The failure of high-profile online clothing retailer boo.com in the UK only six months after its launch has sent a wave of panic across internet stocks, leading to a deluge of selling on the Nasdaq last Friday. The ostensible reason for the stampede was that boo.com was Europe's first big dotcom failure. But then, that's hardly occasion for surprise. With e-tailers springing up like mushrooms after rain it is natural that quite a few of them will go under. In India, for instance, an ICRA report says that a shakeout in the industry is imminent and there would only be about 20 portals left in operation after five years. So the failure of a dotcom is no reason to get worried. Nevertheless, the spotlight on boo.com has been useful, because it enables investors to understand some of the risk in investing in such companies.
Boo.com's assets were its brand, its intellectual property and its website. So far as the brand value of such businesses are concerned, any company can build a brand if it throws around cash; the trick is to build it with the least amount of money. That's very difficult in a cluttered environment with many competing brands. An additional problem for e-tailers is the lack of differentiation between portals, as any new feature is automatically copied by the others. Under such circumstances, control of costs become critical. There is also a lesson about technology. Boo.com poured much of its funding into a proprietary system for e-commerce solutions, enabling sales on its website and tracking deliveries. But such packages are now available off the shelf. The reality is that technology changes so fast in this field that there is no point in trying to reinvent the wheel. The key is to find something you do well and then build alliances that complement the competitive advantage.
The third lesson is that several of the new notions of valuation need to be taken with large doses of salt. For instance, boo.com reported February revenues of $ 657,000, almost as much as the $680,000 it reported for the three months to end-January. Those analysts who point to revenues per share as an acceptable parameter for internet valuations would have considered the company very healthy. The costs of acquiring that revenue need also to be kept in mind. The list of those who had invested in boo.com include Goldman Sachs, a private fund held by Benetton's principal shareholders, JP Morgan, Bain Capital et al. Typically these institutional investors put their money into a vast number of companies, in the hope that what they lose on 90 per cent of their investments will be more than made up by the remaining 10 per cent. The individual investor cannot afford this luxury.
And finally, the immediate reason for the firm's collapse was that a round of funding failed to materialise. These companies are critically dependent upon the availability of equity funding. When the stock market falls, their vulnerability increases exponentially. So what's the moral of the story? In the latest round of corporate results in the US, it was the technology infrastructure companies which delivered above-average results. In a gold rush, it is those who sell the picks and shovels who are sure to gain.
