Look beyond Google IPO Euphoria

Investors are already getting exuberant about Google's planned $2.7 billion initial public offering. But they should remember the lessons of the all-too-recent dot-com market meltdown.

The public excitement generated by Google Inc.s announcement that it has filed for an initial public offering that could raise as much as $2.7 billion has also revived unsettling memories of the last dot-com market bubble, which crushed so many fond dreams when it collapsed in late 2000.

But there are a number of reasons why Googles prospects are far more sound than so many of the fabled Internet startups that crashed and burned with startling rapidity during the last market boom.

Google is no Pets.com, WebVan.com, DrKoop.com or even Amazon.com in its early days. Thats because Google has all of the things that these ventures didnt–solid revenue, profits and a real business plan. With the registration of its IPO papers with the Securities and Exchange Commission, Google disclosed that it generated a profit on revenue of nearly $1 billion.

Even with these apparently bright prospects, investors should keep in mind what happened in the all-too-recent dot-com market meltdown.

/zimages/6/28571.gifClick here to read more about Googles IPO filing with the Securities and Exchange Commission.

So many of the extinct dot-coms went public with the intent of raising millions that they would use to build their business infrastructure and market niche—long before they had proved that they actually had an economically viable business plan or that there was a sustainable demand for their service.

These companies used venture funding for massive advertising campaigns that lent enough market recognition to their corporate names to make them bankable on Wall Street.

In those days, there was some supposed magic in the Internet that meant that the well-established rules of economics and business management no longer applied. If you were able order books, wine or pet food over the Internet, that naturally meant it had to be more efficient and profitable than any mail-order catalog business that went before it.

There was talk of "frictionless commerce" and "disintermediation"—euphemisms for getting rid of the middleman. But they still couldnt answer the question of whether customers would be willing to pay a premium to buy a 20-pound bag of dog kibble shipped overnight by express mail. The answer, it turned out, was no. It was still easier to go to the discount store down the street.

The failure of dozens of dot-coms cost stock-market investors and venture capitalists billions of dollars. Those who benefited most from these short-lived companies were mostly senior executives who cashed in their founders stock before the bottom fell out. Many of them escaped the stock-market debacle of 2000 and 2001 with their fortunes intact. Many small investors, however, are still licking their wounds.

Next Page: Googles success in search doesnt ensure long-term value as a public company.

John Pallatto

John Pallatto

John Pallatto has been editor in chief of QuinStreet Inc.'s eWEEK.com since October 2012. He has more than 40 years of experience as a professional journalist working at a daily newspaper and...