Shopping for Bargains in Europe's High-Tech Rubble

BARCELONA -- Europeans revel in their long and glorious history, but when it comes to the Internet, the Continent is woefully behind the U.S. But now Europe is catching up on one front: After just six months, Europe's brief flirtation with a New Economy-driven bull market appears to be coming to an end. As in the U.S., investor enthusiasm for "Euronet" companies is waning. Publicly traded Internet stocks are taking a beating, IPO opportunities are vanishing, and funding for start-ups is as dry as a summer day in Spain.

On the heels of U.K. fashion retailer Boo.com's high-profile collapse last week, and with financial markets skittish, Internet companies have been pulling the plug on planned IPOs. In the past few days, U.K. Internet ventures Telecity and ProjectTelecom have cancelled offerings. Online bank Egg, a unit of insurer Prudential, cancelled an offering only to put it back on the schedule Wednesday. Between October 1999 and March of this year, "anything could come out," observed Rory O'Sullivan, a principal at Robertson Stephens International in London. "That window has now slammed shut."

Against the backdrop of dashed hopes, Internet CEOs and investors gathered in Barcelona for a lavish conference sponsored by trade magazine The Industry Standard. The conference ended Wednesday. For the most part, they tried mightily to put a brave face on the situation, touting the high growth rates outside the U.S. -- albeit off of a smaller base -- and a return to long-term investment strategies. And at least one courageous company, consumer group-buying site LetsBuyIt.com, is, for now, still planning to proceed with a June 7 IPO.

Still, it was hard to avoid "the B word" as Boo.com was invoked again and again as a cautionary tale. "In the last few weeks there has been a lot of soul searching," says Ernesto Schmitt, the CEO of chairman and president of online music retailer PeopleSound. "It is no longer good enough to put a dot-com behind your name." Real revenues, he says, are what matters.

Internet insiders are predicting a shakeout that could prune the European landscape before it's had a chance to flourish. "Unlike the U.S., which had a period of hypergrowth before seeing a shakeout, Europe will have a shakeout before it sees hypergrowth," says Christopher Spray, senior partner at Atlas Venture in London. Boo may have been just the beginning.

In the weeks and months ahead, Europe is expected to undergo a consolidation that some say is much needed across Internet markets like online travel and ISPs, where numerous contenders are jostling for a the same customers. Jim Rose, CEO of QXL.com (QXLC Quote), a London-based auction site, says his company is leading what will be a broad consolidation. QXL has acquired eight companies across Europe in less than eight months, including the recent purchase of Germany's Ricardo. "We were the first in Europe to really do that. Others will have to," says Rose.

Another category ripe for the picking is content companies, according to Robertson Stephens' O'Sullivan. "All the ISPs realize they need to go out and acquire content," such as sports, health care, weddings, and other areas, he says. Many niche content players, such as Sportal and sports.com in sports, and confetti and alafolie for wedding information, were banking on IPOs. "These [acquisitions] are good exit options for them," says O'Sullivan.

No surprise, bargain hunters cruised the halls of the Standard conference in search of deals. M&A specialists Broadview & Assoc. were scouring the crowds for possible business, and venture capitalists were out in force, buoyed by the cheap valuations. "Right now, it's very good for us," says Suresh Patel, director of strategy, finance & administration for Europe, the Middle East and Africa for Compaq(CPQ Quote). The PC maker is looking to swap hardware and equipment in return for equity stakes in promising European technology companies, particularly those in wireless and mobile.

Still, many VCs see reason for optimism, compared with the carnage in the U.S. "Europe did not have that level of excess; there simply wasn't the funding available to go to that excess. To us, [Europe] seems more attractive," says Atlas Venture's Spray. "Europe may develop more slowly, but the leaders will be able to impose themselves on the market without all the noise."

Neil Rimer, a general partner at Index Ventures, argues that the downturn "will have a favorable effect on valuations that will allow us to build companies in a rational way." