No sure thing in Internet stocks
May 26, 1999
by David Needle
(IDG) -- Would-be investors looking for specific tips on how to hit it big on the stock market with Internet companies will have to keep studying the numbers. A recent panel discussing venture capital didn't name names, but did offer general, often amusing observations about market trends and types of investments to beware of.
The panel of experts in the technology, health, and telecommunications fields spoke on "What's Hot? What's Not?" at a Silicon Valley program sponsored by the nonprofit, public affairs-oriented Churchill Club.
Staying power counts
The recent flurry of Internet company Initial Public Offerings has made many investors wealthy as stock prices have soared. But not all Internet companies are destined for greatness, according to Michael Moritz, a partner in Sequoia Capital, a well-known Silicon Valley venture capital firm.
"We pick companies that are going to be franchise players," Moritz says. To illustrate, he cites two hit films released more than 20 years ago -- Star Wars and The Big Chill. Both were great movies, but only Star Wars established a franchise that's still growing. Similarly, some Internet companies have "hit" IPOs but flounder later when earnings fail to approach heightened expectations. Says Moritz: "Many of the new Internet companies are weaving around like drunken sailors after a week of shore leave."
Sequoia is careful not to overfund the companies it invests in because that can lead to careless spending and less aggressive employees, according to Moritz. One Sequoia success story is its initial funding of Yahoo. A much more recent Sequoia investment was in eToys, an Internet shopping site that went public in May. Its stock has nearly quadrupled since its IPO, giving the startup a market value of more than $8 billion. Eighteen months ago, eToys didn't exist.
California is by far the leading state when it comes to funding Internet companies, according to Sam Colella, a partner in Institutional Venture Partners. California venture capital firms have invested $1.5 billion, compared with $441 million from runner-up Massachusetts, which is followed by New York, Colorado, and Texas.
Demographics play a major role in the growth of the Internet and the adoption of new technology. Colella is eyeing a market he calls the "dot com" generation -- people born after 1979. "Every year we're producing children who are technologically fearless," Colella says.
Another example of technological fearlessness is the recent boom in online trading of stocks. But Moritz worries that too many traders don't know what they're doing, and risk losing lots of money. "Online trading has replaced off-track betting as America's favorite sport," Moritz says.
Telecommunications ventures get a bullish thumbs-up from Cliff Higgerson, a partner in Communications Ventures, which specializes in early-stage investments in networking companies. Higgerson says we are on the verge of a bandwidth explosion that will enable a broad array of inexpensive video and audio services via the Internet.
"The gap between what is being done in research labs and what is available to consumers is unbelievable," Higgerson says. "I suspect that what science fiction writers are predicting we'll have in 200 years, we'll have in 15 years in the telecommunications area. Just in the area of TV, the graphics we have today are poor compared with the incredible resolution and gradations of color that are coming."
Health care versus technology
Though it shows no signs of slowing down, perhaps some day the information technology industry will evolve into a more mature, slower-growth field like health care, the panelists suggest. Brian Dovey, a partner in the venture capital firm Domain Associates, gave a humorous top-ten list of reasons why it's better to invest in health care than in information technology. Among them:
Domain invests in technology-based companies focused on life sciences, such as biopharmaceuticals, medical devices, and health care information systems.
Biotechnology was overhyped in years past, Dovey concedes. But recently, biotech companies have made dramatic improvements in discovering new drugs, he says, adding, "Health care is a trillion-dollar industry and remains an attractive investment."
The five-letter clue
Reeling off a list of Sequoia's successful investments -- including Apple, Atari, Cisco, Arbor, Ccube, Yahoo, and eToys -- Moritz jokes that the firm's secret is to find companies with names containing only five letters. Actually, Sequoia has had many non-five-letter investment successes, including Oracle and 3Com.
But faced with trying to explain the explosive run-up of some Internet stocks, Moritz concedes that he really has no answers. "It's all a bit bewildering," he says.
Good-bye to cut-rate Internet stock trades?
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