So, what have we learned ?

It is clear that in recent years we have seen a tremendous boom and bust in investor appetite for internet related stocks. In fact, those of us not present during the tulip craze of 1633 or the railway mania of 1845 should probably thank our lucky stars for the salutary career lesson this experience has imparted.

  • The period of boom, which began around 1995 and continued right through until early 2000, was characterised by a set of widely held beliefs:
  • that the internet would fundamentally alter the way in which commerce was conducted.
  • that the internet would give rise to dozens of completely new business models made possible only by the internet.
  • that internet companies would overtake their traditional counterparts to become giants of the new economy.

Indeed, we have seen the emergence of a few prominent business models and companies that have arisen largely because of the internet. Some of these business models include 'persistent world' games, electronic bandwidth exchanges and application service providers. Early examples of internet driven companies include Yahoo (with portal services), Ebay (with highly scaleable auctions) and Amazon (with, in theory, inventory-less retailing). However, it is increasingly clear that the internet primarily enables existing real world businesses to operate more effectively, and to interact better with their suppliers, customers and partners, rather than creating completely new business models.

In the post-boom environment, the distinction between an 'internet' company and a 'traditional' company is rapidly disappearing, for three key reasons. Firstly, the focus for start-ups is now clearly on the development of a fundamentally successful business, regardless of the specific channels or modes of communication used. While the internet can be a key enabler, it is usually not the only channel over which business may be conducted. Secondly, the internet has become a pervasive part of the communications infrastructure and most 'traditional' businesses are adopting it themselves to operate more effectively. Thirdly, investment in internet and media ventures is increasingly being driven by established businesses creating corporate spin-offs rather than by venture capitalists funding start-up companies.

In fact, corporate venturing by established companies is resulting in some of the most interesting, well thought out and robust new businesses in the current market. Established corporations bring a number of useful assets to the table that provide a competitive advantage. These include an existing business, a brand, a customer base, existing partners and relationships, and proven management and execution capabilities. Innovative corporate ventures make optimal use of these assets to push the parent into a new line of business, often by partnering with other established corporations.

For example, Securicor, a security, distribution and communications group has invested in a new venture called Safedoor, a safe and private shopping service on the internet. The service allows users to sign up once with Safedoor, and then to shop at numerous sites on the internet without having to divulge their payment or delivery information to the merchant. In so doing, Securicor has used its brand reputation as a trusted third party, its physical delivery infrastructure, and its existing retailer relationships to build a new line of business.

Similarly, insurance company Royal & Sun Alliance has built on its relationships with small and medium sized enterprises (SMEs) to develop a new service called, which aims to deliver assistance to SMEs on legal, tax and health & safety, and employment law issues, and to provide them with an online buying club.

Other corporate ventures include Mviva, a mobile portal developed by Carphone Warehouse in collaboration with AOL,, a used car buying site developed by Avis, and Intelligent Finance, a multi-channel financial service from the Halifax. Supermarket group Sainsbury's has set up several corporate ventures including Sainsbury's One, a mobile phone service on One 2 One's network, Taste, a food portal and TV channel developed in partnership with Carlton, and Sainsbury's Bank, set up in partnership with the Bank of Scotland. Collectively, significant sums of money are being invested by established firms in media and internet related ventures.

The move from venture capitalists to established corporations as a key source of funding for new ventures is driven by a change in the financial markets, principally characterised by significantly lower valuations for internet and media firms. While venture capital firms are driven by the desire to achieve high returns in a relatively short space of time, established corporations have different motivations. These firms have a lower cost of capital and lower return expectations. The value they see in corporate ventures is driven not by the return they derive at exit (whether by trade sale or public offering) but rather by the ongoing revenue streams of the new business and synergistic benefits accrued to the parent. Corporate ventures are seen primarily as a strategic rather than a financial investment.

It is likely over time that damaged investor perceptions of technology and media firms will recover, and although we do not expect to see a return to the heady days of 1999, venture capital firms will begin investing more actively once again. However, there is likely to be a perceptible shift in their attitude to investment driven by the lessons they have learned. Historically VCs in the technology and media space have made themed investments in successive waves of internet development, from search engines and portals through to e-commerce sites, internet infrastructure, mobile applications, and optical networking. Many of these firms are now returning to the basics and looking for sound business models, a clear path to profitability, and a management team with proven execution capabilities, independent of whether the area of investment is perceived to be the next big thing.

In any case, there is no doubt both that the ongoing evolution of technology will continue to provide strong investment opportunities for astute investors, and that the definition of technology will evolve from one focussed primarily on the internet to one encompassing developments in a variety of fields including life sciences, materials and nanotechnology.

Jay Marathe
Head of Consulting


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