Some fascinating arithmetic in today’s Financial Times. From 1995 through 1999, venture capitalists in the US invested $26.5 billion in Internet-related companies. IPOs over the same period for Internet-related companies raised $75.2 billion and follow-on offerings a further $51.6 billion. That’s a total of $153.3 billion (roughly equivalent to Norway’s GDP, according to the FT). Where did all that money go?
Richard Tomkins does the sums. Investment banks collared $5.3 billion in fees. $22.6 billion of the money raised in secondary offerings went to investors selling shares. A significant percentage of the money that actually reached the companies was spent on advertising. The article cites “up to 80%” in some cases. In the year to last June alone, dotcom spending on sales and marketing was $8.4 billion. The good news is that customers were also winners: “The main beneficiaries from this activity [the widespread practice of selling goods below costs to ramp up revenues] were the people who found themselves buying $1 bills for 50 cents apiece — in other words, the customers.”
Apparently most e-tailers have been losing money on every transaction, even if you ignore marketing costs, according to a McKinsey study. Etoys lost $4.04 on every order; Webvan $12.90; Drugstore.com $16.42. (Webvan, of course, is run by former Andersen Consulting chieftain George Shaheen. His former clients must be wondering about the advice he gave them.)
The losers in this spending and cashing-out splurge were “anyone who acquired shares in the now ailing dotcoms and failed to sell them before the crunch came”. This isn’t a modern morality tale, but it does display that greed can be just as senseless in our time as in any other. But as Tomkins points out, this wasn’t quite tulipmania or a South Sea Bubble. A real industry has emerged and a real economic and social transformation has taken place.