Shakeout Changes the Latin Net Game

SAN FRANCISCO (04/19/2000) - Barely a year into the Internet craze, the Net shakeout is sweeping across Latin America, and players fear that the Nasdaq's repeated nosedives will dampen the region's mood and drastically restrict the cash available to fund new companies. "Lately, the amount of money for startups was such that it was crazy.

There was no rational explanation for it," says Jorge Becerra, vice president for South America at Boston Consulting Group. In a region where the development of the industry is still at a very early stage and only a handful of Internet companies have managed to make it public, the availability of VC funds is the deciding factor. And though nobody expects the tap to run dry, the new rules will force a brutal consolidation that will leave many new companies by the wayside. "The potential of the region is still very real. But what we will see now is the money flowing to the good leading companies, and the ones with no clear revenue model will be hurting badly," says Michel Morin, a New York-based Latin American internet analyst with Merrill Lynch.

The investment explosion was largely sparked by Spanish and Portuguese portal StarMedia Network's highly successful Nasdaq debut last May. It was the first IPO for a pure Latin American play, and the stock quadrupled in value in a matter of months. Leading venture firms such as Chase Capital Partners and Flatiron Partners that were willing to invest in the region acquired overnight celebrity status in the industry and ignited a gold rush. That is part of the problem. Many Latin businessmen with no Internet-related experience entered the VC game and began funding 10 to 20 startups, some with barely a clear business plan to speak of, in hopes that one would make it and handsomely compensate for the others' lack of success.

"The bubble bursting is, in many ways, a good thing," says Oscar Toppelberg, CEO of Consultores Asset Management, a Soros-tied VC fund based in Buenos Aires. "Consolidation in Latin America will mean, in many cases, that bad companies will cease to exist." For the more established firms, the situation is less problematic. Though valuations have been torn apart in recent weeks for companies that float on Nasdaq, such as StarMedia Network or Spain's Terra Networks, a silver lining could be in store. Snapping up companies on the cheap will become an option, analysts say. StarMedia Network's stock closed at under $18, from an all-time high of $70. For companies that were in line for an IPO, the Nasdaq sell-off will mean a significant - maybe an indefinite - delay in those plans that will force some into early consolidation. Yupi.com, the Internet portal for a Spanish-speaking audience, announced Monday that it has postponed its plan to go public.

Only last Friday it had said it planned to go ahead with the offering. Others, such as the U.S.-based portal Todito.com or AOL Latin America, a joint venture of Cisneros Group and AOL, are declining to comment. But they were in line for a first- or second-quarter IPO and are now widely expected to push those plans forward well into this year's last quarter. "Investors will be very selective now," one analyst said.

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