If you started an internet business would it be an Autonomy, a Lastminute.com, or an Easier?
This is the stark reality facing would-be entrepreneurs as they veer between the dream of becoming a multi-millionaire and the nightmare of leading their dotcoms down the route towards failure.
Autonomy, which sells software that can detect patterns in unstructured data, expected its stock to list on the London Stock Exchange at £32.76 per share. While this figure rose quickly to £41.23, it fell back to £23.62.
But if this result seems a little disappointing, it is nothing compared with the performance of e-tailer Lastminute.com. Its shares launched at £3.80, peaked at £4.87, and then collapsed to just 72.5p.
Even worse was the plight of online estate agent Easier which floated at £1.50, saw its shares peak at £3.30, and then fall to 20.5p. The company finally put itself on the market after conceding that its business model was not working.
But Mike Lynch, chief executive at Autonomy, and the UK's first internet billionaire, has a simple explanation for such contrasting results. Success in the new economy, he claims, will belong to those businesses that provide infrastructure technology for the internet.
And this holds true for both high flyers such as Autonomy and world stock market leaders such as Cisco and Oracle.
Autonomy is a good example not just of a company that has pitched itself as providing important internet-enabling technology, but also of one that has positioned itself uniquely. Its sophisticated search software uses probability to recognise patterns in unstructured information, whether this is stored on a user's hard disk or available over the internet.
The company also claims to operate on gross margins of 95 per cent and believes it could be on the brink of being included on the FTSE 100 despite having a mere 170 staff. In its last quarter, it generated net profits of $6.5m, but these earnings promise to increase still further as licence revenues grow.
Lynch, who became the Confederation of British Industry's Entrepreneur of the Year in 1999, has drawn up his own 10-point plan of advice on what types of internet and technology businesses to invest in.
The tips could also prove useful to would-be entrepreneurs as indicators of which ideas might be good to follow through, and which they should throw in the dustbin. The Lynch prescription is:
1. Avoid 'me-too' companies
The best internet companies offer something genuinely new and different. Effectively, it comes down to writing software that simplifies or changes our lives. Companies that are late into the market selling 'me-too' products are rarely going to be as successful.
2. Don't believe the hype
Be wary of startups that tell you they will be successful tomorrow. Autonomy has made a profit in three successive quarters, and we are an exception. Last year's startups that still have flat revenue growth should be avoided. Most startups should start showing signs of good revenue growth in their first year. There are exceptions to this general rule, like the biotech industry, where research and development means the final product takes longer to come to market. This isn't the case in the technology industry and particularly with software.
3. Does anyone actually want this product?
Strange but true is the number of startups which actually launch a product or service before establishing if there's a market for it. They will usually market their offerings as the 'best thing since sliced bread', but if nobody wants the product, what use is it? Those are the ones that are now feeling the pinch.
4. Beware of mutating businesses
Beware of 'startups' that have been around for years selling old economy products and have reinvented themselves as e-tailers or ebusinesses. The days of internet shop fronts attracting millions in City investment are over.
5. Check profitability time scales
Avoid startups which have not crossed the profitability margin after two years.
6. Dotcom versus web infrastructure companies
If you're looking at the bricks and mortar companies of the internet, then identify those that are selling the shovels from those using the shovels in the internet gold rush. Internet infrastructure companies are going to be around longer and will see profits because they are providing hardware or software which is integral to the internet. Take San Francisco. The gold diggers are long gone, but the people who sold the shovels - the prospectors - are still remembered today.
7. How manual is the business?
The more people a company employs, the less likely it is to grow quickly - especially in the new economy. Autonomy has 170 people worldwide and a market capitalisation of over $7bn. That is very efficient. Check out a company's gross margin for tell-tale signs.
8. Look out for 'dodgy' practices
There are a lot of startups out there talking a good game, but look a little closer and you will start to see through the hype. Be careful of those with only one or two customers. This can often mean that a business is only existing because of another business. For example: company A funds company B, which buys from company A. Company A sells an ad to company B, which buys an ad from company A, and so it goes on.
9. People and management count
A 21 year-old might be the next Bill Gates because he or she has created software that will change the world. But any successful company in the new economy will have good management that knows how to run a business. Check out financial accounts, press reports and bulletin boards for the people behind the business.
10. Be careful of companies with small revenues
Small revenues (i.e. less than £750,000 per annum) often mean that a company is not being managed properly. Another sign is when a company's losses are greater than its revenues. These financial situations can be rectified, but should be watched closely. Another point to watch out for on revenues is when a company is 'revenue washing' - hiding its revenue in a dull low value business behind a new ebusiness mask to ensure a much higher multiple and market valuation.
Other advice Lynch might have given would-be entrepreneurs - but didn't - is to develop the gift of the gab and take any chances that come your way.
He obtained his initial capital funding by persuading a man he met in a London pub to invest £2000 in his idea. If you can turn opportunities like that into money, then you've either got the makings of a successful capitalist or a first rate confidence trickster. Happily, the man in the pub recognised the difference and made a fortune himself.
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