Drained Of Funding: Wine.com Sold Off

Portland, Ore.-based e-tailer eVineyard last week acquired competitor Wine.com from Sand Hill Capital and seems already to have popped its cork in celebration. Meanwhile, at least some Wine.com investors are probably still trying to wash the taste of sour grapes from their mouths.

With the acquisition of Wine.com and the imminent launch of a $15 million private equity round, eVineyard expects to be profitable by year-end. The Series D financing will be used to help gel eVineyand.com and Wine.com into a cohesive company, said Brett Lauter, vice president of marketing with eVineyard.

While Lauter said he expects there to be strong interest in the deal, the company has yet to line up any investors. EVineyard previously received more than $30 million in funding from Angel Investors LP, Bear Creek, ITech and Osprey Ventures.

One group which almost certainly won’t be participating in the deal are Wine.com investors, who have pumped more than $200 million into the company over the last six years. One investor said that poor management decisions led to the sale and that every firm’s stake has been essentially rubbed out.

Bubble, Bubble, Toil & Touble

Wine.com’s troubles began with the acquisition of Wineshopper.com, another online retail wine site. After much conflict between Wine.com investors, the online vendor united with Wineshopper, which was only bringing in about $500,000 in annual revenue. As part of the agreement, Wine.com gave away about a 30% equity stake and took on all of Wineshopper.com’s 180 employees and its debt.

The first sign of troubles for Wine.com came soon after. In January 85 employees were laid off, which was blamed largely on the Wineshopper.com debt. But then, in early April, the company laid off another 160 employees, approximately 65% of its staff.

“Taking on Wineshopper was the biggest mistake the company made. It was losing money and Wine.com was overspending on advertising,” said the disgruntled investor. He added that Wine.com was burning through [its] advertising [dollars] and was not close to becoming self-sustaining.

Offering a slightly different perspective, Lauter said that Wine.com failed because it was not a licensed wine retailer like eVineyard, which forced it to use others to distribute its wine, hiking its overhead costs.

“Wine.com’s original business model was never to be a national retailer,” Lauter said. “The original concept was just to sell to California and 12 reciprocity states. The VCs tried to make them something they weren’t.”

The investor agreed that the VCs hold much of the blame. He said many of his peers – specifically Kleiner Perkins Caufield & Byers which declined to comment – kept saying there would be more money to come and pushed Wine.com executives, who also refused to comment, to continue growing their business with hopes of having a strong IPO quickly.

Private Equity Week also contacted eight Wine.com backers in addition to Kleiner Perkins, all of which declined to comment.

Needless to say, the markets turned sour and Wine.com soon thereafter hit rock bottom, leaving investors by the likes of Alpine Technology Ventures, Amazon.com, Applied Technology, GE Capital, Inroads Partners, Kleiner Perkins, MediaOne Ventures, New Millennium Partners and TH Lee Putnam Internet Partners without anything to show for their investments.

eVineyard’s Harvest

Unable to raise another round, Wineshopper.com debt lender Sand Hill foreclosed on Wine.com’s assets, selling off anything it could to eVineyard.

Lauter said eVineyard bought the Wine.com and Wineshopper.com URLs, content, software, trademarks, logos and customer lists of 210,000 customers and 200,000 registered users. Lauter contends that the cash and stock deal was worth less than $10 million. According to the source, Wine.com wound up selling out for less than $l million.

eVineyard did not acquire any warehouses, products, employees, or debt, but said it may look into hiring former Wine.com employees as eVineyard grows its business.

EVineyard, founded in May 1999, had estimated revenue of between $5 million and $10 million last year. Since its acquisition of Wine.com exactly one week ago, eVineyard has seen its revenue jump about eight times per day, according to Lauter. Last year Wine.com’s revenue was estimated at $25 million, almost three times that of eVineyard’s.