INVESTMENTS

Once again, the IPO market is heating up, and more concept companies are going public. Should you invest in these?

During the early part of 1996, there was a raft of concept Net companies going public. Many have fallen greatly. However, some have done quite well. There are lessons to be learned from these. Let’s take a look:

@Home [ATHM] is, for the most part, a concept company. For the past six months, the company posted losses of $22.8 million, compared with losses of $8.3 million in the same period a year ago. Revenues for the past six months were a scant $1.8 million.

But @Home has a great business concept. The company is focusing on a problem that desperately needs a solution: lack of bandwidth. @Home said it plans on using the existing cable infrastructure to solve this problem. According to the company, its technology will boost speeds 300 times more than the typical dial-up access account.

@Home has arranged contracts with major cable giants such as Tele-Communications Inc., Comcast  and Cox, with a combined base of 44 million homes. Of course, there is no guarantee that this will be a solution. After all, when was the last time a cable company did anything more innovative than install cable lines and collect checks? (Remember digital TV?) Also, the @Home service has a high price tag and requires major infrastructure investments.

Despite all this, the company still has a model that seems to make sense¾ and potentially can make a bonanza. On the offering date, @Home closed at $17, up $6.50 on volume of about 12.6 million shares (the stock was as high as $25.50 on this day). @Home is now selling for $22.

True, there are many twentysomethings starting cutting-edge companies. However, there is a big difference between starting a company and running one. Being a CEO of a fast-growing, high-tech company requires a tremendous number of skills: managing human resources, developing alliances, controlling cash flow, dealing with Wall Street, establishing a brand, etc.

One company that successfully transitioned from a young start-up of entrepreneurs to seasoned management is Yahoo. Straight from their dorm in 1994, Jerry Yang and David Filo created a cool search engine¾ something that was greatly needed on the confusing Web.

Enter Michael Moritz, a Silicon Valley venture capitalist with Sequoia Capital. He already had experience in transitioning a business, started from a garage, to the Fortune 500. He invested $2.5 million in a husband-and-wife team, which had a company called Cisco. (Moritz’s partner, Don Valentine, was the venture capitalist that financed Steve Jobs’s Apple.)

Moritz invested $900,000 in Yahoo. He then set out to assemble a top-notch management team. He hired Tim Koogle as the CEO. He was the former president of Intermec, which makes automated data-collection and data-communications products. He was also a top executive at Motorola. Jeffrey Mallett, senior vice president of Business Operations, was the VP of Novell’s Consumer Division. Farzad Nazem, senior VP of Product Development & Operations, was the VP of Media and Web Server Division at Oracle. Moritz also retained high-quality board members. An example is Mr. Hippeau, who has been chairman and CEO of Ziff-Davis Publishing since 1993.

As for Yang and Filo? Well, they’re on the board and are also called the "chief Yahoos."

On April 12, 1996, when Yahoo went public, the company was definitely still at the concept stage. Losses were $643,000 and sales stood at $1.4 million. Yahoo issued 2.6 million shares at $13 each and raised $32.5 million. On the offering date, the stock shot to about $43, then closed at $33. The stock is now at $51.

But didn’t Lycos and Excite also have good management? Why didn’t they do as well?

That leads us to our next factor…

Although the concept of brand recognition is difficult to measure, it was apparent that Yahoo was the leader. Besides, the site was generating a tremendous amount of traffic. And once Yahoo received money from the IPO, the company wisely invested it into brand-building vehicles: Yahooligans (site for kids), local Web guides (such as in Los Angeles, Chicago, New York and San Francisco), Yellow Pages and classifieds, localized versions (sites for other countries), collaboration with Motley Fool, the creation of Beatrice (a site for women), an agreement with Amazon.com to sell books, premium status on the Netscape Communications Web page and a joint venture with MTV to develop unfurled (the Ultimate Guide to Music on the Web).

Many traditional businesses are having major problems transitioning into the online world. A prime example is the traditional print business. Ziff-Davis has generated tremendous amounts of profits selling magazines to technology users. But with the increasing popularity of the Internet, these magazines are becoming dinosaurs. Not wanting to face the prospect of extinction, Ziff-Davis is aggressively developing online media properties.

Unfortunately, it is difficult to charge for subscriptions to online magazines. Also, the online advertising revenues have not been large. This is extremely scary for a company such as Ziff-Davis. That is, the company is transitioning its media into a form that has much lower revenues¾ at least for now. One company that had trouble with this migration is Wired Ventures. The company has spent millions on Internet Ventures, of which none seemed to produce anything but huge losses. Last year, the company had to pull its IPO offering (though Wired did obtain about $21.5 million in a private round of venture capital financing).

However, there are online companies that do not have to worry about this transition. One is c|net [CNWK]. Because it was born in the online world, this company does not have to concern itself with cannibalizing existing businesses.

c|net’s sites push the envelope of the Net, using innovative streaming of sound and video. The news.com site provides 24-hour coverage of the latest on Web happenings. At the gamecenter.com site, visitors can play cool games. One can listen to Net radio broadcasts (called Webcasts, using Real Audio) of news and features stories on computers and the Internet. With shareware.com, users can download more than 200,000 shareware titles, and by using buydirect.com, they can download the latest in Internet software titles.

On July 1996, c|net offered 2 million shares at $16 per share. The stock price is now $36.

One company that perfectly fits this category is E*Trade, which allows consumers to buy and sell stocks without the need for talking to a pushy stockbroker¾ or paying the high fees. Also, you can do tons of research using the tools from the E*Trade site.

In August 1996, E*Trade went public, issuing 5.6 million shares at $10.50 per share. The stock is selling at $36.

Another cool business on the Web is Onsale [ONSL]. Let’s face it: not everyone needs the latest Pentium MMX supercomputer. Perhaps you want a downscale Pentium. Onsale has auctions on closeout and clearance computer equipment. As with Sotheby’s, one submits a bid and, with luck, gets the equipment at the bid price. In fact, placing bids on this site can be quite addictive.

The company not only makes revenues, but also profits. On April 1997, the company offered 2.5 million shares for $6 per share. Currently, the stock is selling for $22.

Of course, there are no guarantees. There are companies that have good management, good business concepts and so on, but still fail. Nevertheless, by following these factors, one’s odds will increase. And it takes only a few home runs to make up for some bad picks.

Tom Taulli is director of content development at DirectIPO, an Internet investment firm.