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Despite Stocks Meltdown, 'Net Economy Is Bullish, Especially For Insiders

You wouldn't know it from looking at the Internet stock market so far this year, but a recent study confirms what we all know: The Internet economy is booming. In the long run, that's good news for investors who may now be gun-shy in the wake of this spring's meltdown of 'Net shares.

The report, commissioned by networking and 'Net infrastructure giant Cisco Systems, shows that the number of Americans employed in Internet-related jobs last year reached 2.5 million, an increase of 36 percent from 1998's estimate of 1.8 million.

And despite the demise and expected demise of dozens of Internet companies that either couldn't build a successful business model or simply ran out of money, the number of 'Net jobs should continue to climb.

The reason? The record amount of venture capital that continues to be poured into Internet start-ups shows no signs of abating anytime soon.

Today alone, $465.5 million in Internet-related venture deals were announced, according to internet.com's VC Watch.

For the year, VC Watch reports a total $35.8 billion has been promised to Internet start-ups. That kind of money translates into jobs as 'Net companies ramp up to compete in a market or attract a buyer.

With so many 'Net tickers crashing back to earth in the past two months, why would savvy venture capitalists continue to pour millions of dollars in institutional funds into companies facing long odds for success, or even survival?

Two reasons: 1) It's not their money, or at least most of it isn't, and 2) One huge success more than offsets several failures.

The second point is the key to understanding how VCs play the game. Take the recent IPO of networking software and equipment vendor Sonus Networks, a Boston-based company that had a first-day gain of 120 percent late last month. Sonus' lead financer, Matrix Partners, sank $8 million into the company. That investment is now worth about a half-billion dollars.

The problem is that regular investors are now bearing a huge risk in SONS, which was offered at $23 per share and was trading Tuesday afternoon in the high $80s. Sonus now has a market capitalization of $5.4 billion. Revenues last year were virtually non-existent, while the net loss was $24 million.

What happens when reality catches up to the company's stock price? We already know what will happen. It's a slick little game the insiders are playing.