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Personal Finance > Investing
VCs still high on dot.coms
June 12, 2000: 7:30 p.m. ET

Flush with cash, venture capital firms willing to invest, but want more proof of profitability
By Staff Writer Hope Hamashige
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NEW YORK (CNNfn) - For Internet entrepreneurs, there will probably never be another year like 1999. Well-funded, enthusiastic venture capitalists, fueled by the dream of helping to launch the next Cisco Systems or Yahoo!, were pouring millions into Internet businesses, giving them the boost they needed to get a team and a product together in Internet time.

And despite the recent failures of some Internet sites and drastic layoffs at others, venture capitalists remain enthused about investing in Internet companies and guarantee there is no shortage of venture capital for good companies with the potential to dominate a particular market and turn a serious profit.

In fact, there is more venture capital available today for budding companies than there has been at almost any time in the past, according to industry surveys. And most venture capital firms are still putting most of it into Internet and high technology companies.

graphicMost say, however, they are going to be more selective now about where they put their money. That means they only want to invest in those companies that are going to be profitable in the short run. Not in the long run.

In the past, and by the past most of venture capitalists are talking about the heady years of 1998 and 1999, much venture investing was based largely on faith. They and the companies they were funding had faith that the business, many of which were hemorrhaging funds, would one day be profitable.

"Profitability was thought of as undefined in the past," said Andy Weissman, managing director at Wit Soundview Ventures. "Many venture investors were willing to accept that at some time in the future the company would be profitable."

In contrast, today entrepreneurs are going to have to make a strong case that the company, if not yet profitable, will be in the black sooner than later. How soon really depends on the age of the company and the amount of money they are asking for, said Jerry Colonna, managing partner at Flatiron Partners in New York.

Most venture capitalists said they are not immediately put off by losses, particularly in high technology pursuits. In the current environment, businesses are going to have to spend a lot to put together a good management team. If they are creating new technology, that too is going to be an expensive endeavor. But they are going to have to convince a much more skeptical world that they are going to turn big profits when they do become profitable.

B2C a harder sell


One place where securing venture capital is going to be extremely difficult is for those businesses trying to launch a business to consumer site. With the benefit of hindsight, most venture backers are shying away from the B2C area because they now know that building a client base can take a multi-million advertising budget. After burning millions in advertising and marketing, many B2C companies sadly discovered there was little demand in the world for their product.

Gary Little, a partner at Morgenthaler Ventures in Menlo Park, Calif. acknowledged that B2C is largely out of favor with venture capitalists who prefer now to invest in business-to-business sites. It will be difficult for them to attract venture capital, but not impossible, he said. Rather than relying on advertising to drum up business, companies in the B2C sector will have to prove their product is already in demand.

"I think what most VCs will say is: `Show me the grass fire,'" said Little. "There are companies with organic growth like Napster, which is a phenomenon without any advertising. Companies like that, that have been validated by consumers, will be interesting."

The wrong path for some


The expected trajectory for Internet companies was for them to get some seed money, with that lure a couple of top shelf venture capitalists to invest and quickly put together an initial public offering. And they were expected to get it all done in Internet time, which means as fast as possible.

Many venture capitalists now recognize that the road from startup to public company was not appropriate for all the companies that followed it. Many were simply too young to be trading publicly, most said.

"Some companies went public too early and had to face the scrutiny of the world," said Weissman. "They had to immediately worry about quarterly numbers rather than building the business."

In the future, most said they do not consider the IPO as the ultimate goal for the startups where they invest.

VCs remain upbeat


The environment for the dot-coms has definitely changed and expectations have been raised. And to highlight the divergent views between Wall Street and the venture capital world, most of the venture capitalists still seem rather enthusiastic about the future of dot-coms and high technology.

"There are great ideas and great people who are coming into the Internet space," said Weissman. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.