The Day Ahead: Dot-coms search for happy medium

Commentary: Where is that happy medium for dot-com companies?

Last year's orgy of funding is over for dot-coms. Stock prices, staffing, optimism and damn near everything dot-com related has gone from tulip mania to meltdown. Barron's cash burnout rankings and f**kedcompany.com are required reading.

The yet-to-be-revealed truth is somewhere in the middle. Dot-coms weren't worth last year's valuations, but they aren't completely worthless either. If dot-coms continue to get pounded, just remaining listed on the Nasdaq will be a feat.

"When anything gets overhyped there's a backlash," said Fred Wilson, a partner in Flatiron Partners, a New York City venture capital firm that helped fund TheStreet.com, StarMedia, and Multex.com. "Public markets aren't valuing these companies fairly on the upside or the downside."

A recent trip to Silicon Alley's annual CyberSuds schmooze fest revealed a different vibe from a year ago. A year ago, wannabes with wacky Web ideas were talking IPOs, paper fortunes and stardom. This year, folks were crowding around the IBM.com recruiting booth. "They know we'll be around," said one IBM recruiter.

Last year, I knew many of these dot-com dreams were a joke, but I listened anyway -- who was I to be a critic. Some of these lame ideas could have been worth billions. The funding was there, and typically the IPO soared. A lofty stock price overwhelmed common sense.

Today, nearly everything dot-com is toast. No future ahead, bankruptcies, massive layoffs are common themes. To say the dot-com world is in a bear market is being way too polite.

Alleged leaders in the dot-com world such as Priceline.com hope to hold $5 a share after a revenue warning and collapse of WebHouse. Even Priceline pitchman William Shatner is feeling the dot-com pain -- he's paid in stock. We hope he beamed his paper profits to his bank account before the fall.

The valuation of Amazon.com -- which is partnered with some questionable dot-coms -- has sparked intense debate. Amazon is either worth $80 or $8 depending on what analyst you ask.

Some dot-coms (Pets.com, Drkoop.com to name a few) are struggling to hit $1 a share. Second-tier dot-coms such as iVillage and TheStreet.com hope to hit the $4 mark.

The reality is in the middle. Flatiron's Wilson, chairman of TheStreet.com's board, noted that he considers the financial news provider a real company. "By market measures, it hasn't been a success," said Wilson. "But is a company with strong year-over-year growth and two million page views every day a failure? Its failure has been living up to expectations."

As for fair value for TheStreet.com, Wilson said the company is "closer to fair value now than when it was at 70". You could plug almost any dot-com into Wilson's statement.

The happy medium will arrive and the survivors will be better companies for it. Let's look at some of the implosion points and how companies are finding some balance.

• Layoffs: Dot-com job cut headlines are a dime a dozen. Sure, dot-coms are laying off a lot of people, but common sense dictates that they were completely overstaffed to begin with. When you have venture capital and hopes for lots of public money why bother with the lean and mean approach?

Take MTVi's recent layoffs for instance. MTVi laid off 25 percent of its workforce, or 105 editorial and technical folks, begging the question of why MTVi hired so many people in the first place. The answer: companies get bloated when shareholders are expected to foot the bill. Now dot-coms are "right-sizing" for the better.

Garden.com has a good customer-focused site, strong following and would be a nice acquisition for a larger company (Martha Stewart, Home Depot, Lowe's come to mind). But Garden.com has cut 30 percent of its workforce, is reaching to sell its back-end technology and has a market cap of $10m. Cash is running out and shares are going for 56 cents. Garden.com probably should have never gone public, but it isn't worthless either. Is Garden.com worth the 56 cents it trades at today or the $12 IPO price last September?

The truth may be somewhere in the middle.

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