Insight Analysis: Is Investor Confidence In The Web Returning?

The fall-out of the internet and technology markets over the last couple of years has led to the demise of a large number of companies, many of which saw funding dry up as investor sentiment soured. Since 2000 there have been at least 835 internet company closures, with the majority in the consumer category, according to data from Webmergers.

However, the group now reports that for five months in a row, the number of dotcom closures has continued to decline; in April 2002 there were just 12, around one fifth of the number of closures in April 2001. So far this year 66 Net companies have closed, down from 220 during the first four months of last year.

Shutdowns by Major Audience Since January 2000
	Number	Percent
Business	303	36%
Consumer	423	51%
General	109	13%
Source: Webmergers.com, July 2002

Shutdowns, Jan-Apr 2000-2002
	2000	2001	2002
Jan-Apr	6	220	66
Source: Webmergers.com, July 2002

This decline in the rate of bankruptcies and closures comes amid anecdotal evidence of a broader decrease in business aversion to the internet, according to Webmergers. The company claims that during the height of the dotcom shakeout in mid-2001, investors ‘slaughtered internet stocks indiscriminately’, causing many companies to swiftly distance themselves as much as possible from web enterprises.

Webmergers claims that this is an irrational fear of the web, what it terms ‘cyberphobia’. This cyberphobia is waning, according to the group’s April data, as investors are beginning to realise that certain online business models do make sense. There are signs of health in sectors such as online travel, entertainment and recruitment and a surprise profit from Amazon.com has helped boost confidence a little.

“We are not at all surprised to see the end of cyberphobia. We have seen similar, though less exaggerated, mood swings in previous technology cycles. We expect that at some point in the near future, the marketplace will settle down to see the internet for what it really is – as a tool, albeit a profoundly important one, that will enable the industry to develop a wide variety of new and advanced applications in the next several decades,” says Webmergers.

Comment There is no denying that during the boom, dotcom market valuations were inordinately (and perhaps indefensibly) high, with some companies receiving market capitalisation that could not be matched by earnings for scores of years, if ever. There had to be a climb-down.

The continued struggle to really get internet advertising off the ground and the tentative flirtations with subscription-based models for consumer information-based sites have both contributed to the back-lash.

Net advertising has taken a long time to develop the exacting measurement metrics that were promised in the days when the medium was emerging as a viable consumer and business advertising platform. Even now it is still not wholly clear. Add to this the fact that many consumer-based, non-commerce sites are effectively offering content for free and being subsidised by larger media groups and it is fairly easy to see why investors have become and remained sceptical about the web’s ability to deliver profit.

The decline in the number of closures may well be interpreted as a process of sorting the wheat from the chaff; some astute commentators had predicted that this would eventually happen even in the heady days of the boom. Those that have survived and are surviving may represent the beginnings of a distillation of the market – a move toward all that it can support viably support.

The decline might also be the result of a dramatic rethink in the level of resource that a web business can be allocated. At the height of web fever, companies were throwing money left, right and centre at online enterprises – the bigger the budget, the better for the stock price. Perhaps after the change in mood over the last year or so, web companies have become leaner and more able to balance their books against a return on investment that has transpired not to be as high as was expected.

On the other hand, maybe Webmergers is correct and the cycle is on the upturn with viable models being picked up by investors and confidence in the web returning. More than likely, it is a combination of all three of these things.