First came Rupert Murdoch. Then came US Federal Reserve chairman Alan Greenspan and even online stockbroker Charles Schwab. All three recently may have prompted investors in the Internet to pause and consider whether the huge rise in many Internet stocks can continue.
All three (differing) statements may give succour to those who believe that, in the US at least, an irrational “gold rush” is taking place among a growing body of naive investors who will lose their shirts when the realisation dawns that the sector cannot deliver the rate of returns anticipated in current heady stock market valuations.
But European business leaders and financiers who have so far failed to provide the seed-corn funding for their own Internet entrepreneurs should not take too much comfort from the situation. Because, in fundamental terms, businesses and investors who fail to respond to the opportunities of the Internet still risk missing out.
What may not be appreciated is the extent to which cultural differences between the US and Europe are shaping and, in Europe’s case, perhaps holding back the growth pattern of Internet businesses.
In the US there is an attitude that risk is an integral prerequisite to reward. Both companies and individuals can seek to include risk in their investment calculations, but it cannot be eliminated. In Europe, people are far more inclined to seek to eliminate risk from investment decisions, even though it is impossible in the Internet world.
At a personal level, attitudes to supporting “garage start-ups” – some of which have now transformed themselves into major players on the Internet – also differ.
People respect garage start-ups in the US. Yet in Europe if people give up jobs, remortgage homes and run up credit card debt to finance the business, there is less understanding within the immediate family, friends and potential employers. At a national level many governments have punitive tax structures for start-up companies, limiting their ability to use stock options to mitigate otherwise modest compensation offers.
Risk-taking and urgency are inherent in the business approach of many US Internet start-ups. Many have already raised capital through public offering of equity at early stages of their business cycles to take on established “bricks and mortar” players.
Even in the US, Internet companies must come to the stock market quickly. While venture capital can kick-start the project, the steep funding curve required by many Internet enterprises means they are coming to the stock market for equity much earlier than conventional companies.
But the speed at which they have to achieve the scale of reach to achieve future profitability on their business models means they can need ten or 100 times the level of seed-corn funding of typical start-ups.
Again, for investors this may involve risk, but it is not irrational.
We may begin to see this ease of access to capital grow in Europe.
But it remains a different business environment.
Many of the major European Internet ventures are structured as offshoots of existing businesses. So if a few millions dollars is sunk into an online business which fails to deliver, there is little urgency or investor pressure to turn things around. So long as the losses do not impinge on the wider group’s operating profits or margins, companies can say “we don’t mind”. For the likes of Amazon.com, on the other hand, it’s “do or die”.
Yet this level of urgency and ease of access to capital must surely stand as two key factors in determining who will emerge as the winners and losers among businesses on the Internet.
On both these counts, Europe must catch up with the US. Because, while Internet use lags behind the US across much of Europe, we are now beginning to see a push towards critical penetration of Internet use and audiences.
Online retailing has already taken off in the US and Europe will follow shortly.
Murdoch and Greenspan may be right in pointing out the risks involved in investing directly in the sector. Sure, there will be winners and losers.
But my advice is this: there has never been a better time to look at the online business models which are succeeding in the more advanced markets of the US and Scandinavia, and to make these models work in the less developed European markets.