Is the silly season for investing in Internet-based companies about to restart?

If so, hang on to your mouse, for the bright minds leading companies into the latest round of the buying spree are prepared, once again, to pay what seems like top prices for the online companies that survived the last shakeout.

Of course, what may seem a relatively high price now will be forgotten if the purchased companies make enormous sums of money for their investors. Over the last week two major purchasers of online companies could signal the start of a new round of investment in the sector.

IAC/InterActiveCorp announced this week that it would buy Web search provider Ask Jeeves Inc. for $1.85 billion in stock. Earlier this month IAC announced its intention to buy catalogue and online retailer Cornerstone Brands for $720 million.

Meanwhile Yahoo Inc. has announced it is acquiring Flickr Inc., an online photo-sharing company. The price was not disclosed. What's different this time around? Firstly, there are a lot more people on the Internet now and it is truly integrated into many people's lives, whether at work or at home. Secondly, a lot more people are getting broadband or wireless networks, increasing their access to more sophisticated fare.

In other words there's a more tech-savvy market out there waiting to be plucked by a variety of companies who have a better idea of what works on the Internet and of their target customer base - at least we can hope lessons were learnt in the last buying spree. Hopefully, Bermuda, one-time host to some of those failed companies, can also cash in on the upsurge in interest in a more level-headed market.

The Internet boom and bust lasted from 1996 to 2002. From January 2000 to April 2002 at least 835 Internet companies shut down or declared bankruptcy, according to Business Plan Archive (BPA), set up as a repository of all those failed business plans.

An analysis of the archive (www.businessplanarchive.org) by Webmergers, Inc. (www.webmergers.com) says the top ten lessons culled from the “Dot Com Meltdown” should instruct investors this time around. Read carefully and decide which ones are less or more of a factor in the more mature era of dot.com investing.

One: The major miscalculation investors made was to massively overestimate the speed at which the marketplace would adopt the Internet's technological innovations.

Two: Dot.coms forgot that innovations almost never replace existing products but rather typically worm their way into the mix and inhabit their own niche. Business plans were therefore based on inflated revenues.

Three: Many of the web's wrecks came to market too early with high-cost products well before the infrastructure was ready to receive them. Four: Many failed Internet start-ups began with ideas that involved little more than shovelling an existing business model onto a web site - or copying another company that did it.

Five: Even the most disciplined investors concluded that the rules really were different and eventually rushed in at the end.

Those who jumped on the fads early and cashed out ended up with a tidy profit. That depended though on the lemming-like herd getting into a speculative frenzy. Will that happen again?

Six: Free is folly. Many failed business plans were built around the idea of giving something away free and making it back on other bundled products or advertising.

Seven: A large number of entrepreneurs decided to use the Internet, the “ultimate narrowcasting medium”, to reach the widest and most undifferentiated consumer markets.

Eight: The $50 million rule can kill. Many dot.com casualties fell victim to the temptation to gin up business plans to meet the size criteria of the typical venture capitalist.

Nine: Many of the disasters stemmed from business models that required the start-up to build both a critical mass of buyers and a critical mass of sellers.

Ten: Investors need better predictive tools to plot the speed at which new technologies will spread.

Meanwhile Webmergers notes that merger and acquisition activity in the information technology sector from February 26 this year to March 3 amounted to 42 transactions. Fourteen deals had declared values worth a combined $1.05 billion. Of the total I counted 14 deals directly related to Internet development. The total number would still support the M&A revival hypothesis in the sector, Webmergers notes.

So while the dot.com sector seems to be picking up again, I would caution you to keep your eyes on the numbers instead of being dazzled by them. Some of the last excesses of the previous boom are only just now being cleaned up. This week Time Warner Inc. agreed to pay $300 million to settle charges that it overstated its AOL online advertising revenue (by at least $500 million) and boosted the number of its subscribers.

The Securities and Exchange Commission probe helped to scrub about US$200 billion in shareholder value from the books since AOL purchased Time Warner in 2002.

“As we observed above, the biggest mistakes of the dot.com bubble were mistakes of timing - of misjudging the speed and direction of development and adoption and placing investment bets accordingly,” Webmergers concludes.

I would add: “And also a belief in fictitious numbers.”

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Contact Ahmed at ahmed.elaminwanadoo.fr. Go to www.SecureBermuda.com for security updates.