Neil Thomas
I very much admired the way Lastminute.com co-founder Martha Lane Fox stuck to her guns on a television programme last week. When gently sautd rather than grilled over the pricing of the flotation of Lastminute, she admirably stuck by the decision to float at that level and managed, in the space of a two-minute sting, to drop Morgan Stanley’s name as adviser two, or possibly three times. In, of course, the nicest possible way. A masterly piece of subterfuge – linking, in the listener’s minds, the words “Morgan Stanley” with “overpriced offering”.
And who can blame her? We have had to listen to all sorts of blather from the banking community about the great revolution that is e-commerce and the Internet. To add massive insult to great injury we have also had to endure their production of endless “new valuation models” for Internet companies.
These are largely predicated on taking the birth date of the founder’s grandmother, dividing by a shoe size then multiplying by the wind-speed (measured, of course, by a “finger in the air”).
Well, not quite, but in an excellent article published recently in the Financial Times, Professor John Kay proved that the new valuation models being touted by the likes of McKinsey and a couple of merchant banks, can be instantly undermined by simply applying the maths to existing non dot.com, profit-making companies.
Now, the fact that there is a divergence in philosophy over what constitutes a “fair value” for new economy companies is one thing, but the truly shocking caveat is that the banks and venture capitalists which espouse such convoluted algebra actually do not believe their own modelling. How else would one explain the nervous rush for the exit being made by exactly the same banks and funds who seek to reassure the investor with their own medicine-show calculations?
This week Boo.com, the over-hyped business in the United States which was to be the dernier cri in “urban sportswear” (and you wonder why it’s failing?), will probably lose founders and backers.
Also in the US, News Corp is allegedly writing off its investment in theStreet.com – though to be fair, Rupert Murdoch was one of the first to try to puncture the balloon of Internet valuations.
The Quantum fund is jumping out of e- commerce investment and more banks than you could shake a stick at are shelving initial public offerings or cutting investment .
This can only be because they don’t in fact believe their own models, which look at a rate of return of 10, sometimes 15, years into the future. The relaxed attitude to the production of profits has evaporated almost overnight. If there is no payback in year three, or no sign of a break-even, suddenly investors, notwithstanding their valuation models, are simply not interested. So despite selling the mug- punters and the larger investors a story of long-term gains, the evidence mounts that as soon as the market sags, these selfsame salesmen abandon ship.
The idea behind Boo.com has not changed since day one – neither have the basic dynamics and assumptions about the retail market. Similarly World Online, another famous disaster story, which recently hit our screens as Europe’s largest Internet flotation, crashed and burned.
What changed? Simply matters of personnel or implementation of strategy. Which, if you are truly taking the long view, must surely be factored in to any 10-year development plan. All companies suffer bad times, which is why the old economy companies carry premiums or discounts for such old- fashioned concepts as “good management” or “duff strategy”.
Putting a price on the future cannot work because, in a world where companies stand or fall by human decisions, we cannot know what the long-term future holds. We can look only as far as the next set of results and a sketchy forecast for the following year.
Banks may have changed their computer models, but they certainly haven’t changed their investment philosophy. And if they haven’t, why should we?