Last month I attended my first National Venture Capital Association annua=
l
meeting. This is one group of happy campers. Few periods in history have
seen such a colossal pyramiding of wealth. Yet between the triumphant che=
st
pounding and the accolades to genius lurked a nagging worry. How much lon=
ger
can the Great Internet Stock Bubble last? The past five years has seen a
tidal wave of creative destruction, fueled by mountains of capital chasin=
g
digital dreams. As one speaker noted, "There is not a single industry SIC
code that is not under attack by an Internet start-up." No business is
immune, informa-tion technology is being applied in previously un-imagina=
ble
ways, and old-line companies that fail to develop an Internet strategy ri=
sk
abandonment by trigger-happy stockholders ready to dump and run lest they
miss the wave.
Which is what made the presentation by Bob Metcalfe, retired 3Com
founder turned professional sourpuss, so amazing. Bob was the only one
willing to stare down the audience and say, "The end is near." Not only
that, he promised to tell us exactly when. A hush fell over the crowd as =
Bob
announced the very day that the market will crash: Nov. 8, 1999. What wa=
s
instructive about this prediction was the underlying rationale. Even the
most shameless investment banker has a hard time privately justifying
current Internet valuations. But because stock prices are inherently
chaotic, it can be perfectly rational to advise people to trade into the
updraft, as long as there is a reasonable expectation that it will contin=
ue
a little while longer. (As the saying goes, would you buy a $10,000 cat?
Sure, if you can pay for it with a $10,000 dog.)
Yet a new equilibrium must eventually be reached where earnings actua=
lly
count for something. This has always been true and nothing about the "new
economy" changes this. Today's ticker may say that eBay is worth more tha=
n
United Airlines, but which would you miss if they both disappeared? Bob'=
s
point is that the party will be over when everyone thinks it's over. And
with day traders living on Internet time, when the rush for the exit begi=
ns,
it will gather momentum with awesome speed. What could spark a stampede? =
Who
knows? It might be a capricious remark made by an industry pundit. Hence,
Nov. 8. Bob's forecast was as welcome as the proverbial skunk at the gar=
den
party. "Don't listen to that old curmudgeon! Look at me, I made a billion
dollars on a $500,000 investment!" So what if the stock price eventually
drops by 75 percent, no one in this crowd was stupid enough to buy in at
$100 a share.
Only the battered biotech investors nodded wisely. They know what it'=
s
like to see investor enthusiasm turn to scorn. It wasn't long ago that an=
y
company that could rub two genes together could go public on the promise =
of
developing the next wonder drug. Cure cancer! Live forever! Where are the=
y
now? The scary thing is that the longer this bubble lasts, the weaker th=
e
"DotCom" companies are that are scrambling to grab one more ride. An init=
ial
public offering is now a legitimate alternative to layoffs and cutbacks f=
or
start-ups whose vision exceeds their ability to execute. The professional
venture investors know when enough is enough, but the gullible public see=
ms
to think that risk has been vanquished. This makes them perfect marks. Al=
l
it takes for the insiders to get their money out is a good story and
sufficient analyst sponsorship to prop the stock up through the lock-up
period. Then it's on to the next fool.
From a moral perspective, this scheme has become disturbingly similar=
to
the Great Junk Bond Bubble, in which a fundamentally sound financial
innovation was debauched on the altar of excess. While the hapless taxpay=
er
won't be left holding the bag this time, the widespread ownership of
Internet stocks will leave a lot of regular people broke and angry,
glowering at the venture capitalists who made off with their billions.
I have no idea how much longer the boom will last. But when the bubbl=
e
bursts and the hunt for culprits begins, it will be interesting to see wh=
o
gets to play the role of Michael Milken.
Bill Frezza is a general partner at Adams Capital Management www.acm.com.
and a regular op-ed columnist for InternetWeek . He can be reached at
[email protected] or [email protected]
Tushar J. Mehta
email: [email protected]