"Valuing A Dotcom Is An Art"

How do you evaluate the Internet companies?
Evaluating a dotcom business is, at this stage, an art. How the information age is going to evolve, how many start-ups will survive and what business strategies will finally succeed is anybody’s guess. It is difficult to attribute an absolute value to any of these companies. Valuations at best can be attached relatively, if relevant comparisons are available. Every day, new companies with innovative ideas are mushrooming. But all of them are not going to generate cash. One way of looking at the value of a company today is to look at the potential for cash generation. Also, what are the additional streams of income generation possible for that particular company and is the business synergic with some other businesses which can pay off in future.

Are there any concrete parameters to arrive at a fair valuation of a dotcom?
No. In fact, the traditional valuation parameters like price-to-earnings ratio (P/E) and cash flows do not apply now to the dotcom business which is still in its infancy. The growth is not going to be organic but exponential. Exact projections cannot be made on revenues and earnings potential. For instance, no fund manger can definitely say what would be the future of Amazon.com, but still the stakes are on and the market capitalisation of the company is increasing steadily.

What then determines the success of Internet companies?
For Internet start-ups, a first mover advantage which can translate into customer loyalty is a key factor to success. This should be supported by advantages of size, speed in responding to changing customer requirements and technology and scalability of the business model. Businesses which have a perceivable huge market can also measure up in the long run. Most important is the company’s ability to market its skills to the customer and make him pay for the services. While these are broad parameters, a consumer portal should have high traffic as reflected by the strike rate, repetitiveness of hits and the time spent on the portal.

When do you think there would be a shakeout in the industry and rationalisation in valuations?
It’s too soon to say. Definitely, not in the next three to five years.