Net Prophet

SAN MATEO (04/24/2000) - Over the last few weeks, the Invisible Hand gave the Bull market quite a black eye. The market, especially the tech-heavy Nasdaq, has been wildly seesawing, with a 25 percent plummet in the Nasdaq in a single week. Although this sends shivers down the spine of the tech industry, the Nasdaq is apparently made of rubber; it hit the floor and bounced.

The stock market's fluctuations are hard on investors' stomachs, but this is not the bursting of the apocryphal "stock bubble." However, it is the latest in a series of wake-up calls to overeager investors.

We're seeing the handwriting on the wall. The blind overindulgence of the market is waning -- it's not gone, but there isn't the unbelievable momentum of a year ago.

Venture capitalists are getting picky about business plans, looking for things such as lucrative markets, sound business strategies, and talented management teams. In other words, a real business.

The valuation of some companies is hurting. The Linux mania of six months ago has dried up. The prices of stock from companies such as AndoverNet, Red Hat Inc. Linux, and Caldera are bouncing around their IPO pricing, sometimes dipping below.

And there's been a lot of pressure on dot-coms to come up with a way to make a profit. Barron's ran an article listing a who's who of dot-coms that were going to run out of cash in mere months. (Not coincidentally, several of those companies, such as MarketWatch, got a fat cash infusion mere days after the article ran.) Then Gartner Group and Forrester Research both came out predicting upwards of 90 percent of all dot-coms were going to go belly-up in the coming year or two.

Judging by the latest financial news, now would be a good time to get out of Greed and invest a bit in Fear, because a lot of technology companies' stock prices are propped up with press releases and a lot of positive thinking. A shakeout in the Internet sector is imminent and inevitable.

Venture capital is plentiful (about $14 billion dollars last year), thanks to quick money. Venture capitalists don't usually have a clause that prevents them from flipping stocks. So an IPO that triples on the first day can be a cash windfall to them -- and they are willing to burn money on a half-dozen losers in order to find that one Golden Goose.

The IPO day triple-and quadruple-bangers are often a self-fulfilling prophecy.

Stock prices jump on investors' faith in the company's future. That faith is often coming from the people the dot-com sidles up against: its venture capitalist, its investment bank, its board of directors. They all create a patina of credibility to some otherwise pretty dubious ventures.

But if the stock market loses confidence and we stop seeing quick-fix money, a dramatic reshaping of the tech industry will occur.

Without outrageous stock valuations, venture capitalists' hyper-eagerness to invest will wane. Without lucrative options, luring talent to a start-up is much more difficult.

Without abundant capitalization money, carpet-bombing-style ad campaigns to generate the vaguest awareness of the latest dot-com among Americans will be too costly.

Which all means there will be a lot of dot-dead ducks.

This leads pundits to declare it's time to bring out your dead.

Business-to-consumer plays are dead. Pure-play dot-coms are dead. Even business-to-business is feeling the heat.

And, indeed, many companies will wither and die. Some investors will lose money. But new companies will rise from the ashes. Consolidation will happen.

All is to be expected, thanks to the great Invisible Hand. That's life in a market economy.

But here's the funny thing: The number of online consumers will double again this year. It will keep doubling for the foreseeable future. We're still experiencing an explosive growth of Internet users. There is still opportunity, as there always is.

If anything, the ups and downs of recent weeks will eventually lead to a stronger, healthier breed of dot-com. Regardless of the stock market's volatility, the Internet and the opportunity it represents is not going away.

It will just be a bit hard on the nerves.

Send e-mail to sean_dugan@infoworld.com.

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