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. Last Updated: 07/27/2016

'Net Firms Go, Go, Go Public

LOS ANGELES -- In hotbeds of high technology around the country -- and especially in Silicon Valley -- a mating dance is being played out over and over again, as financiers and company founders race to cash in on the Internet frenzy.


Already, the commercial potential of the global computer network has produced scores of new millionaires -- at least on paper -- and vaulted fledgling companies like Netscape Communications and Yahoo! to the front of the newspaper business pages.


About 15 other Internet-related companies are hoping to rake in some chips in the coming months via the capitalist adventure known as the initial public offering, or IPO.


Conceptually, the IPO is simple enough: The private owners of a company sell some of it -- sometimes as little as 10 percent -- to the public in the form of stock. The private owners at that point generally include the company founders and one or more venture capitalists, who have previously invested several million dollars in exchange for a big ownership stake -- and the possibility of making 10, 20 or 50 times their money.


While not all successful start-up companies go public, most do eventually. The IPO has become a right of passage for generations of entrepreneurs -- especially in high technology.


But the mechanics of an IPO are intricate and unpredictable, involving a complex set of relationships among the company founders, the venture capitalists and the investment bankers, who assume responsibility for selling the shares to the public in exchange for a piece of the action. And with the IPO market red-hot, the dynamics of these relationships -- always fraught with competitiveness, greed and envy -- are more volatile then ever before.


Some of the extra drama results from the fact that today's Internet IPOs are among the most speculative in history: Yahoo!, for example, the hot offering this month, earned about $165 million for the company's two founders, former Stanford University graduate students Jerry Yang, 27, and David Filo, 29. The stock, which was initially priced at $13, began trading at $24.50 and soared as high as $43 before closing at $33 per share -- placing the total value of the company, including shares still held by the founders, at a hefty $848 million.


All that in spite of the fact that the product -- a "search engine'' for finding information on the Internet's World Wide Web -- is all but indistinguishable from that of half a dozen competitors and the company is notably lacking in significant revenue or profits.


A company called CyberCash, which went public Feb. 15 at a price of $17 per share, is now trading at around $30 -- meaning it is valued at more than $300 million. Yet the company has virtually no revenue and $11.2 million in debt, and it is anything but a sure bet in a highly unpredictable market for Internet payment systems.


In contrast, when personal computer software giant Microsoft Corp. filed for an IPO in 1986, it had been in business for 11 years, enjoyed a lock on a key software market and had sales of $172.5 million and a profit of $33.3 million for the previous four quarters.


"Revenues? Who cares? Profits? What's that?" Richard Shaffer, editor of the ComputerLetter, a New York-based newsletter for technology investors, asked rhetorically about the latest round of IPOs. "Fundamentals have ceased to matter to investors. What they're looking for is a sector like the Internet that has a lot of momentum."


They've certainly found that. Nearly $30 billion was raised in IPOs last year -- about $7.5 billion more than in 1994 -- and at the current blistering pace, this year's rake is likely to surpass the record $34.2 billion amassed in 1993.


About $8.4 billion was raised by high-technology company IPOs in 1995 -- more than in any previous year -- and another 15 Internet start-ups are likely to go public some time this year.


"There's a saying on Wall Street: When the ducks are quacking, feed them," Shaffer said.


The gold-rush mentality worries some, who fear companies are not being permitted to mature naturally and are thus hurting their long-term prospects in the quest for short-term profits.


"When investors start losing money, the next time around they don't trust the company or even an entire industry," fretted Vinod Khosla, a partner with Kleiner Perkins, which invested $5 million in Netscape and later netted $500 million.


half a billion dollars little more than a year later. Rob Glazer, a Microsoft veteran who started Progressive Networks, which makes RealAudio software for the Internet. "We've told the bankers, `No thanks, We'd like to defer it for right now.' But in an environment that's like a gold rush, if you don't jump into the public market it's like you have the wrong kind of haircut."





"Once you've done it, you can't go home again," said