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Venture Capitalists Warn Bottom Line Still Rules

A leading panel of venture capitalists Wednesday said while the Internet's growth is just started to take off, markets will dictate that successful players have business models that will generate profits. They also believe the Internet will cause a radical shift in the ranking of the nation's largest companies.

One thing's for certain, the well for venture capital funding is geting deeper. According to PriceWaterHouse Coopers, in 1998, 641 deals worth $3.5 billion were underwritten. The percentage of venture capital being dedicated to the Internet has also grown from a mere 3 percent four years ago to 25 percent in 1998. The average deal netted $5.5 billion in 1997 compared to $2.7 million in 1995. Although 1998's figures are still being tabulated, preliminary data puts the number at $7 billion.

Speaking Wednesday at Summer Internet World 99, Larry Reinhold, managing partner of Chicago and Midwest technology practices for PriceWaterHouse Coopers, said there's no doubt a .com phenomenon is underway.

"The money is growing and investors are seeing upside opportunity," he said.

Joe Schoendorf, a partner at Accel Partners, which invested in UUNET in 1993, characterized the Internet as the most disruptive technology in the history of business. In addition, he said the momentum is just getting started.

"Our thesis is the Internet will change absolutely everything. The venture community is getting calls directly from Fortune 500 CEOs who are worried they will go out of business without a .com company. The Internet has already caused Hewlett-Packard to break in half and go outside to look for a CEO. Many believe it's one of the best managed companies in the 20th Century, but the Internet has changed everything," he said.

Schoendorf is betting primarily on two main areas: the "plumbers" who will be able to capitalize on the global growth in broadband and companies engaging in business-to-business electronic commerce. While Wall Street is still primarily focused on consumer companies, Schoendorf said the momentum is in B-to-B. That's been illustrated, he said, by the market share Dell Computer has taken from Compaq Computer Corp..

He said Dell was at the forefront in shifting its business practices to take advantages of the efficiencies the Internet offers.

"Dell could lower its prices 30 percent and still make a profit," Schoendorf said.

Bill Hulley, general partner at Adams Capital Management, said although lots of companies who are attempting to carve out small niches are getting funded, that will likely change.

No one would have thought there could have been 15 public search engines. Eventually, business models will have to prove out. Lots of properties won't exist two years from now," he said.

Hulley's firm is going after companies that specialize in networking equipment and content management systems.

"Over the next four or five yars, companies sell to content and bandwidth producers will benefit. The notion of working where you want with the lifestyle you want will be the big catalyst over the next 10 years," he said.

Promod Haque, general partner at Norwest Venture Partners, said not only have the business models of new companies been disruptive to Fortune 500 organizations, but the amount of data that is moving over public networks is causing major technological changes.

"You're seeing a lot of LANs being redesigned because of traffic pattern changes. A lot of client/server companies are going to the way side. A lot of them blame it on Y2K, but people don't want to invest in client/server anymore. Networks will all have to get retooled and that will be a trillion dollar opportunity over the next 15 years," he said.

Warren Packard, a director at Draper Fisher Jurvetson, said the important thing to remember is not to be fooled by all the speculation currently going on in the markets. Fundamentals, rather than flash, will always rule.

"The IPO space right now is speculative. Companies are going public to build a brand. It's no surprise Amazon.com's not profitable. They keep making acquisitions and no one's expecting them to make money. At the end of the day, you still have to have a large market with a business model that works," he said.


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