| Sajha.com Archives | |
| Username | Post |
| Sujan | Posted
on 22-Sep-02 11:13 AM
"Of all companies receiving initial venture funding between 1992 and August 2002, $26.1 billion went to companies that went public, compared with $26.7 billion for start-ups that were acquired or merged. About $124 billion in venture capital was invested between 1992 and August 2002 in start-ups that remain privately held." Source: Reuters Internet Report This article gives a synopsis of the dot com venture successes and failures. It states that one in every five internet start-ups failed. Well, that is certainly better than the restaurant business, where 95% of them fail in the first year. Anyhow, with a lot of private companies waiting for their turn to go public, I doubt many of them will see the day as the tech drought continues. It seems venture capital has dried up for now. Thanks to the TheGlobe.com and the likes… Here is the link: http://story.news.yahoo.com/news?tmpl=story2&cid=582&ncid=582&e=7&u=/nm/20020920/wr_nm/financial_startups_dc Enjoy, -Sujan |
| paramendra | Posted
on 22-Sep-02 02:01 PM
Hi Sujan. I hope this thread picks up momentum. Nice article. Informative. I think you make an interesting comparison between the dot coms and the restaurant business. The party was not that wild after all, eh. |
| Sujan | Posted
on 22-Sep-02 07:41 PM
Hi Paramendra, I'm glad to see your interest in the thread. The comparison of the failures between the two businesses- internet and restaurant can only be stated in terms of percentage. The reasons for failure, of course as you know, are as different as oranges and apples. Let's delve into these two businesses, mostly the dot com, to seek the answer to this: why did it bomb? First, the restaurant business- What is the most important element in opening a restaurant? It's simple- location, location, location. How do you value such businesses? Like any other conventional brick and mortar businesses, you discount the future cash flows until you come up with the net present value. If there is no positive cash flow, there isn't a positive earning. Then the business is worth nil other than the goodwill, assets, etc. So, we know how these businesses work, therefore it is easier for us to decide to invest or not. If the restaurant's books don't have a positive cash flow at the end of the first year, it is history. This is simply because restaurants' growth rate is too low to pursue it any further hoping one day it will have positive cash flow. You are losing money, so why take the risk in prolonging it any further? So, the only option is to close it. This is totally unlike the internet business as you will see... Now, the dot com business. These are the four reasons why I think the eventual burst of the dot balloon occurred: 1) Uncontrollable valuations 2) Unfounded business models 3) Market manipulations by the brokerage houses 4) Unnecessary investments by individual/institutional investors which fueled most of the dot com stocks ValuationsHow do you value a dot com? This was very frightening at the beginning. How can a company that has neither positive earnings nor a positive cash flow be evaluated? Just like the restaurant business, this was at first considered to be worth nil. Then came the so called 'experts' from several brokerage houses, Henry Blodgett then of Merrill Lynch, and Mary Meeker then of Morgan Stanley to name a few, (BTW they are facing huge lawsuits from every investor possible as of this moment) who went onto say that we cannot ignore the growth rates of these 'dot coms', so we should value them according to their growth rates. Then they valued the first-movers such as AOL, Yahoo, Amazon, EBay, etc according to their growth rates as well as 'possible' positive cash flows 8 quarters (2 years) away from now. Then they used them as benchmark to value other similar-like companies, which didn't have a positive earning, but did have promising growth rates, in a method known as 'comparables'. What they forgot to realize was that the so called 'anticipated positive cash flow' may never become a reality, so their valuations in itself was 'very iffy'. Some brokerage houses used their own 'proprietary valuation models'. That is all they were, 'proprietary', if a company does not have a positive cash flow then no matter how you value it, it will still come up very 'vague' in valuations. All the other traditional valuation models ( i.e. Book value, P/E ratio ) never came into existence simply because they didn’t' have positive earnings!! *Note: In Spring of 1999, five of my classmates and myself ( during undergraduate) competed in Annual Goldman Sachs Case Competition. We were supposed to come up with the valuation for EToys.com (bankrupt and gone) once it acquired BabyCenter, a dot com focusing on baby products. And EToys.com did not have any earnings, surprised? We were to value