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VENTURESCOPE

The dotcom industry became the symbol of the irrational exuberance of the late 1990s tech bubble, but now a resurgence is underway.

The dotcom boom, as it became known, is now remembered half fondly, half painfully as a time when all an entrepreneur needed to make it was a dream, a domain name and an enthusiastic venture capital investor.

The crash that followed the boom is remembered rather less fondly as a time when it became uncomfortably clear that internet-based business was really not going to be that simple and that most dotcom companies just didn't have viable business plans to make their nifty consumer-facing ideas profitable.

And yet, the internet is now a key route by which companies can reach their customers, as websites have become immensely powerful marketing tools and distribution platforms.

What's more, many of the most successful brand names to appear in the last few years are online businesses that came from that very boom. Think eBay, the internet auctioneer, and retailing giant Amazon; think online booking sites like eBookers, Expedia and lastminute.com, which revolutionised the way people buy travel; think Google, the internet search engine which in June became the largest media company in the world when its market cap overtook Time Warner's.

Think also Skype, the $4.1 billion voice-over-IP innovator sold last month to eBay (see also p. 27) that has already been credited with transforming the way we think about telephony.

These success stories are the reason why venture capitalists around the world appear to falling in love with the internet for a second time. In Europe for instance, there has been a quiet trickle of venture money into the sector for several months.

In March 2005, Munich's Wellington Partners and the London-based European wing of Benchmark Capital backed Zopa, an online consumer-to-consumer borrowing and lending exchange; in June, Benchmark provided laterstage funding to UK online underwear seller Figleaves. A month later, French online DVD distributor Glowria raised €8.5 million from a consortium led by Paris-based SPEF Venture, a group that is part of Natexis Private Equity.

Michael Chalfen, a partner at UK firm Apax, which in September invested €34 million for a minority stake in online gaming site Midasplayer.com, is optimistic about the prospects for net-based business. “Broadband usage has increased, there's a larger user base and a lot more management experience in the sector,” he says. “A lot of the economic predictions from 1999 have taken place – it's just taken longer than we expected.”

THE WEB IS WORKING
One European VC that never left the sector is Paris-based Banexi Venture Partners. Last year it scored one of the bigger successes of the European venture industry when one of its portfolio companies, French online shopping service Kelkoo, was sold to Yahoo! for €475 million, yielding Banexi six times its total investment after a four-year holding period. The firm still holds other investments in the sector, including the job search engine Keljob and Quotatis, a business directory.

Like Chalfen, Banexi chairman Michel Dahan says that the nature of online business has changed significantly in the last five years. He argues that investors are now more cautious about testing a business model before pouring in large amounts of capital.

But the key difference, says Dahan, is that unlike many of their long-forgotten predecessors, many online companies now have revenues: “In the old days people said, ‘Is it safe? Will the customer buy it?’ That's just not a question now – it's obvious that the internet is working and consumers like it as it brings value to them.”

Dahan predicts that, while many European investors are still avoiding the sector, they will return soon – possibly as early as next year, particularly if venture-backed dotcoms continue to be sold at attractive valuations, either to trade investors or to later stage financial buyers.

“If you listen to what the big groups are doing, the [M&A] topic is now on the table,” says Dahan. “They have money and they're ready to buy start-ups. It's like we're creating the car industry and it's 1910. This is just the beginning.”

Such predictions may sound worryingly familiar, but there are good reasons to believe that this time around, the optimism could well be justified. Just think Skype again.