SAN FRANCISCO -- They're the rocket fuel for the new economy, but high-powered Internet stocks have pushed values so high it's even created problems for the burgeoning e-commerce industry.
Some high-tech executives are quietly expressing relief that the long boom has finally hit a pause over the past few weeks, and they see some positive impacts from the pullback after nearly two years of huge gains.
"It was a bit overdue. In the end, the focus will be on sustainable business models, which will be good for the whole industry," said George Bell, chief executive at ExciteAtHome at a panel discussion after the big pullback of the past week.
"In this market environment, people have tended to have an inflated sense of the value of the assets they own," said Roger McNamee, a Silicon Valley venture capitalist and co-founder of buyout fund Silver Lake Partners.
That's led to an unwillingness by some e-commerce companies to confront the need to merge with others or scale back expansion plans at a time when the rocket fuel of booming "e-stocks" has launched more start-ups than cyberspace can ever accommodate.
Even with the phenomenal growth of e-commerce over the past five years, most websites are losing money. A clutter of new sites has forced all of them to spend heavily on marketing, and it's created a mad scramble to fill existing jobs.
"We can't find anyone for our openings," said an administrator at a major website. "And we're losing people every day to the next startup. They're surfing from one IPO to the next."
As long as the market keeps booming, the "IPO surfers" can jump from one wave to the next, staying only long enough to exercise options and then moving on.
"Some people like the security of coming to a company after a public offering, but there are definitely those who are only in it for the huge potential increase when a company goes public," said Bob Spinner, chief executive officer of Extensity Inc., an Emeryville, California-based maker of Internet software for office workers that went public earlier this year.
Investors, eager to participate in the "new, new thing," have been eager to fund hundreds of initial stock offerings. But after the IPOs, the stocks often languish, leaving the market with "too many mouths to feed," as some have put it, and a majority of this year's offerings are below their offer prices.
"There are too many multibillion-dollar valuations out there with too few revenues," said James Montgomery, chief executive officer of Los Angeles merchant banking firm Digital Coast Partners. "There are certainly good companies out there, but some of these stocks just got way ahead of themselves."
The latest market volatility is certain to put some new stock offerings on hold, said Silver Lake's McNamee, and "if you minimize the flood of new offerings, that's a positive" for sites already in operation.
A further sustained correction in stock prices would also spark a wave of consolidation in which "the top companies will start to acquire the second-, third- and fourth-tier e-commerce players," Montgomery said.
Potential buyers will have lots to look at. By one estimate, from trade group Shop.org, there are now 30,000 sites selling merchandise over the Internet.
The "e-tailing" stocks began their descent a year ago, as investors discovered that marketing costs would devour their profit for years to come. But the lack of profits so far hasn't been a barrier to entry for start-ups. And those that have run out of rocket fuel have been able to go back to the stock market for more.
But the doors may be closing for some. Leading online music retailer CDnow, health site drkoop.com and online merchandiser Value America have reported cash problems. And a controversial Barrons article listed over 200 leading sites that could go "up in flames" without more cash.
While many in Silicon Valley aren't bothered by the thought of a correction to cure excesses in everything from labor markets to inflated real estate, nobody wants a watershed event that would create a bear market.
Mel Connet, whose Connet & Co. has lured a number of Fortune 500 executives to dot-coms, said a "healthy correction would be fine."
But a sustained downturn would be devastating. "It would be very difficult to attract people to these opportunities without the huge potential for wealth creation that the early-stage companies provide," he said.
Silver Lake's McNamee sees an "inevitability" in the boom and bust cycles of Silicon Valley. But the boom times have longer to run, he argued, and indeed, after a 25 percent pullback since March 10, the Nasdaq average has already cut its loss in half.
"There might be a silver lining in the clouds of a pullback," said McNamee. "But all things being equal, if it goes on longer, that's better."
