When they opened their doors in 1997, Amazon made $147,000. By the end of 1998, they earned $600,000 rising to $1.6 billion by 1999. At the end of 2000, Amazon generated $2.7 billion in revenues. During the boom years, Amazon managed to go from nothing to a company grossing several billion dollars in revenue. While they often seem to be the epitome of the dot-com boom, another company helped launch almost five years of rapid investment. This company was not the Pets.com sock puppet; that was 1999. Nor was it Yahoo in 1996. The company that set our lives in motion was Netscape, whose tenth anniversary of its IPO passed almost one month ago today. Their browser made the web, as we know it today, possible and was the lens by which all of humanity could view it. And, with a stock touch $75 on its first day of trading, the world showed it wanted to own a piece of the future.
Yet, upon its release some of the smartest minds felt the web and by extension the browser stood no chance of becoming a part of mainstream life. An article in Wired on this topic notes how one television executive proclaimed the Internet the CB radio of the 90’s. And these execs had a legitimate reason to believe that. TV offers no opportunity for interactivity and revolves around a paradigm at complete odds with the potential of the web. Rather than having to schedule ones time around the distribution of content, the web allows users to determine the importance of content. They could not only view it when they pleased but could also create it. Those in TV could not grasp a concept where their content did not dictate the behavior of the users. Netscape’s browser became the new television with search becoming the remote for the now millions of online channels.
Netscape and its IPO, shook the world, impacting, perhaps at some level intentionally, those with the capital as much as anyone. Unlike other forms of media, no one owned the web. The media conglomerates that dictated how users consumed information could not do so here, and the capital markets wasted little time placing bets as to who would rule the Internet. During the five-year boom, the investments were pure speculation. We would like to think that those investing would have not fueled the hype, choosing instead to apply sound business logic that dictated their other investments, but money follows money. The speculators wanted their piece.
In some cases though, what seemed like bad investments were in actuality investments made too early. Webvan, which couldn’t survive on one billion in funding, might have stood a chance today as evidenced by the success of urban fetch. Media consumption and integration simply hadn’t reached that critical mass, but there was no way of knowing it back then. The potential had been exposed, but the promise had yet to be fulfilled. The only real mistake it seems of the first boom was using the public markets to fund the speculation. IPO’s should have occurred only to help scale proven models, much like Google’s did. Instead, institutions took advantage of the times and used IPO’s as a venture fund, transferring the risk away from the company’s investors and onto the general public.
This time around, thankfully the public isn’t footing the bill. They still are exposed – more on that later – but from an investment perspective, the mine owners are not the venture capitalists but the private equity folks. It might seem like a technicality, but it’s an important one. Venture capitalists by definition seek out unproven ideas whereas those in private equity want a stake in something that has evolved beyond concept. Both, however, represent investments in risk. Many venture companies will not see their bets proven just as many private placement investments will not see an exit event. That they choose to invest in our space is part “fashion,” money following money but with a large part based on logic. The first time around, the investment focused on Internet businesses; this time, they have focused primarily on those who have not simply an idea but have proven how to earn money with models that often apply principles seen in the offline world.
Another interesting twist to this cycle’s boom is the amount of Internet companies that have chosen to invest in other Internet companies. Were it only the outside world that was putting money into our space, it would be serious cause for concern. In my opinion, the only cause for concern this time around is the prices. No longer a pure land grab, the Internet is now a reflection of the housing market. Prices are artificially high. It’s not that the investments are bad choices; they are simply overvalued. In rare instances the prices will hold and eventually appreciate. The rest will see their value depreciate, but over time rise and ultimately eclipse the initial price. This is what I expect we will see with the current wave of Internet companies. A few will go under because either they, or those that invested in them, leveraged themselves too thin; or, like the general public, they are too exposed to slight fluctuations from having already leveraged themselves that a large group will struggle when prices fall. Compared to the first boom, many more companies and individuals will survive this time around because the actual investment had value to begin with. It certainly doesn’t help one’s confidence, though, that the biggest deal of the past several years just happened to rhyme with hype.
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