Ignoring biz rules lethal for LatAm Net companies

Violating basic laws of economics and market dynamics has led to the death or near bankruptcy of many of the Internet companies launched in recent years to serve Latin America, speakers said last Thursday at the LatinTech 2001 conference in Miami.

Many Web portals, Internet service providers, online retailers and business-to-business marketplaces have paid a high price for disregarding basic business practices, leaving a trail of abandoned and dissatisfied users along the way.

One basic rule that many failed to take into account when launching their businesses was the law of supply and demand, said Annika Alford, an International Data Corp. (IDC) analyst. The number of providers in the Internet market has so far been too high and the number of customers too small, she said.

“We’ve had more supply than demand in Latin America’s Internet market,” she said.

Alford warned that the new crop of companies building data centers to provide managed services could be the next to fall victim to this oversight, as could the carriers hurrying to launch services based on WAP (Wireless Access Protocol).

The carnage among Latin American Internet companies has scared off investors, many of whom got badly burned in the past two years, as Latin America-focused startups crashed and burned, taking with them millions of dollars of capital.

Thus, this situation makes the possibility unlikely of an IPO (initial public offering) in this sector for at least six months, and more likely for a year to come, said William Landers, director of Latin America technology research at Credit Suisse First Boston Corp. (CSFB). The stock valuation of the four public companies in CSFB’s Latin America’s Internet sector – StarMedia Network Inc., America Online Latin America Inc., Terra Networks SA and El Sitio Inc. – fell a combined 85 per cent in 2000, Landers said.

When the IPO pipeline reopens, much more stringent rules will apply for screening candidates, he added. His company will be looking for companies that generated at least US$10 million in revenue in the quarter preceding the planned IPO and that expect to become profitable no later than six months after the IPO, he said.

Good management is another thing investors will be looking for when evaluating companies focused on Latin America that come seeking funding, said Paulo Caldeira, a director at CVC Latin America, the Citigroup Inc. unit devoted to private equity and venture capital investments in the region. There are a small number of highly qualified top managers in Latin America, he said.

Ultimately, it all boils down to keeping in mind the most obvious rule of all.

“The key issue is profits,” said Andre Bhatia, a principal at Newbridge Technology Ventures.