Sobering Effect Seen in Tech Sector’s Wild Ride ; Shakeout Looms
Throw open the windows and let the sunshine in; the honeymoon is officially over.
Investors’ adolescent love affair with technology stocks came to an unmistakable end this month, leaving behind a mood of uncertainty in a market that had grown fat on wild valuations and almost guaranteed attention from investors hoping to cash in on all things tech.
While it’s too early to tell how long any downturn will last and exactly how it will affect Orange County’s once-booming new-economy sector, observers say events have pierced the illusion of invulnerability that has fueled the dot-com craze,and the fallout is likely to influence the industry for months.
“It’s getting to be a Darwinian situation,” said Chris Woolley, senior vice president and Pacific Southwest regional manager for Imperial Bank, who works with several emerging Southern California companies that are considering putting off planned IPOs or thinking about alternate exit strategies.
“Some of the weak ones are going to get killed off, and it’s the good ones that are going to survive and prosper,” he said. “The really marginal (investment) deals may never come back, but that may not be such a bad thing. The question is whether we’ve gone too far down the food chain in terms of what’s getting funded. You can’t sustain an economy on B-grade companies.”
Woolley calls the downturn a positive development because it will allow the market to focus on better companies.
He added that despite bigger-than-ever venture funds, investors are going to become far more picky about where they put that money. In other words, putting a “.com” onto a company’s logo won’t automatically bring in the speculative investment it would have only a few months ago.
For a bevy of Orange County startups banking on a venture capital infusion or public offering, that could mean serious problems. Some worry that an extended drop-off in Internet investment could spill over into other industries, far enough, even, to spark a recession.
“The economy is being buoyed by artificial means,IPO proceeds and dot-com craziness that I’m concerned will stop, and stop sharply,” said Sam Zell, a real estate magnate with Orange County properties, at a recent conference in Los Angeles. “And when it does, the impact on the economy will be much greater than everybody envisions. If I were a prognosticator, which I sometimes am, I would think the next recession will occur at the same point that the IPO window closes.”
Some Pain Expected
While not everyone is so glum, most predict some pain for the startup sector that has spent investment money on everything from real estate to advertising.
According to observers, many Internet companies were already facing the possibility of running out of money, and if the capital markets close to them, most will be in deep trouble.
“The days of throwing money at anything with a ‘.com’ in it have been over for a good six months to a year now,” said Bruce Berman, chief executive of GoPublicNow.com, an Internet portal of capital-raising resources that recently went public itself. “The first thing a company needs to ask itself now is how it’s going to make a profit.”
GoPublicNow has had stock troubles of its own, falling to around $3.50 per share from its opening day high of $15.
The Internet sector had enjoyed an almost uninterrupted ascension since Netscape Corp. shares doubled on its first day of trading in August 1995. That record-breaking IPO, which gave the company a market value of $2.2 billion, set the tone for an industry that has until recently enjoyed sky-high valuations and sure-fire returns.
IPOs on Hold
But as investors have become more skeptical of individual companies’ hopes for profitability, several recent IPOs turned out to be DOA.
Ryan Steelberg, co-founder of several OC tech startups including free high-speed Internet access provider Broadband Digital Group Inc., hopes his capital-intensive fledgling won’t be among them. The well-known entrepreneur said he’s already considering getting an additional round of venture capital before going forward with a public offering that had been planned for third- or fourth-quarter 2000.
Despite the market’s newfound sensitivity to earnings, Steelberg said he will continue to focus on customer acquisition over profits for now because his business plan hinges on the size of his audience.
“We are one of the darling private companies on the block, and since most people are still flush with cash, private equities like ours are still a hot commodity,” he said, though he admitted that volatility in the market dampens valuations and makes it harder to get financing on favorable terms. “It will have some impact, but hopefully not too drastic.”
Buffer Zones Needed
Several OC-area startups have recently consummated financing that provides a buffer for the rest of 2000 or longer.
Steelberg’s company recently closed a $20 million round, and Richard Rambus, the new president and chief operating officer of Huntington Beach high-speed Internet access provider Flashcom Inc., told a crowd gathered at a local tech conference April 14 he was relieved the company already had its financing “sitting in the bank.”
But for many ventures, particularly those in the crowded online retailing and content fields, it won’t be so simple. Forrester Research predicted earlier this month that four-fifths of e-tailers in business now wouldn’t survive the year. While big names such as Amazon.com and Buy.com probably have enough of a brand name and market share to weather short-term volatility, many smaller companies are going to have a tough time attracting the capital to survive.
Still, the change might not be completely detrimental. Broadcom Corp. chief financial officer William Ruehle said dashed IPO hopes will make it easier for companies like his to scoop up smaller firms with promising technologies.
“The biggest competition we always have when we’re going to acquire a company is they say, ‘Well, we’re going to do an IPO and be worth a billion,’ ” he said. “That IPO window doesn’t look very attractive anymore.”
And a consolidation wave could go far in alleviating the worker shortage that has plagued the industry as workers jumped ship for unknown startups offering instant riches through stock options.
“This could end up being a very healthy thing for the industry,” Ruehle said. n
