Date: Sat May 20 2000 - 06:24:28 PDT
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.
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
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
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
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
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
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.
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
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
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
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!
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