Junk e-mailer proves its staying power

August 27, 2001

Online junk mailer webloyalty.com convinced investors it had largely ducked the consumer Internet mayhem of the last year, landing another $5 million in a third round of funding.

webloyalty raised the money with first-round backer Canaan Partners of Rowayton, Conn., alongside second round investors BCI Partners of Teaneck, N.J. and the company's founders. webloyalty CEO Rick Fernandes said the founders have put cash into each of the company's rounds.

The founders joined lead investor Canaan in $4.5 million investment in a March 1999 first round, then led investor BCI and Canaan in a $12 million deal in June 2000. The founders again are contributing to the current round to keep the company going — with the valuation down only slightly from the previous investment.

Fernandes would not reveal how much stock the founders retain or the precise valuation. "Clearly it was down, but not nearly as much as the public markets," he said. "I think this investment is more than enough to get us to break even in the second quarter, and we have projections that will take us there, but we never had an ultimatum from investors."

The company, which did not use an outside financial adviser, called on Edward Reilly of the New York office of Brobeck, Phleger & Harrison llp for legal work.

webloyalty has adapted the founders' experience in traditional junk-mail businesses to the Internet environment. Companies considered competitors include San Francisco-based Getrelevant and New York-based Offerlab Inc. Traditional direct-mail companies that have made forays into the Internet market include Metric Cos. of St. Louis Park, Minn., and Stamford, Conn.-based MemberWorks Inc.

webloyalty offers direct marketing-based affinity marketing systems for consumer Internet companies to boost transaction rates and create new revenue sources. Rather than offering inducements directly to Internet users — as consumer incentive programs by companies such as Netcentives Inc. and MyPoints.com Inc. have done — webloyalty creates such systems for consumer sites such as ZDNet Networks and works with third parties such as MyPoints.com to fulfill them.

"This is more of a business-to-business-to-consumer model," Fernandes said. "If we do a good job, the customer never knows who we are."

Fernandes said the company has not altered its approach to the market since the collapse of the consumer Internet market. And he says the company has been unscathed by the changes in the market. "We haven't had to rejigger our business model, and if anything, companies need us more than before," Fernandes said. "The Internet is moving to more of a paid model, and we have proven we know how to market premium services."

Although the company has marketed its services primarily to startup Internet companies, Fernandes could name only priceline.com Inc.'s Webhouse division and LifeMinders Inc. as customers that have thrown in the towel. Still, he added that the company has made a move in the last six months to focus more on established companies in so-called "clicks-and-mortar" businesses.

Investors could not be reached for comment on the investment, though in a statement Steven Green, general partner of Canaan Partners, explained the rationale. "As the Internet evolves from a free model to a paid model, we think webloyalty is one of the best positioned companies to enable sites to successfully navigate this change," he said. "The need for webloyalty's services is truly being felt now and will continue to grow as Wall Street continues to look to companies' bottom lines."

webloyalty has not had to lay off any of its 50 employees, said Fernandes, adding that its burn rate remained steady over the last year. He would not state current revenues, but said the company has experienced 150% quarterly growth and believes the new funding round will carry the company to profitability next year.