations and limited partners – Angel investors running out of patience, the most compelling new deals are earlier stage investments. Although the risk is highest, seed level investments are at diminished valuations and they offer the highest upside potential. As mere seedlings, investors allow for more time needed to truly incubate a company and for the IPO window to reopen. Those other VCs that have chosen to seek "upstream" deals (lower risk, later stage deals) may find their value proposition makes no sense. Many of these companies are the forty percent or so of venture capital investments that linger in a state of the living dead, always seeking fresh capital to stay afloat or prove that their often faulty business models really work.

Yes we live in a Brave New World where Net companies have refined new concepts of doing business; yet, we are finding that there is no replacing the old brick-and-mortar world, the old traditional axioms of business. Long gone are days when a young entrepreneur will make more money in an IPO minute than business owners and managers did during their lifetimes. Established companies have found that e-commerce augments a business; success is a direct result of building and maintaining a corporate culture that focuses on its employees and client’s needs, be they offline or on, rather than a short-term flavor of the month focus. Corporate culture, not the Dot Com, dress down Starbucks drinking kind, is the sum of beliefs and values of Management. A strong commitment by employees allows companies to make changes and evolve at Internet speed. A culture builds a basis of alignment and filters out those that do not follow suit. It all comes from the top, the leaders who inspire and act as examples. We at WPs look for management integrity and steadfastness as complimentary tools to a killer business model. It is always about the people. We want to acknowledge those CEOs and management members of our portfolio companies that have worked so hard for our investors especially during this treacherous past quarter.

This past quarter, as you might imagine, WPs and/or affiliates did not invest in any new companies. We have, for the past 90 days or so, focused on our current portfolio of investments and assisted its management, in any way possible, to maximize shareholder value. Often this included various forms of triage and/or assisting in obtaining capital from other sources. Indeed two of our portfolio companies, Aluminium.com and Icras, Inc. are both attempting to raise capital privately with large investment banking firms and Kinkos.com received a tender offer to be acquired by its parent company, Kinkos, Inc; MyDocuments.com received a series of bridge loans and, under Mike Gencarelli’s steady hand, is weathering the storm; We recently set up a meeting for Cloudsource, Inc. with Yahoo to take place in early February and have high hopes. In addition, we were retained by several new potential portfolio companies, Shop@, RussiaXchange and MetalsRussia and are negotiating with four others to assist in their incubation. We have begun discussions and are developing relationships with two companies that could dramatically change and enhance our very business. We have been working with Harrison Securities, Inc., a 17-year-old NASD member brokerage firm (previously named D.L. Springate) offering general investment banking related consulting services. We hope to add HS to our family of investment banks that participate alongside us on future financings. We are also working together with the largest Natural and Specialty Food, Snack and Beverage company in the United States, The Hain Celestial Group (NASDAQ symbol "HAIN"), to evaluate the development of a string of retail stores and kiosks, ("Teaosks"). Should the project come to fruition, we hope to capitalize on Hain’s fabulous products, in particular, Celestial Seasonings Tea, the leading brand of natural and specialty teas in the US. Through our "Vulture Capital" investment and lending arm, Epiphany Holdings/Spider Financial, we are looking at interesting short-term high interest-bearing bridge loans to distressed Dot Com and "new economy" type companies including a 118 year old former India based jute manufacturer and now a London based IT service provider. Finally, due to demand from our clientele, we are doing a feasibility study for the development of a modest hedge fund or trading partnership under the stewardship of Zachary Prensky, our Managing Director. More information to follow.

With a new President and revised Congress and House of Representatives to boot, certainly the old Chinese proverb could not be more applicable today:

On behalf of all our employees, may we wish you and your families and very happy and healthy New Year.

NOTE: This report was produced by Wellfleet Partners, Inc. ("WPI") from various public research sources, for the sole purpose of general information. WPI makes no warranties to its factual content and is not a brokerage firm, registered Investment Advisor nor securities dealer; therefore, nothing contained in this report shall constitute an offer to sell, solicit or buy any securities or investment advice. Investment in these securities mentioned here involves risk and should not be considered without first reading the target Company’s most recent financial statements, 10Q and 10K, its Private Placement, Offering Memorandum or Business Plan, if applicable, and discussing the investment with your registered representative or professional financial advisor. Venture capital is inherently extremely risky. Mr. Lev is currently a registered representative of Starr Securities, Inc. a NYSE and NASD member broker-dealer.