What Now for Dot-Com IPOs?

The shakeout shark may not be finished gobbling up little dot-coms just yet, but for reasonably cautious investors, the news is good: It's safe to go back into the water.

True, the freewheeling days of the "anything goes" Internet IPO are long over, but that era was too surreal for comfort, anyway. Now that the hyperactive market has cooled, it is reassuring to see that, once again, there is logic behind what scores and what misses.

Market Trends

The business-to-consumer (B2C) market will likely never re-experience a level of IPO action comparable to last year's mania. "B2C won't bounce back any time soon because the markets are already maturing and consolidation is taking place," said George Nichols, Morningstar.com Internet stock analyst.

Nichols told the E-Commerce Times that investors are now focusing on companies that develop and implement underlying technologies -- such as infrastructure, broadband and wireless firms.

However, Nichols believes that rumblings about a shakeout in the business-to-business (B2B) sector are premature. "B2B is still largely out of favor, but getting primed for a bounce-back by the end of the year. Unlike B2C, the B2B sector has a chance for recovery. It's a relatively young market, and many promising companies haven't gone public yet. It's too early for a shakeout," he said.

Some Like It Hot

As for the flagging B2C sector, a collective sigh of analyst and investor relief can be heard over the death rattles, as a semblance of order returns to the financial community and the IPO game once again falls into a familiar pattern.

While simply adding ".com" after a company name no longer does the trick, it is still possible for B2C ventures to have successful IPOs. But they must now follow many of the old rules that were all but abandoned during the B2C frenzy, along with some new ones that are emerging as dot-com survivors are distinguished from the fallen.

Once again, a fledgling company must lure investors with a product that is first on the market or unique in some demonstrable way -- it must generate "sex appeal."

NetLibrary, Inc. recently filed to raise $82 million (US$) in an initial public offering, on the conviction that Stephen King's widely touted digital publishing success is not merely a celebrity-driven fluke, but proof that consumers are ready for electronic books.

Further supporting the notion that e-publishing is here to stay, NetLibrary cited a recent study from Andersen Consulting, which projected that total revenues for e-books will reach between $1 and $3.4 billion by 2005. NetLibrary and its backers are pushing the "hot" buttons.

Path To Profitability

But along with blinking lights, a new venture must have a solid, working business plan and a management team with enough experience and savvy to convince big league investors the company is tough enough to go the distance.

A good example of a dot-com disappointment that had little hope of success right from the first flush of its IPO is Buy.com, a company that offers merchandise at or below cost and tries to make its profits through advertising sales. "Buy.com has an inherently poor business plan," Nichols said. "It's competing on pressuring margins downward."

While down, but not yet out, Buy.com is still miles away from turning the profitability corner -- and above all, today's IPO-bound dot-coms must show a clear path to profitability.

Dramatic potential for revenue growth, while far from irrelevant, is no longer sufficient to attract venture capitalists and underwriters. "If a company is not within a year -- or two, at most -- of being on a clear path to profits, investors aren't interested," Nichols said.

Though there are only a few lucrative markets left in the B2C sector, according to Nichols, one area that has strong market potential is online payment. Of several fiercely competing services that allow individuals to send and receive money over the Internet, "PayPal is the clear leader, with a 'killer app' that is way ahead of BillPay and the rest," Nichols said.

PayPal is owned by X.com, which is gearing up for an IPO. However, because X.com owns a lot of other properties, PayPal is just one element that may influence the offering's success, Nichols acknowledged.

Seventh Inning Stretch?

It is indisputable that a great deal of investor attention has been diverted from the jilted dot-com sector to companies that supply infrastructure and underlying technologies. Nevertheless, it is equally clear that the maturing e-commerce market is not yet overripe.

A recent study from PricewaterhouseCoopers indicates that both B2C and B2B companies are getting a smaller share of a larger venture capital pie -- but in the second quarter of 2000, that slice was still worth about $3 billion -- a bit more than a tasty morsel.

With the B2C sector stabilizing and B2B gearing up for a comeback, the e-commerce ballpark is still plenty big enough to attract IPO players with the right stuff to an action-packed game.