Is the Bubble Back?

In a story reminiscent of the late 1990s, search marketing firm Marchex raised over $26 million in an initial public offering this week. The stock debuted at $6.50 per share, jumping to $8.88 on its first day of trading.

Adding fuel to the fire, anti-spam company Brightmail and comparison-shopping engine Shopping.com are preparing for IPOs. Meanwhile, the mother of all industry stock offerings, Google’s, hit the cover of Newsweek, and the company’s executives seem to be dominating every mainstream media outlet. Already-public companies are seeing their stock prices soar to 52-week highs, and venture capitalists are increasingly interested in funding growth among smaller players. Industry veterans have seen these signs before, and the activity begs the question: Has the bubble returned?

Industry experts answered ClickZ News’ question with a resounding “no.” Unlike the “irrational exuberance” of the dot-com bubble, this activity is largely based on strong companies with experienced leadership and business models that are returning profits — not hand-over-fist losses. And the Newsweek cover and a recent Wall Street Journal piece on the efficacy of online advertising indicate the industry’s coming of age is getting recognition.

“In the old days, all you needed was the word ‘Internet’ and the venture capitalists would fund it,” said Tim Bueneman, managing director of McAdams Wright Ragen, a Seattle regional brokerage firm covering stocks including Amazon.com and aQuantive. “Now, a company’s not going to get funded by the VCs unless it has value.”

VCs were so badly burned in the late 1990s, Bueneman said, very few companies are getting funding now. Those that do score have “obvious” business value.

Investors are looking for indicators of solid cash flow, a strong bottom line and a good return on their investments.

“In 1999 a lot of companies were issued prematurely,” said Tony Conrad, general partner in Venture Strategy Partners, a San-Francisco based venture capital firm. “We [investors] need to feel when companies go public they’re real companies and they’re going to be around for a long time and they’re going to generate real returns.”

Though Marchex did not seek VC funding, its financial situation is a good example of what investors are looking for. Marchex’s prospectus reported revenue of $19.9 million for Jan.17, 2003 through Dec. 31, 2003. Though not strictly profitable by GAAP accounting because of non-cash charges caused by acquisitions, the company had positive cash flow in 2003 of $2.9 million.

Conrad said a firm does not have to have huge revenues or a large number of customers, just a good-quality customer list, a steady revenue stream and a strong business model. “We are looking for proof of concept,” he said. “We want to see companies that at least have beta customers in place.”

In the same practical vein, unproven and wildly expensive marketing gambles have gone the way of the dodo. Companies now rely on marketing approaches such as low-cost but reliable search engine marketing — not bet-the-farm Super Bowl ads. That means agencies, online media companies and ad technology companies are earning their profits by winning over smart clients, not simply capitalizing on wild VC-fueled ad spending.

“This is not a bubble. It’s growth and recovery,” said Marc Ryan of Nielsen//Net Ratings. “Advertisers’ customers now are solid companies, not dot-coms throwing around ill-gotten VC funds. We’re back the way business is supposed to work.”

Ryan said the numbers reflecting ad spending show positive increases that have been happening for the last two to three years, indicating a solid recovery.

“Companies have gotten very smart about where they’re putting their money online,” said Mark Kingdon, CEO of Organic. “They’re putting it in initiatives that drive results. And that’s impacting how they buy media and how they engage agency partners.”

“It’s not a razzle-dazzle business model,” agreed Kelly Colbert, VP of interactive strategy for Young & Rubicam. “It’s eminently sensible.”

Clients are seriously revisiting their online strategy, not putting up bells-and-whistles Web sites as was so often the case during the boom.

“The idea is not just slapping up the most flashy Web site you can. It’s serious strategy,” said Fred Rubin, partner and director of iDeutsch and directDeutsch. “Mapping out the decision process, all those key moments of truth, and organizing all these tactics and ultimately measuring the tactics to dial up what works and dial down what doesn’t.”

These agency execs’ comments stand in stark contrast to those of Razorfish CEO Jeff Dachis in an infamous 1999 “60 Minutes II” interview, in which he struggled to explain exactly what his company did.

“We radically transform businesses to invent and reinvent them,” Dachis told reporter Bob Simon.

The future looks solid as well, according to predictions by Jupiter Research, owned by the parent of this publication. Jupiter pegged online advertising to grow to $14.8 billion by 2008.

“It’s an exciting time in the venture business and an exciting time in the marketing and media space. In 1998, pundits predicted the Internet would reach its potential in terms of e-commerce in five years and we’re nearing that horizon. Now, in large part, those sectors have delivered,” said Venture Strategy Partners’ Conrad.

Pamela Parker, managing editor of ClickZ News, contributed to this article.

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