the ‘synergy’ between the two dot coms. And this was a real future acquisition where we had the CEO and the CFO of EToys.com come to our auditorium and listen to our presentation. We placed third out of 20 teams, and EToys did acquire BabyCenter early that summer. Along with this, I did some internship work on these ‘negative earning’ dot coms. Business ModelsTheGlobe.com IPO in 1998 spiraled up some 700%. Ralph Amanpoura, an old analyst at Prudential at the time, said that it didn’t' make sense for such a company to be pushed up that high; he thought that its businesses model was worse than the local coffee shop! But, investors (as you already know the old cliché- greed and fear drive the market) with the I-want- to-climb-on-the-rocket-too-before-it-takes-off type mentality drove up the stock price. There simply was no other reason for this than an idiotic method of investing . Now, getting back to the TheGlobe.com business model- they wanted to collect revenue simply by advertising on their site. Where is the service? Where is the product? What value are you providing to your customers? Ok, the company has got internet games, chats, message boards and the likes on its site to offer, but then again what other commercial website didn't? Where is the ‘proprietary technology’? They wanted to follow Yahoo! but as important as first-mover advantage was at that time in this sort of business, no one survived it unless your business model varied tremendously. Along with such frivolous business models came the cut in spending by the telecoms. This affected the growth of the majority of the Internet backbone providers - Cisco, Nortel, Juniper, and Redback to name a few. Coupled with this, and the questionable valuations of dot coms led investors to 'fear' that these companies were not 'so promising' after all. And you know the rest... continued on the next page |
| Sujan | Posted
on 22-Sep-02 07:42 PM
continued Market ManipulationsThe underwriting of an IPO is a tricky business. So, are the market makers on the floors of NYSE and the ever-so electronically inclined NASDAQ's money 'poachers'. If you've ever seen a Bloomberg terminal or a NASDAQ Level II quoting machine you would have an in-depth understanding of what I mean. All the brokerage houses from the big Merrill Lynch to the boutique Robertson Stephens play to win at all cost, and unfortunately they do not really care about what they bring to the market as long as there are 'potential investors' waiting to grab a piece of that IPO. Having said that, this leaves a lot of room to manipulate the 'IPO market' as well as the 'secondary offerings' and so on. They are even allowed to allocate any number of IPO shares to any client they choose, as well as an option to dump them at the day of the IPO. And certainly, the average investor is not aware of these kinds of 'inner dealings' of the brokerage firms. More importantly, the investors were lured by the 'expert analysts' (i.e. Blodgett, Meeker) in their rating game, while they were themselves cashing in on the stocks!! Oh, what a way to make money. The Uninformed Individual/Institutional InvestorsIRAs, Pensions, State Trusts- you name it, they all invested in the dot coms. Some even borrowed money from their grandmother to invest in the market in hopes of cashing in fairly quickly. Boy, were they wrong. At one moment, a dot com stock could climb 30% or more in one day. If you go to your favorite website, which has stock quotes, check out the charts, you will notice a steady climbing slope before 1999 on most dot coms. Most of the dot coms before this time behaved in this way when there was ANY good news by the company-- merger, partnerships, on the way to profitability, new product, subscriber growth; I mean anything. This is how ridiculous it was, believe it or not. It was a feeding frenzy. And these investors assisted in analysts coming with ridiculous 'DOW 30,000' in five years or 'NASDAQ 10,000' in five years slogans. So these investors are very guilty in helping the market not to capitulate when it should. So what's the result of the bust? Trillions lost in total market value. There are thousands of lawsuits pending against brokerage houses, and dot com companies and its directors/management. The lost faith in our ‘brokerage houses’ and the ‘market makers’ have increased. The unfolding saga of Enron, WorldCom, Global Crossing, Tyco and the likes are all result of this ‘greed and fear’ driven market. The SEC hasn't done much in its role as a watchdog either and it is suffice to say that Pitt should be fired from his role. So, where do we go from here? Nowhere for the time being... -Sujan |
| Sujan | Posted
on 02-Oct-02 05:27 PM
Why in the world VCs have lost interest in wireless? Read on... From the Seattle Post -Sujan |
| Sujan | Posted
on 02-Oct-02 05:33 PM
opps...dead link, try this: From the Seattle Post |