`Bubble' authors now see Internet opportunities
BY MATT MARSHALL
Mercury News
When Anthony and Michael Perkins penned their book, ``The Internet Bubble,'' they hit the bull's eye. If we'd only listened!
The book, published in 1999, concluded with one command: ``Sell Now!'' It packed a powerful punch, explaining that history and basic math showed technology stocks were on average about 50 percent overvalued -- exactly right based on the time they wrote the book.
So when a copy of the ``revised edition'' of their book showed up in the mail last week, I was interested in what they are saying now. (The book is being sold online by Amazon.com and Barnes & Noble, but will hit store shelves in September.)
The value of the revised book lies in its encouraging assessment of the future. (Although it does have a scooplet -- an eye-opening example of how even a top Sand Hill Road venture firm, Sequoia Capital, was drawn into the mania despite knowing better.)
The book's main message is about ``a massive opportunity'' to build out the next generation of the Web -- the same message sent by entrepreneurs and venture capitalists in recent months, but it carries more credibility coming from authors who called the crash.
The multibillion-dollar investment made during the first phase of the Internet, they explain, has created a new computing and networking architecture ready to be exploited. Down the road, they predict a high-speed, broadband, multiformat Web with billions of devices -- and opportunity for those who invest smartly.
They also predict that long-term technology winners will come from the ``new guard'' companies, some of which aren't even on the horizon yet.
As in the first edition, their conclusions are based on history. Only one company founded during the early PC boom in the early 1980s, Apple Computer, survives today. The two largest hardware players in the PC business, Dell Computer and Compaq Computer, both sprang up after the PC Bubble popped, and Microsoft didn't go public until 1986.
Likewise, the Perkins brothers now say that companies such as Cisco Systems, and perhaps Oracle, will play a strong role in establishing the ``new architecture.'' But it is newbies such as Corvis, Sycamore and Extreme Networks, in the networking equipment sector, and Broadcom, PMC Sierra and Applied Micro Circuits, of the semiconductor space, that appear the most promising, they say. Applications such as Zaplet, they note, are turning electronic mail into a ``powerful new collaborative software platform'' for employees and customers -- a form of a new, real-time computing.
However, caution is merited here. These picks stem from the authors' particular vision of the next wave -- one based on real-time computing -- an idea that Tony Perkins' VC friend, Roger McNamee, of Integral Capital Partners, has been propagating, which has caught on in other circles too.
But the question is, what will drive sales of products from the new generation of companies? Some skeptics believe companies will buy software that helps them realize concrete business goals, but might balk at buying software like Zaplet that improves the technology of communication only incrementally.
Regardless, there's an increasing chorus from venture capitalists who agree with the Perkins' optimism. Kevin Harvey, venture capitalist at another big-name firm, Benchmark Capital, says big companies will continue to boost spending on information technology, driven by fear of competition and desire to stay ahead. That spending spiked out of control during the mania of the late 1990s, but it's likely to snap back to its historical average growth rate and drive the technology revolution forward, he says.
These are optimistic words. But it helps to have the Perkins brothers on your side.
MORE ON SEQUOIA: The first edition of the book notes how Don Valentine, the leader of the firm, warned before the crash that a bubble was in the making and cautioned investors against getting involved. ``That is the traditional mistake made at a peak of a bull market,'' he told the Perkins brothers.
His partner, Michael Moritz, disagreed. ``The fools are dancing, but the greater fools are still watching,'' he said.
The second edition tells the rest of the story. In 1999, the firm created a $440 million Sequoia Franchise Fund, designed to invest in tech stocks that were about to go public, according to the book.
Sequoia pumped $45 million into the online grocer Webvan Group, at $12 a share. Webvan has since gone public, and its stock hovers at 10 cents -- wiping out 99 percent of Sequoia's investment. Sequoia didn't sell the stock, because it likes to invest in companies for the long haul, explains Moritz.
Similarly, Sequoia sank $10 million into eToys (which has since gone out of business), $8 million into Internet consulting firm Scient, at $6.75 a share (now worth only $1 a share), and a string of other companies.
At the end of 1999, the Franchise Fund boasted a 240.9 percent ``internal rate of return,'' according to data of InsiderVC.
By September 2000, the IRR value was only 34.3 percent. And since then, the Nasdaq has fallen 40 percent or more. |
