Baker Capital’s Wine.com Investment Failed- URL Up For Sale

This story has been updated.

One of the most expensive URL’s has been put up for sale by Venture Capital firm Baker Capital after nearly a decade of failed attempts to turn a decent profit selling wine nationally online. I reported today for finance trade publication Growth Capitalist that Baker signed an exclusive deal to sell the Wine.com business with a bulge bank but insiders say the URL is the only asset worth buying. Meaning so far offers are not exactly coming in and Baker is expected to take a huge loss on the investment.

Matt Marshall, founder of Venture Beat, first covered the legal saga of Baker Capital using unique voting rights to squash a sell to Liberty Media back in 2005. A sale that wine.com founder Chris Kitze and CEO George Garrick said would have made their investors $30 million.

Growth Capitalist writes today:

In 2004 CEO Garrick convinced Baker Capital to put in $17 million in an initial round which gave the venture firm 35% ownership, two board seats, and co-liquidation veto rights with Kitze. The right for a VC firm with a non-controlling stock interest to veto any sale of the company was rare but Garrick believed Baker partner Joe Saviano when he said they’d never use it. A mistake in vetting a VC firm’s character that Garrick said later in court filings he regretted.

Baker is basically the evil VC firm in this saga who got too greedy trying to push out the original investors but when they got control of wine.com they couldn’t turn it into anything worth selling for a profit or make a viable IPO. Court records show Baker invested at least $26 million into wine.com but it’s likely more millions were spent keeping it going for the last 6 years that they had control ownership. Amazon could be a likely buyer for the URL, a name that according to valuate.com is now worth $5.4 million, but so far they don’t appear interested in buying it.

Baker also appears unable to admit their collapse in assets under management. The firm’s marketing material says they have $1.5 billion of AUM. But a check of their SEC records for registered investment advisors from December 2012 shows only around $500,000 of AUM. They also haven’t been able to close out and start a new fund since 2000 according to Capital IQ.

The wine.com deal highlighted a rich investor/tech company founder spending millions and 3.5 yrs of litigation in California State court to show the world that Baker Capital cheated them out of millions–only to watch the Judge rule in total favor of Baker because of how the transaction was set up under Delaware law. Gibson Dunn were Baker Capital’s lawyers on the deal and now tout the case as a win-win legal strategy for VC investors who hold significant stakes in companies and act in their own interest. Meaning it’s a legal strategy for how to screw over growth company founders.

This one is a buyer beware scare story for all you new tech or Bitcoin company CEO’s looking to the VC capital markets to grow your company. Chris Kitze the famed former founder of wine.com who has a history of successful start-ups told Growth Capitalist he’d never use a VC again. He’s since built two new tech and media companies–one about to launch out of beta that has some supper secret James Bond like two-way communication platform that even NSA and the FBI can’t get into. Kitze, who can’t comment on wine.com because of confidentiality agreements, is likely licking his chops and smiling at Baker loosing all their investors money on this deal.

There are ton of great details about the decade long history of the players involved in this company along with reasons why online retail wine sells will likely never be profitable so go read it at www.growthcapitalist.com.

UPDATE 7-2-13: Venture Beat has followed my reporting and add their own news that a whopping $75mn of VC and Angle money went into wine.com in the last decade. They also confirmed the revenue numbers that my sources have been told by the bankers selling this dog but the wine.com CEO leaves out the fact he is still at zero EBITDA.

UPDATE 7-3-13: The Wine.com CEO who was placed in the job by Baker Capital has gone into spin mode. We stand by our news report at Growth Capitalist. Berqsund, the CEO, is likely worried about employees jumping ship off the news. The CEO, Rich Bergsund, doesn’t get to deiced when the company is up for sale…that Baker Captial’s lucky job.

Update 7–10-13: Apparently Baker Capital now has their wine.com CEO promoting company numbers that relate to cash flow two years ago (and one EBITDA number from 2010) without admitting what their net profits are for the last three years. Rob Manning, one of the few remaining people at Baker Capital, told the SF Business Journal his VC firm likes companies that generate cash flow. Rob also knows that M&A bankers like continued positive EBITDA (Earning before Interest, Taxes, Depreciation, and Amortization) and investors want to see a company can actually make money after a VC firm has spent 9 years pumping their cash into it.
Former public auditor and consultant Francine McKenna told this reporter, “Cash flow is very subjective and doesn’t equal positive EBITDA, positive EBITDA doesn’t equal a net profit. Tech companies that are getting ready for an IPO or sale love to taunt revenue or sales numbers but that’s not a picture of profitability.”
You see taxes and interest eat up a lot of cash flow. If a company tells you they have positive cash flow for one year they could just be delaying paying suppliers, sold an asset that year (like one of their on ground wine shops) or simply be paying their bills late. So when I see CEO’s responding to a news report with half baked numbers (that might not even been audited) I know they are in full spin mode.
Baker Capital also doesn’t deny they hired a big bank to sell wine.com. I thought this story was newsworthy for Growth Capitalist subscribers because it showed a retail frontier that VC’s have pumped mega millions into but have been unable to nail down how to make the online business model really profitable for national wine sales. It also was a tale of how company founders can get screwed over by VC’s when they give up to much control for fresh capital.

Baker Capital (wine.com’s owner) and their attorneys were called for comment days before my news report ran at Growth Capitalist. All chose not to respond to the facts and comments we were planning to report.