Signs of trouble in the technology start-up market

It is now becoming apparent that Y2K will not be causing as many market-jitters as originally feared, and investors appear set for a relatively smooth sleigh-ride through e-Christmas. A return to positive sentiment also means a better environment for the backlog of tech IPOs lined up in both the US and Europe, and more success stories to fuel money into the tech sector.

The media is increasingly bringing high internet valuations and internet paper millionaires sharply into focus. Unfortunately, the accompanying "10 steps to becoming an e-millionaire" features have trivialised the issues involved in setting up and successfully running internet ventures.

While increased availability of capital is a good thing, we are also seeing a trend that is sounding some alarm bells. Around 4-5 years ago, the nascent state of the internet market spawned some truly original, high-potential ventures. Today, the average quality of business plans is declining. In fact, it is fair to say that band-wagon jumping has reached endemic levels with me-too's forming on a daily basis. Many of these business models are fundamentally flawed because of an absence of experienced or qualified management, poor research into the market, or a poor understanding of how internet economics works.

In addition, many City institutions and VCs have only begun to wake up to "internet" in the last year or so and often have a poor understanding of the businesses and the market. Not wanting to miss the "boom", these companies are collectively making considerable sums of money available but exercising only limited quality-filtering.

This, unfortunately, has led to an increase in the number of dreadful ideas and companies being pumped with funds. We feel that this investment cycle could have worrying consequences. When the multimedia company investment boom ended in spectacular failure during the mid 90s, it resulted in games companies being forced to exist on depressed multiples for over two years and at least one was forced to sell out because of such conditions.

Clearly, the internet is a larger and more diverse beast than multimedia and games, but the inevitable failure of many of the current internet start-ups and the resulting loss of investor confidence in the sector could seriously undermine the long-term growth prospects for UK internet.