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ARTICLES
Los Angeles Business Journal December 27, 1999 - January 2, 2000
Still Plenty of Money to Chase After Dot-Coms by Joel Kotkin Think a lot of money went into Internet companies in 1999? Wait until next year. The wave of enthusiasm that greeted the initial public offerings and startups of Web-related Los Angeles companies - and which has quickly made this city one of the Internet's most important strongholds - is unlikely to cool anytime soon. Oh, there may be less money going into pure e-commerce plays - especially the sexy consumer sectors that have received so much attention this year - and more money going into the duller confines of business-to-business activity. But make no mistake, the funding is there, regardless of whether the venture is close to turning a profit or whether there are several companies in the same niche. The simple reason is that the Internet bazaar is simply too new, even in 2000, to determine winners and losers. Barring widespread financial catastrophe, lots of investors remain willing to place huge bets not so much on existing fundamentals but on future potential. "I predict there will be some spectacular failures, but all and all, I think that for the year 2000 and the near future things look phenomenal for the Internet applications and e-commerce," said Peter Cowen of boutique investment firm Cowen & Associates. "There is a lot of capital being put in and even more looking to get out there." Those on the receiving end agree. "We have conversations all the time with venture capitalists, investment bankers, as well as private investors," said Brad Sobel, president and CEO of Santa Monica-based EHobbies, which didn't even exist until July. "They're all telling us, 'You have to go with us when you go public.' There's no lack of money out there for a good idea." There is likely to be industry consolidation in 2000, as certain Internet companies are bought out and others go bust. There are also nagging concerns about the over-reliance on sky-high stock valuations. As a result, some are gamely predicting that investors will likely become a bit more discriminating. "By the end of 2000 we may start to see things shake out a bit, and we probably won't see a lot of consumer-oriented sites get as much funding," said John Funk, general partner at Media Technology Ventures. "There have been a huge number of startups, and whether most are competitive is too early to tell. But a lot of the private rounds of funding are based on certain milestones that must be achieved. Companies are beginning to be measured on whether they've achieved these milestones," he said. Those include specific volumes of site traffic, sales, number of customers and/or subscribers. Companies that don't meet their goals may find the money well start to dry up. One company that has been achieving its early Internet milestones is Westlake Village-based The Right Start Inc., which sells products for infants and young children on its site, Rightstart.com. In its first full quarter of operations, which ended Oct. 30, Rightstart.com sold $2.2 million worth of goods. The online retailer did post a net loss of almost $3.2 million during the period, but investors are obviously not as concerned about such measurements - at least for now. "Rightstart.com just announced that it's doing something over $650,000 a week in sales from a standing start," said Michael Montgomery, managing partner at Digital Coast Partners. "Potential is still going to be what's driving these things. We're too far away from profits at this point." Rightstart.com is one of L.A.'s more prominent e-commerce companies with high-profile local competition. In July, EStyle, run by an ex-Walt Disney Co. executive, launched Babystyle.com, an online store that sells baby gear, although it also offers maternity wear (which Rightstart.com doesn't sell). While neither Babystyle.com nor Rightstart.com dominates it's niche, they are examples of the kind of business plan venture capitalists like. "There are some e-companies that have no rhyme or reason to them or the items they sell," said Frank Creer, a partner in L.A.'s Zone Ventures, and affiliate of Silicon Valley venture firm Draper Fisher Jurvetson that invested $1 million in seed funding for Babystyle. "But with Babystyle or Rightstart, they're selling things everybody needs. People have babies all the time." By contrast, online stores embracing the "we sell everything" model are considered more vulnerable. Many such companies have spent huge sums on advertising, on inventory to meet peak holiday demand, and on technology to make their sites as user-friendly and glitch-free as possible. While it's not known which e-commerce companies are failing to meet holiday expectations, don't be surprised to see at least some post-holiday fallout. "A lot of companies thought they were going to make it through the holiday season and found they didn't (meet expectations)," said Sobel. "Clearly, some companies are going to fail either on the sales side or supply side. We've dealt with one local well-known company that couldn't ship overnight. It was, 'It'll be out sometime this week.' That's unacceptable to customers." One big issue is how far to extend the brand. EHobbies launched its online hobby site in October, only to be beaten to the punch by Etoys Inc., which added hobbyist goods to its site a few weeks earlier. Sobel disputes that the two sites are really in competition, because his caters more to hard-core hobby enthusiasts of all ages. But he maintains that online companies targeting a well-defined audience are more likely to succeed. "It's very difficult to be all things to all people," he said. "I used to know who Amazon.com was, and now I don't." (Amazon was originally a bookseller, but now carries various other products.) Santa Monica-based Etoys, one of L.A.'s most prominent Internet companies, is illustrative of online ebbs and flows. It was the darling of Wall Street after its initial public offering in May opened at $20 a share and soared as high as $85 on its first day of trading. As usual, investors brushed aside any concerns about profit and loss. "Any venture capitalist will tell you that they want to see detailed numbers of a business plan," said Harold Vogel of Vogel Capital Management in New York. "But when the market is hot for an IPO, and the company shows a loss, it becomes, 'So what?' " Yet as of late, the going has gotten tougher, what with Etoys locked in a fierce battle with Amazon.com, Toys 'R' Us Inc.'s online service and other merchants. There is also concern about a post-holiday customer backlash as a result of spotty operational problems through the online ranks. As of last week, Etoys stock was trading at around $33. Vogel agrees that some e-companies may come out of the holiday season damaged, but he is loath to name names. And besides, enthusiasm for the opportunities unrealized continue to outweigh any concerns about Internet companies being overvalued, based on traditional measurements of what they are producing. "There could be an out-and-out bear market and a collapse in (share) values. But until that happens… there will be an onward process of growth," Vogel said. The ultimate outcome of the Internet frenzy "will be messy, but that's the way capitalism is. You throw a lot of stuff on the wall, and some of it sticks." |
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