October 31, 2005, 12:00 AM

The Money Spigot Opens

(Page 2 of 2)

Valuation sensitive

That doesn`t mean investors are giving away the shop, though. "Investors are still valuation sensitive," Yang says. "There`ll always be that tension between VC investors and entrepreneurs. Investors want to pay as little as possible for as much ownership as possible and entrepreneurs are the other way around." That was one of the questions that Become.com asked in investor meetings, he says. "We met with a bunch of investors to see what kind of investment and valuation was available," Yang says.

Today`s investment market is a direct outgrowth of the previous huge investments, participants say. "Funds have a limited lifespan," Golden says. "A lot of big funds were raised in the late 1990s and early 2000s and many have run their lifespans. Venture capital firms need to invest those funds somewhere else now or give them back to their investors."

In addition, with a strong economy, the funds are growing bigger and thus need more places to invest their money--or they want bigger deals. "More venture firms are raising larger funds," Albertini says "What would have been a $1 billion fund is now $3 billion, or in the case of Warburg, they went from $3 billion to $5.2 billion and are now an $8 billion fund. Therefore size of the deals they are investing in is now larger."

While private money is flowing, the IPO has been revived as well. After the crash of high-profile public companies, investors were skittish about buying into public companies and retailers were cautious about taking their companies public and subjecting themselves to the pressures of being a public company. But in just the past 18 months, public offerings have come from online jewelers Blue Nile Inc. and Odimo Inc., catalog and online gourmet food retailer Harry & David, flower and gift retailer FTD.com, among others. Ritz Interactive, operator of RitzCamera.com, BoatersWorld.com and other web sites, also announced an IPO earlier this year.

To IPO or not to IPO

With the market opportunities as they are, there is no one-size-fits-all approach. While IPOs built to a crescendo in 1999 and 2000 with entrepreneurs eyeing the quick riches to be gained by going public, today`s market does not seem to be creating a stampede to IPOs. While some retailers are going public, others are going in the opposite direction. Investment company The Mustang Group LLC, for instance, took Vermont Teddy Bear Co. Inc., which sells online at VermonTeddyBear.com, private in May. And SmartBargains.com withdrew a proposed IPO in February, deciding to go with private financing because the effort to go public would have distracted the company. "The opportunity for growth is so great that doing anything that does not help us accomplish that growth was not in our best interests," says Ben Fischman, president and CEO. "We had to go no farther than our existing investors who realize that they have lightning in a bottle."

SmartBargains plans to use the $18 million it received to expand online and offline marketing, including creating a loyalty program, and to expand its merchandise.

When the Internet investment bubble burst in 2001, everyone said the next time would be different--and it is. Investors are looking carefully at P&Ls;, long-term prospects and the competitive landscape before they hand over any money. And retailers are making sure that they have a solid foundation with a plan to get where they want to go. But one thing hasn`t changed and that`s the eagerness of investors to buy into e-retailing businesses and the technology and services companies that support them. "I don`t see any reason that this market won`t continue to grow," Albertini says. "As long as investors are making money, this market will stay hot."

kurt@verticalwebmedia.com

 

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