HANDS up if you haven’t fantasized about whipping up a business plan, registering a domain name, chucking the day job, hooking up with some wet-behind-the-ears venture capitalists, hiring some students to work 20- hour days, rolling out a dumb dot-com product, hitting the financial news programs, throwing a big launch party, smoking the competition, hustling up some more VC money, putting on a suit again, tipping waitresses with stock, doing a seven-city roadshow, pricing above expectations, puffing on a big stogie, saying, “It’s worth whatever people will pay” on TV, filing to sell a big chunk of stock, stepping aside for a proper CEO and retiring to a life of snowboarding and golf?
Before you do any more fantasizing, read a new book called “The Internet Bubble” by Anthony and Michael Perkins (Harper Business, $27). A more frightening, apocalyptic vision of your dot-com dream swirling down the toilet there could not be.
The Brothers Perkins – who work at the technology magazine Red Herring, which follows the Silicon Valley venture capital scene – have made it their mission to expose the precarious nature of the Internet stock boom. They look at the 133 Internet companies that have gone public as of June 1999 and put a number on just how overvalued they are.
On average, these 133 companies’ revenues will have to grow by 80 percent annually over the next five years. That’s more than successful, profit-making companies like Microsoft (53 percent) and Dell (66 percent) did in their first five years of being public. Even if they all grow at 65 percent annually, they would still be overvalued by a whopping $130 billion.
But the authors’ favorite subject is the venture capitalists who have rushed on to the scene since 1992. A picture is painted of spoiled, greedy boys funding pathetic me-too companies that will never make a profit, because they know they will get out before the real danger hits.
Remember, this is from the epicenter of the economic quake zone, Silicon Valley.
If the bubble bursts, the founders, VCs and investment bankers will all have made their fortune, but the retail investor will lose out.
Anthony Perkins, in New York this week promoting the book, told me he expects “a lot of personal destruction” when the bubble bursts. By way of example, he cited the Atlanta day trader who shot up his office this summer.
The authors also remind us that IPOs now happen before a business has been built and that all the cheap shares have gone to friends and family before the public gets their hands on them, at which point the price usually drops back.
“The venture capital risk is being passed on to the public,” complains Perkins.
This Menlo Park native looks at his peers and he can’t believe their greed. Perkins says the book was written to educate the retail investor, because he is disappointed in the VCs and the analyst community (“a bunch of frauds, they won’t dare say ‘sell'”) for keeping the public in the dark about the real risks in buying Internet stocks.
Neither writer predicts when the bubble will burst. They do, however, capture the feeling of buyer’s remorse that will one day prevail.
The best quote in the book comes from CS First Boston Analyst Lise Buyer: “People are buying Internet stocks as if they’re Beanie babies. A Beanie Baby is worth 23 cents, but temporarily I’ve got to pay $20 for it. And I’ll pay even $150 for it, until I’m no longer interested, and then I’ll say, ‘Damn! It’s just a piece of felt and some beans. What was I thinking?'”
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