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.