Swell Raises $2 Million

Almost as soon as my article on surf industry internet models was finished, Swell shut down its Crossrocket site and then, on May 3rd, announced it had raised $2 million in bridge financing. I hate it when that happens.

Rather than just throw up a press release that created more questions than it answered (see it below) Surf Biz asked me to track down new Swell Chairman and CEO Bob Allison and ask him what was up. It required a fairly impressive game of phone tag, but we manage to connect. Hopefully you’ll agree that the additional information was worth the wait.
 
The headline on the press release was about a $2 million bridge, so the first question was “Bridge to what?”
 
The $2 million is a loan convertible to equity. Mr. Allison confirmed that Swell had burned through most of the capital it had raised (most recently, $8 million raised last October). The $2 million “gives the investors time to evaluate how to move forward with the appropriate plan,” said Mr. Allison. He indicated that investors had committed to invest an additional $5 million in Swell consistent with the company demonstrating to them a viable business plan and revenue model.
 
So the additional $5 million is “committed” but not in the bank. It’s hardly surprising to learn that investors won’t throw money at a company until they understand the business model. 
 
The money raised towards the end of last October lasted six months or a little longer. That’s a burn rate of something like $1.3 million per month. Obviously, Swell has moved to reduce that. Part of that is the moving of the Swell media business to Huntington Beach, which Mr. Allison confirmed.
 
Swell’s actions in containing costs are consistent with what other surviving dot coms have had to do and, in any event, just make good business sense. But of course, no matter how much you reduce costs, you also have to grow revenue to demonstrate a viable business.
 
That business, according to Mr. Allison, will focus around the catalogue and ecommerce business. Brick and mortar may still be in the picture, but only in the longer term. Since launch, Swell had generated more than $1.5 million in revenue in spite of having essentially missed the Christmas season. $400,000 of that was in the last month, so it appears that revenue growth is accelerating. Their four catalogues have had a combined circulation of 1.6 million, and Swell has shipped more than 25,000 orders.
 
Still, they clearly have to grow revenue, reduce expenses and raise more money for the business model to succeed. The alternative is to make a deal.
 
Like with Surfing, for example.
 
Mr. Allison pointed out that Primedia, the owner of Surfing, had been an investor in Swell since its inception. He said that the two companies see significant potential synergies between what Swell is doing on line and what Surfing is doing off line. He acknowledged that there were discussions ongoing, but that no deal had been reached as of this time (May 11th). He expects a conclusion to those discussions in the next couple of weeks.