October 1, 1996

Add ‘Internet’ label for meaningless appeal

I saw an interesting business plan recently. It came from a company launching a product that will be used on the Internet. A simple product, and one that probably will sell well. But near the end of the Executive Summary, there was a telltale comment that seemed to imply that sales didn’t matter too much, anyway. Set in bold type, to make sure everyone got the idea, was a statement that the company had the potential to go public in a year or so, and sell stock at “premium Internet value.” Furthermore, the company could be bought out soon by another big Internet player.
Now, what does this statement mean? I think the author of this business plan means that a major consideration for investing in his company is not simply that the company may grow, that it may produce a great product that sells by the bucketful – but that it may be possible to go public with the company, or be bought out, and make bucketfuls of cash that way. Why? Because this is an Internet company and, well, we all know that such companies have “premium” prices. Which, when you get down to it, really means that people are paying more than the companies are worth.
To further drive home the point, a list of Internet company stocks was appended to the business plan. The list showed the value of the company based on the Initial Public Offering stock price, and the income of the companies.
This list made quite clear that corporate income really wasn’t important. A number of these stocks had absolutely ridiculous prices when compared to the company sales record.
Take Yahoo, for instance (YHOO). A fine little search engine on the World Wide Web, but is it really worth more than $308 million? Of course not! And their earnings show that quite clearly. The list showed that Yahoo had earnings of only $1.4 million. Yahoo recently reported a loss, by the way. That’s OK, Yahoo’s stock is currently at $18.88, well above its original share price of $12.
The really exciting one, if you’ll excuse the pun, is Excite (XCIT), which began its public life with a total stock value of almost $130 million, though it only had sales of under half a million dollars. It’s value, at $13 a share, was about 300 times its sales. A good bet? Not for you, perhaps, but pretty good for the founders. I just checked, and it’s now trading at $5.88 a share.
How about Netscape (NSCP), the one that got the most attention? They offloaded a tad over a billion dollars worth of stock, not bad for a company that had sold next to nothing at the time and hasn’t sold much more since. (Well, OK, a very large tad – $68 million over the billion – and sales of around $17 million, but when you’re talking a $billion …)
The stock rose from $28 a share to the completely ridiculous price of over $115 at one point, giving the company a share value of getting on for $4.5 billion, enough to buy a number of small countries. (I checked just now and it’s down to $35; still, that means a market price of almost $3 billion.). Now really, $3 billion for a company with almost no sales but a lot of hype?
All this reminds me of Tulipomania. In the first half of the 17th century, Holland went mad for tulips. Tulips, only recently introduced into Europe, suddenly became extremely valuable. Bulbs were selling for huge sums – in one case 12 acres of building land for one bulb. In another case, a single bulb was sold for “4,600 florins, a new carriage, two gray horses, and a complete set of harness.” Wait, don’t laugh … did you buy Netscape stock when it reached $70? … $115?
What can we learn from this little lesson? Simple; your products are more valuable if they are Internet products, and your company is more valuable if you can somehow position it as an Internet company. So take a few moments to consider how to reposition your product and company. For instance, let’s say you sell modems (yes, that’s too easy of course, but we’re just getting warmed up). You don’t sell mere modems, you sell modems that are optimized for fast and efficient Web browsing. Better still, you sell Internet Connection Devices.
You company’s in the computer display business? Of course these are really Internet-display devices. You have a software company selling a scheduling program? Your product is perfect for tracking Internet research projects and reminding your customers of important updates to their favorite Web sites. You sell printers and print utilities? These are ideal for printing Web pages, of course. (You may have noticed that ClickBook, a popular program used for creating little booklets from word-processing files, is no longer a print utility; it’s now an Internet print utility.)
But perhaps your company is not in the computer business. Don’t worry, you can play this game, too. For instance, let’s say you sell soft drinks: These are ideal for providing refreshment during long Web sessions. TV dinners should be renamed Web dinners, of course (too busy surfing to cook? Throw a Web dinner in the microwave and carry on!) Perhaps you run a publishing company. Then sell books about the Internet. After all, more money is spent on books and magazines telling you how to use the Internet than is actually spent on-line. You manufacture underwear? Much surfing goes on at home, so underwear could be positioned as casual Webwear.
So if you are creating a new product or company, be creative. A friend told me recently that his company is going to produce a special machine for dispensing medication. “Good idea,” I said after he’d described it to me, “but will it download Web pages?”Peter Kent is cashing in on the Internet by writing books about it. He can be contacted at 71601.1266@compuserve.com.
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I saw an interesting business plan recently. It came from a company launching a product that will be used on the Internet. A simple product, and one that probably will sell well. But near the end of the Executive Summary, there was a telltale comment that seemed to imply that sales didn’t matter too much, anyway. Set in bold type, to make sure everyone got the idea, was a statement that the company had the potential to go public in a year or so, and sell stock at “premium Internet value.” Furthermore, the company could be bought out soon by…

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