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Thursday, 18 May, 2000, 17:40 GMT 18:40 UK
Will investors still turn to the web?
Venture capitalists and entrepreneurs at a thechemistry.com networking event
Hunting for money: Entrepreneurs schmoozing with venture capitalists
by BBC News Online's Tim Weber

Spectacular plunges in the value of dot.com shares and the collapse of high-profile firms like boo.com have given high-tech investors food for thought.

Should they keep on funding fledgling internet start-ups or is there a danger that they throw good money after bad?

Entrepreneurs with bright ideas, meanwhile, will worry whether there is still enough money out there to finance their ventures.



There is still enough money out there chasing too few ideas

Mark Simon
thechemistry.com
For now, money is still aplenty. In the first quarter of this year, US venture capitalists ploughed $17.22bn into new ventures - more than four times the amount spent during January to March 1999.

The spending spree continues "despite the recent downturn of the stock market", according to Tracy Lefteroff of the US venture capital practice at PricewaterhouseCoopers.

And in Europe, the wave of venture capital (VC) has just started rolling.

At monthly industry networking events, organised by firms like First Tuesday and thechemistry.com, VCs are still jostling with each other to get hold of entrepreneurs with good ideas.

The coffers of VCs are still bulging with the gains made from early investments in the likes of Amazon, Oracle and Cisco Systems.

But as technology stocks are plunging, so does the value of investment portfolios. Before long, VCs will have to make cutbacks.

Getting choosy

And they are already getting more careful when choosing their next investment target.


Mark Simon, thechemistry.com
Simon: "Consumers are dot-commed out"
Peter Bradshaw, internet analyst with investment bank Merrill Lynch, says that "the days of funding dubious business propositions are over".

His prediction is dire: "75% of European dot.coms will disappear either through consolidation or failure over the next few years."

But despite mounting losses at dot.com companies, the steady stream of venture capital has not begun to dry up yet .

"There is still enough money out there chasing too few ideas", says Mark Simon, founder of thechemistry.com, an organisation that brings entrepreneurs and venture capitalists together.

But the 'smart' money has become even smarter. Mr Simon argues that many investors were already weary of "business-to-consumer" web firms well before boo.com went belly-up.

The failure of the online fashion retailer simply confirmed their worst fears.

Dot.com fatigue

There are simply too many online retailers with similar ideas on the market, which makes building a brand name - and a customer base - very expensive.



Start-ups and middle-stage companies [with] good product will continue to be supported

Brian Larcombe, 3i
Consumers in turn are bewildered by the abundant choice of dot.coms vying for their spending power.

Mark Simon says: "The public is just numbed by it all with adverts for dot.coms everywhere."

And that has badly affected the value of the shares of internet companies on the stock market, especially in Europe.

Most European internet companies have now fallen below the price at which they were floated, with many investors who hung on losing money.

That will make it more diffficult for new companies to raise capital from the stock market - and for many entrepeneurs to gain the immediate rewards that a successful flotation could bring.

But if former VC darlings like Lastminute.com and boo.com are out of favour, what is the new favourite flavour?

B-2-b, exchanges, web enablers

Since the start of the year, the buzz word is b-2-b - business-to-business e-commerce. If companies sell to other companies, they can make money without having to spend millions on marketing to consumers.

Even better are web exchanges, online market places that make fragmented markets for commodities, products or services transparent and global.

The top tip, though, are web enablers, firms that help companies to go on the web in the first place.

Brian Larcombe of UK venture capital firm 3i predicts that "start-ups and middle-stage companies that have got good product and long-term potential will continue to be supported".

But there are still investors out there that are not investing wisely, says Mr Simon.

They put their money into anything 'e' - e-commerce, e-tailing, e-services - regardless of the quality of the business plan.

Another issue is the quality of management. Too often venture capitalists have been happy to let entrepreneurs get on with the job.

But good technical knowledge and a strong personality cannot replace a good business plan - as the case of boo.com has shown.

Old economy firms move in

Now it is the turn of 'old economy' firms to move in. Egged on by competition from hungry start-ups they use the internet to diversify their distribution channels and improve their supply chain management.

But according to Mark Simon, this does not spell the end of the start-ups.

Old economy firms know that start-ups are better at generating ideas and quicker at getting them to the production stage.

They will continue to find money if they are innovative and have good ideas.

As a result, the amount of investment capital available to entrepreneurs could actually increase.

Venture capitalists are now joined by corporate investors who know they can get better value out of start-ups than any in-house development.

Big firms like Microsoft, IBM, and Unilever are prepared to invest in start-up firms with promising technologies that could be useful for their own development.

Some firms, like Cisco Systems, are accused of - or applauded for - the fact that they have effectively outsourced their research and development effort by simply buying up firms with the right ideas.

So while consumers may be "dot-commed out", venture capitalists have still got some appetite for the internet sector.

They have just become pickier in what they choose.

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See also:

18 May 00 | Business
The future of e-tailing
18 May 00 | Business
Top web retailer collapses
18 May 00 | Business
From Boo.com to Boo.gone
18 May 00 | Business
My bout with Boo.com
01 May 00 | Business Basics
What do venture capitalists do?
30 Jan 00 | Business
The internet money game
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