Reality checks in
June 2000

Lastminute.com did a great job of giving the e-naysayers an opportunity to forecast the end of the technology boom in world stock markets; but perhaps the disappointing sag in the price when the shares became tradable was the fault was the greed of those who set the price of the share offer. So this specific example of over-pricing might not herald the end of e-civilisation as we know it - but since all "dot coms" are grotesquely over valued when measured with the yardsticks of olde world bricks and mortar businesses, then it might just be enough to start to poke a hole in the fragile dam of confidence that is holding up the valuations in this sector.

Initial Public Offerings (IPOs) are when companies sell part (never all) of their shares to the public via some public stock market. The rules and regulations surrounding these offerings are quite something to behold, and are designed to prevent unfair advantage being gained by anyone with inside knowledge. Such IPOs create "paper millionaires" aplenty, because the terms of the offer nearly always mean that the founders of the business agree not to flog their holding and run for the barn screaming "yippee!" Instead, they are obliged to hang about and see if their promises come true before being allowed by the new shareholders to "cash out" with their gains ...if there are to be any. And even when the period of "restraint" expires, the market closely watches the personal holdings of the shareholders present at the IPO, and any attempt for a founder to sell is regarded as a big hint that it's time to be careful, so maybe all the stock holders should take the hint, and run for the barn, too. And one day, it's not going to be "Yippee!" that's being shouted, it's going to be "Arrrrghhh!"

After all, if the founders of the business can think of something better to do with their own money than invest it in their own business, then why should Joe Public do different..? The usual answer to such probing is that the founder is seeking "prudent diversifiation", ie not keeping all their eggs in one basket.

An older stock market darling is games publisher, Eidos - creators (inflaters?) of Lara Croft. Eidos shared halved in value one day in March as the result of the most dreaded thing in stock tradinga "profits warning". Which is stockspeak for admitting that the profits that you have been hinting that your business is going to make are unlikely to be met.

But at least Eidos is making a profit - £38m on sales of £226m last year, in fact. There are precious few dot coms doing that sort of thing. However, the fickleness of the computer games business is an unnerving thing. The expression "easy come, easy go" springs to mind. So why, if the stock market only likes safe bets, is it going bonkers with untried dot coms..? Search me.

In fact, why not search Ask Jeeves UK site at www.ask.co.uk and pose the question:

"how do I keep a pig at home"

And you will quickly discover that spending a fortune with the eager advertising industry to tell the UK TV audience about your wonderful web site is likely to be an excellent way of getting through your shareholders' funds before the first AGM, and thus before anyone has time to ask awkward poignant questions about the validity of your business model.

I think perhaps the most interesting response I got back was "How do I buy a new home in Alabama", closely followed by the link to "Dr Pig's infamous pants-index"

American venture capitalists are still saying that all that matters for a dot com is winning the race to own a "market space", and they simply don't have the plot or the market space.

More like “dotty com”. Any proposition that is merely a website can be undone by the next website covering the same market space that is willing to spend more to buy in. Arguably, the next web site along doesn't need to spend so much developing the idea and concept, and simply concentrate on stealing the "space" by being cheaper and more blatant. It can also cherry pick elements of the "space" and avoid the 80/20 paradox that afflicts all B2C endeavours.

In other words, no matter how a shopkeeper tries, 80% of his turnover is generally represented by only 20% of his stock lines. In the world of the web, a site that wants to cherry pick a specific market genre can set up www.stepscds.com and run a very efficient business with perfect targeting and stock management. While a general CD vendor is going to be stuck listing Doris Day, Pavarotti and all sorts of other stuff that only adds to their overheads as far as Steps fans are concerned.

We’re still learning about this cyber lark, and by the time you read this, the dot com mania might well have a big dose of reality. Let’s hope that more thoughtful companies whose business models are not vulnerable to madness marketing budgets do not also gets sucked down with the daft ones.