Part 1 : Winners and losers

Ok Matt, we have dot coms with billion dollar valuations who have never made a profit. And we have other dot coms whose equity value is less than half the amount of cash they have in the bank. To the casual observer this all seems a little odd - what's your take on dot com valuations? What mistakes are investors making?
OK, great question. Let me try to answer it really in two parts. One, I'm not so sure that investors are really making any huge mistake. Instead, we're seeing more now that the investment community - Wall St., as well as Sand Hill Road venture capitalists - has very little patience.

Everyone is stuck on jumping quickly from sector to sector. Even after the April market crash, the amount of hot money hopping around is scary. All focused on the next quick score. It's entirely opposite from how the Internet stock universe needs to be looked at. But the reality is that's how this game is being played right now, so if you don't observe the current rules - you'll get burned!

So in the environment we're in now, you see companies with these huge premiums baked in because they are the leader in their space. Number one is everything online right now for investors. I'm not saying this is always right - but I will make this observation. I think the Net is great at accelerating the paths of winners and losers. It is the Net's Darwinian tendencies therefore that scare the hell out of most investors wanting to back a two, three or four player in a particular segment of the Web landscape!

The market problems have seen IPOs delayed and venture capitalists think twice before investing in online businesses. Is there going to be a shortage of cash in the sector, or is the new economy simply getting back into balance?
The April Nasdaq debacle was terrible, but fantastic long term for the healthiness of the online world. It finally brought some semblance of reality back into the leadership of many of these organizations, as well as everyone else along the food chain. I'm talking from bankers and analysts to customers, dot com employees and even Old Economy companies. You definitely aren't seeing any traditional companies trying to take dot com spin offs public anymore!

All of the quarterly venture capital surveys show that more capital has been pumped into Internet startups this year than last year. So I wouldn't worry so much about it drying up. Only, it has shifted to where it is mainly flowing - now optical components, wireless and broadband networking related software and equipment is the sweet spot.

But these areas always shift in and out of favor. Bottom line, if an entrepreneur really has a clear execution plan, team and market opportunity, he will still get funded regardless!

I guess if you could pick a guaranteed winner, I'd be interviewing you on a large yacht in the Caribbean. But are there any kinds of Internet companies which look most promising for the future - would it be fair to say that the companies most likely to succeed are those building the net's infrastructure, rather than those using this infrastructure to sell products or services?
Well, I couldn't swing the yacht yet. I'll stick with living in Florida for now! I always enjoy being the contrarian so I'll stir up a little controversy hopefully with this answer. As we know, everyone is pounding the table to invest in Net infrastructure. It's not that I disagree - it is a safer place to be - but when the herd all heads one direction, rarely is it the right answer.

Net investors need to look and figure out what the next hot "layer" of the Net is. I mean we're building all these broadband networks, laying fiber, buying optical gear to cram even more data cheaper, faster, quicker to us. What does that mean? I think that content delivery networks, cacheing and quality of service software and hardware are next.

We're building the super highways; the "highway patrol" companies I'll call them, the ones that can organize and prioritize and guarantee delivery of all this rich media and information, they're the next frontier.

Do you think that the large pure play dot com retail sites will survive in the long run, or will offline competitors with strong brands win through in the end with their own online sales?
Yes, some are going to make it. They will limp along as zombies, find a way to conserve their cash and ratchet down their spending but still look unattractive to investors, as well as acquirers. Amazon will be a survivor, though, for one.

If I was head of a bricks and mortar player right now - I would seriously be looking at grabbing up one of these battered pure plays... sucking them in and re-tooling them. That's the one bad thing about the April crash. I get the sense that there is this big sigh of relief now out of traditional retailers. That they have won. That they are drinking their own kool-aid now and feeling great because everyone realized that clicks and bricks was the ticket. This misses the point. I continue to believe in the next decade. Online commerce, which breeds price competition, better selection, and smaller margins by nature will cause some notable offline U.S. retail chains to fail.

Continued...