05 May 2010   |   News

Ten years after the bubble, another wave of dotcoms

Ten years after Dotcom crash, the Nasdaq is still 55% below its March 2000 peak. But the Internet is now spawning a new generation of dotcoms.

During the last quarter of 2009, US venture capital investment in young Internet companies increased by 38 per cent, to $1.8 billion, compared to a year before.

And according to Crunchbase, a database managed by Techcrunch, this momentum is continuing, with VC investments doubling during the first quarter of 2010, compared to last year.

In Europe, statistics are less upbeat. Last year, venture capital investments dropped 41 per cent in all sectors. Yet, if you listen to Internet start-up investment professionals, these figures do not reflect the full picture.

At Index Ventures, Ben Holmes, the partner in charge of e-commerce investments, explains, “With the financial crisis, VC tends to be cautious with new investments in semiconductors or enterprise software companies. Meanwhile e-commerce kept growing even during the crisis. It is a great place to be right now.”

At I-Source, a Franco-British VC firm that has invested in four internet companies in the last six months, senior partner Nicolas Landrin confirms,  “E-commerce is still a major social phenomenon and its economic potential remains largely untapped.”

In order to capture some of this, 60 of France’s professional internet investors have just launched ISAI, a syndicated fund with €24 million Euros dedicated to seed investments in internet start-ups.

 “The financial crisis made 2009 an even more challenging year for VC investments than 2001”, explains Swiss entrepreneur Stephane Doutrieux, founder of Poken. “Still, in that environment, we were able to raise several million euros from VC firms.”

Similarly, German entrepreneur Carsten Frien, CEO of Madvertise, a mobile advertising platform, says, “There is clearly a gathering momentum for VC investments in internet related companies. There is a noticeable increase in online and mobile start-ups getting funded.” Frien says this is because these companies are playing a significant role in the changing media, entertainment and marketing landscape, even replacing traditional players.

At the same time, some successful internet entrepreneurs are now launching their own VC funds. Marc Simoncini, founder of dating website Meetic in France, recently created Jaina Capital, while the founder of low-cost internet access provider Free, Xavier Niel, has founded Kima Ventures. And Skype’s Swedish founder, Niklas Zennström, is back from the US with his fund Atomico Ventures, looking to invest up to €165 million in European internet start-ups.

As the cash flows, the number of European internet start-ups getting funded is growing, with Plyce at €300,000, Jobintree €1 million and mySkreen at €1.5 million being some of the most recent examples. mySkreen is a French video on-demand service.

How can this relatively upbeat picture be reconciled with the grim statistics?  “That is because launching internet companies today is ten times less expensive than in 2000,” answers Ben Holmes. “Fewer funds are needed to finance a greater number of companies.” His remark is in line with the latest European Venture Capital Association statistics. They show that if VC investments (in all categories) remained low, they bottomed out in Q3 2009, and even increased slightly, up 19 per cent for early stage rounds in Q4. Meanwhile, the number of companies getting funded has already reached its pre-financial crisis level at the end of last year.

“In 2000 those getting wealthy were the Internet gold rush tool makers,” explains Nicolas Landrin. “Since today those tools are more or less worthless, that isn’t true anymore.” In 2000 the domain name annual registration fee was, for instance, US$129. It is now $10 dollars. The cost for hosting data has also plummeted and the price for streaming one gigabit of video has fallen from $193 dollars down to 2.8 cents.

At the same time some of the business models that emerged and then vanished in 2000, such as video broadcasting (broadcast.com), social network (theglobe), and targeted information delivery (PointCast) are back.

The concepts have been improved and become blockbusters like YouTube, Facebook and Twitter. Even better, those applications turn out to be essential to the new Internet companies and their business models. For instance, YouTube is an easy and cheap way to advertise. Thanks to the “connect” functionality on Facebook, expensive customer relation management (CRM) software is often not needed any more. In addition, there are more and more free tools such as open source software and cloud computing resources like Amazon EC2.

Finally, the emergence of an advertisement platform with Google Adware, and autonomy from telecom operators thanks to iTunes and Appstore, allow the e-retailers to be much more profitable. Last, but not least, now there is a true market. E-business sales climbed from $19.5 billion in 2000 up to $156 billion last year. And there are now 1.7 billion internet users, a 380 per cent increase within ten years.  

Instead of “risky business”, investors are dealing with companies that already have customers, some revenue and even, at times, profits. According to Poken’s Doutrieux, “Today, internet companies do not solicit investment with a vague business plan.” VCs want to see customers, revenues and a proven business model. Things that have become more possible to achieve even with a small amount of seed money prior to a first round of VC funding. “They are not after more cash to get started, but to develop,” explains Ben Holmes.

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