[Business 2.0]Separating the Winners from the Losers

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From: joelinda1@home.com
Date: Sat May 20 2000 - 06:24:28 PDT


http://www.business2.com/articles/2000/04/content/boombust5.html

Separating the Winners from the Losers

By J. Neil Weintraut and Walid Mougayar

Having trouble telling froth from substance in Net
Economy companies? The long-term survivors and
those riding on nothing but money and marketing can
exhibit telltale signals.

                        Substance

                        1. The company is a leader. When
                        you try to think of who plays in their
                        category, it's tough to come up with
                        anybody else. Especially in consumer
                        retail markets, brand matters the
                        most. Quick: Who sells books online
                        besides Amazon.com or
                        barnesandnoble.com?

                        2. It has smart people. The
                        pervasiveness of digital technology
                        has marginalized everything but
                        original thought and human initiative.
                        People employees, customers,
                        and partners are the best
                        long-term assurances of success.

                        3. Relentless innovator.
                        Built-to-last Internet companies
                        create new ways of doing business
                        that are often inconceivable outside
                        the Internet. They innovate not just
                        with their business model, but within
                        it. And they are usually the first ones
                        to do so.

                        4. It delivers. Winning companies
                        are obsessively focused on executing
                        their business model. Each activity
                        seems to add another building block
                        toward the overall objective, and it's
                        easy to tell when it's working.

                        5. It's fast. Speed impresses
                        customers; captures markets before,
                        and hence without, challenge; and
                        attracts capital, which can be used to
                        buy more speed as well as surprise
                        and specialization. Product features
                        are triaged, partnership contracts
                        abbreviated, and fundraising cycles
                        reduced, all simply to do things fast
                         and in particular, faster than
                        anyone else.

                        6. Competes with partners.
                        Internet companies give a new
                        meaning to competitive partnerships.
                        Internet co-opetition is bold, but
                        necessary. In some cases, it's a good
                        sign to see an Internet's David strike
                        a deal with a nondot-com Goliath.

                        7. It passes the disappearance
                        test. If the company didn't exist
                        tomorrow, would its sector suffer
                        irreparable damage? If the answer is
                        yes, it's a winning company. Is it just
                        a coincidence that hackers targeted
                        some of the most successful Internet
                        companies?

                        8. Cash on hand. If you look
                        beyond high-growth quarterly sales
                        and soaring market capitalizations,
                        the inner financial strength of a
                        company is tied to its cash on hand,
                        and debt. Look for little or no debt;
                        typically, successful Internet
                        companies have zero debt
                        Amazon being an exception. Cash on
                        hand is important to cover the
                        ongoing burn rate until a company
                        generates a positive cash flow. It
                        ranges from $3 billion for AOL to a
                        more typical $100 million for a
                        fast-growing company with about
                        300 employees.

                        9. Market-leading metric.
                        Whether it's the number of customers
                        that are doubling every year, or the
                        page views that are tripling, or
                        transactions that are growing tenfold,
                        look for New Economy metrics that
                        soar.

                        10. It's a buyer, not a seller.
                        Leading Internet companies are the
                        ones acquiring others versus the ones
                        being acquired. History has shown
                        that once a company is in an
                        acquisition mode, it repeats it and
                        continues to grow and grow. Look at
                        Cisco Systems; it has acquired
                        dozens of companies.

                        

                        Froth

                        1. Executive exodus. Most
                        Internet company CEOs have
                        long-term stock option plans that
                        are designed to anchor them against
                        the pull of temptation. Being forced
                        to leave millions on the table means
                        that either the board doesn't believe
                        in the CEO anymore or the CEO
                        doesn't believe in his company.
                        Neither is a good sign.

                        2. Another me-too. After the first
                        two leaders emerge, the third and
                        fourth face an uphill battle. They will
                        likely fold into another company.

                        3. Risky business. A risky
                        industry sector is one where no
                        viable leader has yet emerged.
                        Maybe the battle isn't over (pets),
                        or maybe it's a tough market
                        (groceries), but who wants to take
                        a chance?

                        4. Declining quarter-to-quarter
                        sales. Although it sounds like an
                        oxymoron in the red-hot Internet
                        economy, some companies manage
                        to fall into that trap a fate no
                        company can afford. If sales are
                        declining, market share is eroding.

                        5. Low price-to-sales ratio (P/S).
                        It usually means the company isn't
                        getting any respect, not that it's
                        undervalued. Highly valued
                        companies are worth the premium
                        they deserve. Companies that trade
                        at a P/S ratio below the average for
                        their group are at risk. (The
                        B2Index group of 85 companies
                        has an average P/S of 33. See
                        p366.)

                        6. Stock is at 10 percent of its
                        52-week high. It's usually
                        indicative of an ailing symptom the
                        company can't shake out. The only
                        other speculative play here is a
                        targeted acquisition possibility, but
                        you're an investor, not a speculator.

                        7. Flat metrics. Most companies
                        release an array of usage and
                        adoption statistics about their
                        Website. If the business model is
                        focused on subscription services,
                        and the number of paid users isn't
                        growing aggressively, there's a flaw
                        in the business. Either the value
                        proposition isn't strong enough or
                        the company isn't executing.

                        8. Slow Website. Although they
                        are a public company, and
                        supposedly have made it to the
                        Internet league, their Website is
                        sloooooow. It means the company
                        hasn't invested in mirroring
                        technologies or high-performance
                        content delivery. Akamai, Digital
                        Island, and CacheFlow deliver such
                        services.

                        9. Deal-breaker. Partners are
                        canceling agreements. If they're
                        fleeing, they probably know
                        something we don't.

                        10. Few analysts follow it. If only
                        three or four analysts follow the
                        company one year after it goes
                        public, that's not enough. Successful
                        Internet companies must receive
                        wide coverage. Amazon is followed
                        by 33 analysts, Ariba by 18,
                        Commerce One by 13, and Yahoo!
                        by 30.

                                                      


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