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| BRAINSTORM |
Get ready for another wave of Net IPOs
By David Kirkpatrick
FORTUNE.COM
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(FORTUNE.COM) -- It's back-to-school time, so let's start with a quiz. In what year did a cocky young dot-com CEO whose startup was threatening the old guard tell me that the Internet was the "next wave": (a) Just before Netscape's IPO in 1995; (b) At the filming of Netpliance's Super Bowl commercial in 1999; (c) In the midst of the continuing ugly environment for tech in 2003?
If you chose (c), you're either smart or lucky -- or you work at one of the many venture-backed dot-coms that have been Wall Street pariahs over the past few years. Now wiser, more mature, and in many cases profitable, these firms are eyeing the emergence of another Internet era. The real kickoff, most agree, will be the IPOs of Google and Salesforce.com (whose founder, Marc Benioff, was the source for today's quiz).
A dot-com resurgence is long overdue. The Net's power as a business tool never weakened, even after stocks plummeted in mid-2000. In the post-bubble wreckage, too many people dwell on the Razor scooters and irrational exuberance and ignore the Net's fundamental promise. Says Clay Corbus, senior managing director at investment bank W.R. Hambrecht & Co.: "What was ballyhooed during the bubble about the potential for hypergrowth has been tested, and it still holds. The Internet does allow companies to scale quicker."
The best examples are Google and Salesforce.com. Google, less than five years old, now powers more than 200 million web searches per day, employs over 1,000 people, and by many accounts (though not its own; it won't comment) is nearing $1 billion in annual revenues, with hundreds of millions in profit. Salesforce.com, the Siebel Systems competitor that makes online tools for managing the sales process, is younger than Google and smaller, but growing rapidly. Benioff says that the company is in its second profitable quarter and that sales, which have been doubling annually, are running at a $100-million-a-year clip. Neither company is allowed by the SEC to discuss it, but many investors and techies expect both to go public within a year.
There's no question that a new hunger for dot-coms is building. Revenues and stock prices are soaring for public stars of the Net like Amazon, eBay, and Yahoo. And though fewer than 15 venture-backed firms have gone public since mid-2000, roaming-Internet access provider iPass tested the market in July and lived to tell about it. It garnered a valuation of over $1 billion and has seen its stock rise from an opening-day $14 to a recent $19.50.
Lining up for their chance to cash in are classic dot-coms: Emode, which offers online personality tests and matchmaking, claims 35 million members and five quarters of profitability; MyFamily.com, which helps people research their family trees, is "very profitable," says investor Tim Draper of VC firm Draper Fisher Jurvetson; and gift site RedEnvelope is already in registration. Further down the line are companies like Web site marketer LinkShare and online print-and-delivery outfit Mimeo. Research firm VentureOne calculates that more than 400 private infotech startups now operate profitably. About 200 deal in software, and 25 still proudly wear the dot-com appellation.
Many of the companies planned to catch the last wave of IPOs but missed out -- devastating at the time but clearly now a blessing in disguise. The delay allowed execs to manage their businesses rather than manage Wall Street. BizRate.com, which helps people research consumer purchases, bulked up to 250 people by 2000 even as it was hemorrhaging money. "I got carried away, just like everybody else," says chairman Farhad Mohit. "I'm still stuck in a ridiculous BMW lease. I didn't even negotiate. I told the guy, 'I want to be the fastest purchaser in this dealership, not the one who got the best deal.' "
Now, having cut back to just 95 employees, BizRate is "very profitable," he says. "We're not ready to go public. But we'll see what Google does." Meanwhile, rival DealTime recently bought Epinions.com and seems closer to an IPO.
Thankfully this wave of Internet IPOs will build slowly -- investors are smarter, and the hurdles higher. Says Benioff: "Not only do you have to comply with Sarbanes-Oxley, but you also have to decide about expensing stock options. You'd better have three quarters of profitability and be cash-flow positive. You'd better be of scale and have marquee customers and enough momentum to keep going for two or three years at the earnings growth rate you go out at. This market is unforgiving."
Those that meet the challenges will be much stronger than their bubble predecessors. Get over your skepticism and notice how much time you're spending online. We're only starting to see the real commercial promise of the Internet.
