While many bankers focus on how to make loans on the Internet, some are looking into making loans to the Internet
Remember the CB radio? For a time it was the province of a few professionals. Then, suddenly, everybody had to have one. Folks all over sending messages to each other, often using colorful nicknames as identifiers. And then, even faster than the business bloomed, it faded into the background. The story is not lost on bankers and others as they try to digest the hype spawned by the Internet and the World Wide Web: Today's ultra-hot topic could be tomorrow's flop.
Case in point: On Feb. 26, many larger Internet firms and such related companies as America Online had been riding high in the stock market. On Feb. 27, AT&T, telecommunication's 5,000-pound gorilla, unveiled an unprecedented, though not wholly unexpected, offer: five hours a month free on its new Internet access service, a consumer version of WorldNet, for a year. Internet stocks took a hit.
After AT&T admitted it had details to work out yet (the service launched in mid-March), the markets settled down somewhat. But a lesson was learned.
In other words, he who leaps into this business with both feet and a substantial wad of money could drown in a sea of hype. Conversations with bankers, consultants, and Internet entrepreneurs give a picture of a banking industry carefully dipping its toe into serving the financial needs of companies that, in one way or another, make the evolving Internet happen.
The pace of growth has been incredible. "We're seeing companies go from idea to IPO in less than two years," says J. Nell Weintraut, lead Internet analyst with Hambrecht & Quist LLC, San Francisco. The firm is one of a handful that has squired most of the initial public offerings of Internet-related companies to market.
In fact, continues Weintraut, equity capital is so interested in the Internet right now--despite the AT&T announcement--that it is very cheap. As a consequence, raising funds through debt has been fairly limited thus far.
Yet the growth that excites the imagination must also be tempered with a heavy dose of reality--not to mention the proviso that history has an uncomfortable way of turning today's success story into tomorrow's lending debacle.
"The most difficult thing about the Internet is figuring out how these companies will make money," says Jess Marzak, managing director at BankAmerica Ventures, the venture-capital subsidiary of Bank of America. "A lot that's on the Internet now is being given away for free." And the dreams about making big bucks from 'Net-based advertising is unlikely to be meaningful for many anytime soon, he says.
Financing this new industry thus far appears to be the domain of banks that have a bent towards high-tech companies. However, the Internet opportunity is widespread, from California's Silicon Valley to New York City's Silicon Alley to the Washington, D.C. environs dubbed "The Netplex"--and eventually, perhaps, all points in between.
What is an Internet business?
The Internet industry is really multiple industries under a common umbrella. Hambrecht & Quist's Weintraut breaks it down into six subdivisions, the first two being the hottest:
1. Equipment--The manufacturers of the modems, servers, routers, and switches that make the pieces of the Internet work.
2. Network Services--The providers, many of them small and local, of access to the Internet. Among the larger participants, these include national providers, regional providers, consumer on-line services (such as CompuServe and America On-line), and telecommunications companies such as AT&T.
3. Software--The designers of browser software (Netscape being the most notable), which help 'Net users move around the 'Net, and server software, which runs the computers where 'Net sites reside. Also the designers of application, security, and program and site development software. …