"There is, as everybody knows, a huge volume of venture capital sitting there," said Ian Stewart, one of the founding investors in Wired magazine and currently managing director at N. M. Rothschild & Sons in London. Stewart addressed a crowd largely composed of entrepreneurs seeking advice on getting start-up capital.
"In the early days, 1992 or 93, I used to be excited by things that were cool," said Stewart. "Now I'm looking for real business models that can show me how they'll make money."
Much of the recent IT investment was made on the "greater fool" theory, he said: investors hoped to boost share values and get out quickly, on the theory that there was always someone else willing to pay more for a given stock. The craze led to a pattern of start-up enterprises tailoring their business plans to enticing investors, not to profitability.
After this spring's shakeout in the stock market, investors will be skeptical of electronic commerce ventures that a few months ago might have attracted large sums of capital, said Stewart. He pointed to such recent failures as online clothing retailer Boo.com, Mango Planet's health-and-beauty site Clickmango.com, and ill-fated home furnishings seller Living.com. "Creativity is not enough," he said, "You've got to know who will buy what you do."
The future belongs to those who understand the specific business they're in, not just Internet technology, said Stewart. He drew an analogy to the first five years of the motion picture industry, when cameramen controlled the trade, since they were the only ones who understood the mechanics of movie-making. But over time, he said, successful film entrepreneurs were those who knew what audiences wanted and how to market to them.
A panel of Internet entrepreneurs spoke of their own experiences seeking start-up capital. "Back when it was easy to get money in the States, it was too simple," said Jeffrey Frank, chief executive officer of ISP Microportal.com. His company raised about $US5 million from venture capitalists, he said. "As soon as the market tightened in April or May, so did the VC group. Even though we already had 500,000 active subscribers, this VC team pulled the plug." He urged would-be entrepreneurs to choose their investment partners wisely. "After the honeymoon is over, they want more than ever to know where the returns are," he said.
Getting a business plan scrutinised is good for entrepreneurs, said Olaf Hopp, marketing director of online radio broadcaster Webcast Media Group AG. "The new economy is becoming much more selective, in a positive sense," he said, as "old economy" managers are evaluating the usefulness of the Internet for their businesses. Today's investors are asking tough questions, he said. "Will [a business model] really stand up with customers, or is it just euphoria?"
The bursting bubble is having a cleansing effect not only among start-up ventures, but among venture capitalists themselves, said Stewart, forcing out those who don't know enough about the businesses they invest in. "You may find mergers happening, with fund managers with better expertise taking over other funds."
Investors were temporarily scared off after the April plunge in stock prices, but they will be back, he said. "In September or October, this money is going to come flooding back into the market. Hopefully with a better investment strategy, but I have my doubts."