The great tech stocks forest fire of 2000
By R. Scott Raynovich
Redherring.com, April 17, 2000
Technology stocks got torched. So what does it mean?
Think of it as a cleansing, say many technology investment managers, including
fund managers and venture capitalists (VCs) -- a controlled burn that may put an
end to the anything-goes investment attitude of recent years.
"It's a forest fire clearing the way for the second-growth forest," says Maurice
Werdegar, vice president and investment strategist of MetaMarkets.com.
After years of a seemingly endless and accelerating boom that allowed just about
anybody with a business plan and venture money to go public, the markets have
rebelled. In recent months, venture capitalists had talked about "feeding from the
trough," and investors seemed to think that making money was easy.
What are they saying today, after a 34 percent correction in the Nasdaq
Composite Index?
"It washes away the mistakes," says Keith Benjamin, a general partner at
Highland Capital Partners and a former stock analyst. "It's a fresh game come
Monday. It's healthy. It happens every quarter, only this quarter it's happening
faster than usual."
For big and small tech stocks alike, the carnage has been brutal. Trillions of
dollars in market capitalization has been wiped out in a period of weeks. For
example, Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO), Intel
(Nasdaq: INTC), and Oracle (Nasdaq: ORCL) have lost a combined total of $471
billion in market cap since March 27.
Nasdaq fell every single day of the week of April 10. On Friday, the plunge
reached what some analysts and fund managers hoped was a climax of panic
selling. For the Nasdaq, there was talk of reaching a bottom at the 4,000 mark,
but the index -- which includes most major technology players -- plowed through
3,400 on Friday, dropping 355.63 points, or 9.7 percent. That was enough to
register as the largest single-day point drop and largest single-day percentage
drop in Nasdaq history, beating out the drop of 349.15 points registered just
weeks ago on April 3. The Nasdaq Composite average is now off 34 percent from
its record high of 5,048 set earlier this year. The Dow Jones Industrial Average
dropped 617 percent, or 5.7 percent.
IS THE CORRECTION OVER?
While it's too early to discern the long-term impact of the steep correction -- or
whether it's even over -- some observers already detect subtle changes in the
approach to building technology companies.
Mr. Benjamin does not think the current environment has fundamentally changed
anything in the tech industry, but he does believe it narrowed the public company
"sieve."
"There's too many stocks, that's the problem," says Mr. Benjamin. "There's a
time-tested process of consolidation. I look at the screen today and what I'm
seeing is impatience. I'm not seeing anything fundamentally new. My confidence
level in the economy and the Internet economy has not changed. My concern is
that there are too many companies."
The public markets seemed to agree, eagerly slashing and burning many of the
recent public offerings that aren't profitable. For example, Red Hat (Nasdaq:
RHAT) has lost 80 percent of its value since December, when it was trading at a
split-adjusted $143.13. It closed on Friday at $24.13.
CLOSED TO THE PUBLIC
While Mr. Benjamin remains upbeat, saying that the market is not likely to
change the way he approaches technology investments, others believe more
profound change is coming toward technology startups and venture capital.
"I'm not a VC, but the question asked by venture capitalist up until recently was,
What's your revenue model?," says Mr. Werdegar. "I think it has already
changed, and they are now asking, What's your path to profitability and When will
you get there? Nobody wants to be saddled with a burn rate of $200 million a
year anymore."
Anthony K. Tjan, executive vice president of Zefer (proposed Nasdaq ticker:
ZEFR), whose IPO was postponed on Thursday night, says the correction has
definitely introduced a new frame of mind.
"For investors, whether they are venture capitalists or not, I think that we will see
a reallocation of capital," says Mr. Tjan. "I think future investments will be made
and measured on real revenue growth instead of the potential for revenue. The
ability to achieve real profitability will become more important than it has been."
A month ago, Mr. Tjan's company would not have had a problem getting its IPO
out the door. Today, things are different.
"I would say that we are in standby mode for our IPO," says Mr. Tjan. The
company recently raised an institutional round of $32.3 million, so it is not yet
cash-strapped.
It's always difficult to predict how much the IPO process will tighten and how long
the tightening will last. But those involved with the investment banking process
say that IPOs are going to be examined more closely in the coming months.
"My institutional customers say they're going to scrutinize business models in far
greater detail and they're not going to be buying some of these flimsier IPOs,"
says Ullas Naik, senior vice president of equity research with FAC Equities First
Albany.
"People turned into these high-flying optimists," says Mr. Naik. "When they live
through something of this nature, reality sets in. There's a new set of rules that
come into play when there's a major change."
QUALITY, NOT QUANTITY
The slowdown in IPOs leaves another question: Will some venture capitalists alter
their strategies towards other methods of seeing a return on capital? For
example, Mr. Werdegar theorizes that the venture capitalists, still awash in cash,
may become more involved in private placements, especially now that the share
prices of many companies have dropped to attractive levels.
Where to put that capital? Mr. Werdegar says we may see more hybrid
investment models in which VCs make private placement deals with public
companies whose share prices are at attractive levels.
Mr. Benjamin, though fairly new to venture capitalism (he became a venture
capitalist at Highland Capital after leaving a senior analyst position at Robertson
Stephens last year), doesn't believe that his job of analyzing potential startup
investments will radically change. But he confirms that the filter may need to
become finer.
"Hopefully now venture capitalists will be more careful in what we choose. The
public markets are saying they want more selectivity," says Mr. Benjamin.
"Our funds are structured as ten-year funds. It may be that we go back to a
slower and more rational way of investing these funds. We've only been asked to
speed up in the last year," he says. "There's always a gun to my head to find the
best companies; there's never a gun to my head to rush. Now we can slow
down."
Edit Your Reply (15 minutes left) |
