Where are they now: Flooz

Some of the most controversial business models in the early days of the Web were based on "alternative currencies." In today's installment of Where Are They Now, we profile one of the more well-known startups in this space. Flooz was a Web-based payment system which had a spectacular, high-profile run before a number of factors -- ranging from high operating expenses to security concerns -- forced the company to take radical steps to ensure its survival.

Founding: Flooz launched in 1999, co-founded by CEO Robert Levitan, who had earlier co-founded iVillage. Other co-founders included President Spencer Waxman and CTO Dermot McCormack. The company raised a $50 million round led by Oak Investment Partners.

History: The name of the service came from an Arabic term and French slang word for money. To customers, Flooz was an alternative Web-based currency for buying goods and giving gifts.

In an email interview with The Industry Standard, Levitan explains how the service worked: "Flooz.com built an online 'stored value' payment system which allowed people to send virtual gifts to others," he says. "For example, you could send a friend $100 of Flooz for their birthday [using their email address] and they could spend the Flooz to buy things online at more than 150 stores. Flooz was accepted as a form of payment in a similar way as Visa, MasterCard and American Express. One dollar of Flooz was equal to one U.S. dollar. You could divide your purchase among the sites that accepted Flooz and you could add more Flooz to your account as needed."

While a relatively small number of stores accepted Flooz, Levitan says that the list of partners included major retailers such as Barnes & Noble, Dick's Sporting Goods, Toys"R"Us, and Tower Records. Flooz was also helped by powerful buzz, which kicked into high gear after the company hired Whoopi Goldberg. The Oscar-winning star pitched the virtual currency in a series of expensive TV spots, and Flooz quickly gained popularity as an online gift currency.

Levitan says the company hoped the platform would enable new forms of ecommerce by making it easier for individuals to give gifts and for corporate customers to more efficiently and effectively administer reward programs for their employees. "Half our sales were to individuals and the other half were to corporate customers, the largest of which was Cisco Systems," he says.

At first, the business model seemed promising. According to Levitan, in 18 months, the company opened more than 1.2 million Flooz accounts and "the business grew to an annual run rate of $30 million in sales." It attracted retail partners by directing customers to online merchants and getting paid a fee based on performance.

Other alternative currency services were gaining traction at this time, including Beenz and CyberCash. In late 1999, Beenz and Flooz announced that consumers could buy Flooz with Beenz, although the executives from the two companies made pains to point out the differences in their respective business models.

But optimism started to fade in the beginning of the new decade. Levitan says the turning point came in April 2001 when Cisco Systems reported bad financial results and reduced previously scheduled purchases of Flooz by several million dollars.

Another big hit came when Flooz executives were informed by the FBI that a Russian organized crime syndicate was using Flooz and stolen credit card numbers as part of a money laundering scheme. Levitan says that the rate of fraudulent purchases spiked from less than one-twentieth of one percent to 19 percent of consumer credit card transactions in June and July 2001. Chase Merchant Services, which processed credit card transactions for the company, then imposed tens of thousands of dollars per month in fines for the excessive fraud rate. Chase also attempted to hold $2 million in company credit card deposits to cover the fraudulent transactions. Credit card fraud was already a major concern for online shoppers, and digital currencies were attractive to fraudsters due to its instant delivery and potential anonymity.

What Happened: In May 2001, even before the fraud problem snowballed, Flooz knew it was in trouble. There was never an IPO, and Flooz was unable to generate sufficient revenue. Executives began a radical plan to overhaul the company and cut operating expenses. Half of the staff was laid off. According to Levitan, the company also attempted to renegotiate its agreements with Chase, but was unsuccessful.