It is nearly five years since the internet bubble burst and who now would use phrases such as “incubator fund” or “advertising revenues estimated on prospective site hits” in polite corporate company? The conventional view is that the ludicrous over-valuations of that millennium-turning market were the consequence of absurd multiples of future revenues from dot-com enterprises, which were devised by investment banks that then fell for the very same valuations. In short, the capital markets talked up the price of fledgling dot-com stocks and then poured investors’ money into them, on the back of the propaganda.
It is similarly conventional to argue that the market has grown up since then, that the hubris and ponytails have gone from the dot-com sector and that the sector’s intrinsic worth is unaffected by the hysteria of five years ago. I argue that the key differentiator of potential value is what is now widely called connectivity – the dot-com market is predicated on connecting markets, rather than necessarily on expanding them. That’s why a lifestyle internet proposition such as Boo.com was doomed, while Friends Reunited was a sure-fire winner. The widely accepted consequence is that a new, more mature and stable dot-com sector has emerged.
But I begin to wonder about that. Not that I think the dot-coms that are into connectivity are essentially weaker than we supposed. Nor do I believe that the capital markets have forgotten the spivs of the late Nineties – they are still chastened by the experience. But there are some indications that the self-fuelling excitements of the dot-com era are back, with some of the same investment bank brands pushing them. More of that in a moment, but first, a cautionary tale from my own recent experience.
I was called the other day by the colleague of someone I knew a little six years ago, who had run a new media brokerage, which he had sold at around the turn of the millennium in New York. This had turned out to be at the top of the market and just ahead of the great collapse in internet stocks. So the timing had been perfect and I heard he had cleaned up. I had done some litigation-related work for this character in London, with which he had apparently been well pleased, and he now wanted to meet me again about a new business proposition.
This turned out to be a kind of super search-engine development – the details of which are highly technical and don’t matter here. We met for breakfast in a suite of a hotel overlooking London’s Piccadilly. This struck me as an odd location, as no one in his party was staying there. Even more oddly, we were joined by a media analyst from an international asset-management firm. It was unclear whether I was being approached for investment or for professional communications advice or, even more worryingly, a combination of both (one of the silliest characteristics of the last boom-and-bust was the tendency of advisers to take stock from clients in lieu of fees).
When we left, my host had a Mercedes SLR McLaren parked outside – what I took to be his bodyguard and general factotum drove another six-figure Merc behind, as if it were a tender behind his boss’s yacht. When we next met, there were three improbably well-groomed young City women at the lunch table. It swiftly became apparent that, while their role was indeed professional, it wasn’t directly related to the more mundane practices of the financial markets. I would like to say that I made my excuses and left – but, more accurately, they made theirs and left for northern European siestas, leaving me nursing my coffee. My diary has, sadly, been too full to join this party again.
Anyone who wants to examine, from a safer distance, the psychology of the people who inhabit this niche of the investment markets should read Blood on the Street, by Charles Gasparino. Subtitled “The Sensational Story of How Wall Street Analysts Duped a Generation of Investors”, it is about the boom of five years ago. You will find in it, inter alia, the story of the extraordinary Jack Grubman, the Citigroup telecoms analyst who pushed WorldCom shares beyond understanding and who upgraded AT&T in a deal with his boss to get his children into nursery school.
Let’s be clear: there are hugely successful and valuable internet stocks out there. Indeed, good old Citigroup has just upgraded Yahoo!’s shares. Another search engine, Google, has enjoyed a flotation that was both novel in its engineering and enriching in its performance. Online auctioneer Ebay is worth more than most of the American investment banks that support it.
But let’s also be clear that many of the same kind of characters are still out there, behaving in much the same way.
George Pitcher is a partner at communications management consultancy Luther Pendragon