Eugene Lacey: Farewell to dotcom mania

Brace yourself, because traditional business values are about to reassert themselves in Internet-land

Gloom has descended on the Internet IPO scene as the stock prices of recently floated companies fall below their offer prices, and the venture capital tap is abruptly turned off. So what's going on, and is it too late to join the rich kids who made a quick killing in the Internet IPO gold rush?

The answer to the second question is probably yes. From here on, Internet businesses are going to have to think the unthinkable -- they must include in their business plans some notion of how their cyber venture expects to generate revenue and make profits, and when exactly both of those things are likely to happen. That's good. If the public school toff who is investing my hard-earned pension contributions isn't asking these kind of questions of Internet companies, then he needs a good kicking.

The problem for aspiring Net millionaires is that even if you have a watertight business plan, it may not be enough, because certain types of Internet plays are simply out of fashion with investors. Forget business-to-consumer (B2C) plays, for example. Even in Silicon Valley, venture capital for B2C is said to be almost impossible to find.

But don't misunderstand me -- some of the recent companies to have floated are under no illusions. lastminute.com, for example, has fast-rising revenues and brand recognition that some non-Internet players in the travel business would die for. It also has something far more valuable than anything marketing money can buy -- it has word of mouth recommendation aplenty.

Similarly, Freeserve (quote: FRE) is building a sound business, as is 365 group, QXL.com (quote: QXL), and many more recent entries to market.

So what is going on? If some of these companies have promising fundamentals, why does the market now appear to be unwilling to accept jam tomorrow as it has traditionally done? The answer is simple -- it's fear.

The market has two basic drivers, bulls or bears if you prefer, but strip away the language of the city and what you're left with is greed and fear. Right now, investors are fearful that we have gone too far, too quickly.

The writing was very clearly on the wall in January, when a clutch of leading US consumer e-commerce Web sites produced appalling numbers for the Christmas trading period. Many of them had spent more on marketing than they had generated in revenues -- never mind about profits or that all of the marketing money was wasted anyway in a cacophony of dotcom advertising noise.

It's happening here, too. Want to know which new Internet startups are most vulnerable in the shakeout? Simple -- they're the ones you first heard about when you saw their posters on the tube, or advertisements on the television.

The good news is that you can still become an Internet millionaire, but first we need to debunk the biggest falsehood that's distorting the Internet investment picture.

Some analysts are talking up business-to-business (B2B) Internet plays as though they were the only worthwhile investment, and they're doing it with as little real understanding as they previously had for B2C plays. There are two problems with this. First, no business is an island completely separated from the consumer. Ultimately, all industries and businesses exist to serve the needs of people, and are a part of the wider economy. Business-to-business Internet players do not exist in some cushioned, B2B parallel universe.

Second, the argument in favour of the supposedly safer B2B investment fails to take account of the main lesson of the Internet in business -- all firms are vulnerable. The Internet takes no heed of pat analyst categorisations of commercial activity -- consumers can go directly to manufacturers, and are doing so increasingly in organised e-groupings. Similarly, manufacturers can go directly to consumers, slicing away tiers of B2B firms that may have previously existed. All things are connected, especially in business, and especially in Internet business. There are no ring fences.

So how do I become an Internet millionaire now? The good news is that there are many, many fortunes still to be made. Internet usage in the developed worlds is still a minority activity. New e-commerce platforms, such as mobile devices and interactive TV, have opened up whole new markets to be exploited.

But the world has changed, and you should be thinking more in terms of building a business than building an IPO. Many business people will tell you that investing your own capital gives you far more control than going to the markets anyway. There are, indeed, still plenty of opportunities to get rich, but it may not happen quickly, in the lottery win style of recent Internet IPOs.

You can still make your million, but guess what? You're going to have to build a business that makes profits; blows the competition out of the water; is fiercely competitive in the long term, not just in a burst of launch enthusiasm; employs the best people and hangs on to them; offers your customers products and services that don't just please, but delight, them; and when it starts going well and the profits start to roll in, you're going to put those profits back into the business rather than buying a Ferrari like a Net IPO-er would.

Yes, you can still get rich on the Internet, but you'll need to build a sound business in order to do so.

Eugene Lacey is editor-in-chief of ZDNet UK.

Tony Westbrook asks -- Is this the last chance for gratuitous IPO's? Go and read the news comment at AnchorDesk UK.

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