Dust settles on dot.com hype

Have we gone from dot.com to dot.bomb, or is the Internet market finally starting to grow up?

Consider the evidence: after burning through £80 million sterling (€129 million) in investment, collapsed Internet clothes retailer Boo.com ended up going for just £250,000 in a fire sale this week.

With a new report predicting that up to a quarter of British dot.coms may fail in coming months, the high-profile failure highlights how spooked investors are in the technology and Internet sector. Since the April 14th market fall, Britain's Techmark index of technology companies has dipped by up to 50 per cent below March levels, the Nasdaq has dropped to 40 per cent below peak, and the German Neuer Markt has been 35 per cent off.

"It may be a new economy, but you can't buck certain basic business tenets," says Mr John Soder, one of the authors of a recent PricewaterhouseCoopers report that predicts many British dot.coms will fail in the next six months due to poor management structure.

"Start-ups are about spending money," he says. "The important thing is that they clearly know what they're spending it on."

Boo.com was widely criticised for disorganised management, a delayed rollout, lavish spending on parties and perks, and a slick, premature advertising campaign that began before the online store was even open.

But Mr Soder also points out that start-ups in every business sector have a high failure rate. The Internet, he says, will be no different. Still, the first big-name failures in the sector seem to be attracting particular attention, not least because most have received huge investment and high market valuations for unproven business models and no profit stream. Dot.coms are the unruly rock-and-roll companies of the corporate world and no one knows quite how to make sense of them.

Yet, even the people who fund them, the venture capitalists, admit the Net has been a sector out of control, with profitless companies gaining multibillion pound valuations.

"There was no way from a capital markets point of view that companies should have been valued in this way," says Mr Shay Garvey, a partner with Dublin venture capital firm Delta Partners. "Amazon would have to dominate the whole book trade worldwide to justify its valuation."

Following the market tumble, venture capitalists and investors are now more cautious, which in turn is making it more difficult for dot.coms - and technology firms in general - to find funding.

"I believe [investors] will be more focused on not throwing money around," says Mr Tom Byrne, head of corporate finance advising at Davy's Stockbrokers. "The possible problem is that good companies may find it hard to raise money."

"Our gut feeling on the ground is that nearly all venture capital deals here are being repriced," says Mr Garvey. As a result, "the guys who were going to go public aren't. And the guys looking for pre-IPO [initial public offering] private-placement funding are not getting funded."

But many pre-IPO dot.coms say the market downturn is, at least in some aspects, a relief. "In a way, this helps more than it hurts. Things were getting a little frothy, to say the least," says Mr Jamie Rapperport, founder and director of Silicon Valley office administrator portal, Officeclick.com. In particular, like many in the industry, he believes the sector has had an unhealthy focus on the IPO, which now, he hopes, will be reined in.

"The IPO was starting to be an event that was far out of proportion to a company's history," he says, noting that investor and employee pressure to go public had pushed many companies to IPO too early.

Mr Byrne agrees. "Some of the start-ups have been somewhat ambitious in their timetables," he says. He notes that many young companies announce a timetable for going public on the same day as the company launch.

This is ridiculous hype, he says. New companies, particularly in the volatile Net sector, are unable to predict their own growth and thus, their readiness for an IPO. Companies should go public - and take on the new responsibilities to investors that go with it - for a single reason, he says: the timing is correct for them to seek this particular source of funding.

Given the current stormy market, technology company ranks are littered with companies that had planned to go public but have now changed their minds. "I wouldn't want to go public now. But I think, that's fine, you continue to grow your business, " says Mr Rapperport. He says he is more interested in making sure Officeclick.com builds a strong business foundation. Despite some high-profile press from Silicon Valley papers, the Wall Street Journal, and the New York Times, he says the company has never talked up an IPO and he remains noncommittal.

"If you're seriously building a business, the IPO is just a marker, not the summit," says Mr Mike Feenwick, director of Galway-based communications portal Yac.com, which targets the British market.

In March, Mr Feenwick had indicated Yac.com might go public later this year. Now, he says, such a move would be "extremely ambitious".

"I think a lot of companies are going to IPO too early," he says. "New companies with young management can be led into it - the public always likes an IPO."

Mr Steve Cole, founder and director of British retail site Streetsonline.co.uk, is also holding off.

"We'll go to the market when the time is right and it can really give us value for what we have to offer," he says. "It won't do that right now."

After 14 years in the software business, he is philosophical. "The present-day corrections are indicative of a bit of overheating," he says. "During that overheating process, there were funding mistakes. It's no different from the hardware market of the 1980s.

"But out of this will come the Logicas, the Ciscos, the Apples and the IBMs of this sector. The good companies always win through."

Mr Byrne agrees, pointing to the recent success of Irish chip technology company Parthus, which achieved 60 per cent gains on its launch price on the Nasdaq two weeks ago.

"I think good companies with a defined strategy will always be welcome in the market," he says.