Week after week, the giddiness over these offerings provided distraction for investors who seem nervous about the market’s lofty levels. When eToys went public two weeks ago, its stock was offered at $20, opened trading at $78, and closed just slightly lower in its first day of trading. The week before, it was TheStreet.com, a financial-news Internet site whose stock made news itself by soaring from $19 to $60. For all the blaring headlines and popping of champagne corks, though, some troubling signs have been piling up. Comps.com, which went public May 5, was the first Internet IPO to see its shares drop on the first day of trading. After last week, Juno Online Services and Ziplink share that dubious distinction. May was the first month in 1999 in which Internet IPOs did not, as a group, more than double from their offering price in the first day of trading, according to Thomson Financial Securities Data. When you’re living on Internet time, there’s no chance to ponder much of anything, but the softening market forced a timeout for everyone from firms planning an IPO to established companies reorganizing to spin off dot.com divisions.
The companies choosing to go public these days look increasingly like high-school basketball players forgoing college to try their luck in the NBA draft. And not all of them are Kobe Bryant. Earthweb, which provides online services, went public last November with $1.9 million in revenue and losses of $5.3 million for the first nine months of 1998. Salon.com, an online magazine, wants to sell shares even though it lost $4.3 million in the last nine months of 1998 on revenue of $2.1 million. Mike Moritz, the Silicon Valley venture capitalist behind Yahoo!, takes in a daily foot-high pile of filings from companies that want to go public. Most, he says, are dogs, lacking a clear money-making strategy. Companies historically have taken about seven years to build a track record that they can pitch to the Street. Today many year-old firms are itching to go public. “Almost every one of these offerings should have, on the cover, language saying, ‘Extreme danger! Hazardous material! Handle with care!’ " says Moritz, a partner at Sequoia Capital. The threshold for going public, he says, is so low that just about anybody can step over it. “If you are incredibly cynical about it, you say that companies don’t fail anymore, they go public,’’ he says.
The field is also getting crowded with companies that have doctored their passport photos to look like Internet firms. Appropriately enough, the Plastic Surgery Co. is one of them. Despite the fact that it had no revenue and losses of $3.2 million last year, it wants to go public based on a plan to provide business and marketing services to plastic surgeons. Not just any services, though, “Internet-based consumer-awareness programs’’ and “Internet solutions’’ for surgeons, according to its filings. Everyone’s doing the Internet shuffle these days. Starbucks’ CEO recently signaled his company’s plan to be the “undisputed leader’’ in a “new and significant e-commerce business.” His list of specifics was shorter than a demitasse of espresso. No matter: Starbucks has started to trade more like a Net stock. IBM’s CEO has been trying to drum up interest in the company’s Web potential. The New York Times Co. last week bundled its Web operations into a single unit in a bid to get under the Internet halo. “The general climate has been that if you place a dot.com at the end of your name or craft an Internet-related press release, you can sell just about anything to the Street,” says Patrick Keane, an analyst at Jupiter Communications. Now that the climate has cooled, companies will have to work harder to make a convincing case for their Internet plans.
Despite last week’s letdown, there are many people who think the Internet IPO frenzy isn’t so crazy. Steve Jurvetson, a venture capitalist at Draper Fisher Jurvetson in Redwood City, Calif., believes the Internet is changing traditional rules for deciding when it’s appropriate to go public. Investment bankers have historically acted as gatekeepers, in effect deciding for the markets which companies were ready to go public. But given the vast amounts of company information available online, he says, investors should be free to make that decision themselves. And that’s not necessarily bad, as long as investors spread around a lot of bets. If they can diversify among enough of them, he says, “There’s probably no better investment on the planet.”
A lot of other industries have qualified for Next-Big-Thing status through the decades. Airlines once held out the same promise as the Internet does today. But in their race to grab market share over the years, airlines lost billions of dollars, and the only people who benefited from the squeezed profit margins were consumers, not investors. The last Next Big Thing was biotechnology in the early 1990s. But Jurvetson says there are big differences between biotech and the Internet. There’s broader applications for technology advances, and in biotech, the wait for federal approval of new products can be tortuously long. “It’s not like Yahoo is waiting two years to tell you whether they’ve signed up any customers,” he says. Granted, that’s an important distinction. But it’s one that may be lost on impatient investors for whom historical context means the waiting time between rocket launches.
Last week’s IPOs, though respectable, paled in comparison with earlier public offerings. A look at first-day returns:
Last Week’s IPOs DATE % change in value* Barnesandnoble.com 5/25 43.38% Juno Online Services 5/25 5.73 DLJDirect 5/26 66.67 Earlier 1999 IPOs Marketwatch.com 1/15 509.38% iVillage 3/19 264.23 TheStreet.com 5/11 252.94
