Dot-Coms Unfairly Stereotyped as Money Losers

One of the great stereotypes about dot-com companies is that they are all bleeding red ink despite raising millions of dollars (US$) in well-publicized Silicon Valley IPOs.

However, a recent survey by Ernst & Young debunks that myth. The research, which was based on 150 telephone interviews with CEOs of Internet companies, found that while leaders like e-tail giant Amazon.com are operating in the red, 69 percent of the companies surveyed are profitable.

eBay Reports Small Profit

One example of a profitable e-commerce company is eBay, Inc., which reported a fourth-quarter operating profit as sales more than doubled and an additional 305,000 users were attracted to its site.

The San Jose, California-based online auctioneer reported that net income rose to $4.9 million as compared with $3.9 million one year ago. Additionally, sales rose 139 percent to $73.9 million from $30.9 million.

More Winners Than Losers

According to the Ernst & Young study, eBay is more typical of dot-coms than Amazon. Two out of three Internet companies surveyed in the study said that they are making money, and half of that number claim to have no intention of going public.

Also, more of the profitable online companies are located on the East Coast than in Silicon Valley.

“Perhaps surprisingly, 69 percent of online businesses we surveyed are in fact profitable,” Ernst & Young partner Roger Savell told the Bloomberg Forum earlier this week. “Most are small and highly-focused,” he added.

In addition, of the Internet companies that are currently in the red, Savell noted that executives at 40 percent of them anticipate getting into the black within two years and 11 percent within five.

The survey also discovered that geographically, most profitable online companies are based in New York City’s Silicon Alley, where 72 percent make money. The next most profitable region is the South, where 71 percent of Internet companies are in the black. By contrast, only half of the Internet companies in Silicon Valley and elsewhere in the western U.S. are profitable.

Most Say No to IPO

Savell also pointed out that while most Internet startups are portrayed as wanting to go public as soon as they can, only 35 percent have specific IPO intentions and 15 percent are undecided.

So, while it is true that some of the giant dot-coms will continue to lose money, it is also likely that many dot-coms will continue to make money.

Meanwhile, it is probably going to take a few more years of solid profits before dot-coms are finally perceived as winners, instead of being stereotyped as money-grabbing losers.

What Do We Make of It?

So, what should we think about all of this? To me, it is great to hear that there is a growing horde of successful e-commerce companies that are operating profitably. These firms are not the “industry leaders” that are losing money hand-over-fist in an attempt to develop huge market shares.

Instead, these companies have developed niches online and are operating according to the most basic rule of finance: You must take in more money than you spend.

To me, the study is a strong sign that the online e-commerce industry is far healthier than many of us imagine. It is also a sign that the companies that are not operating in the black will have to adjust their business models quickly or face the wrath of investors who do not want to see their investments diluted by increasing rounds of secondary offerings.

What do you think? Let’s talk about it.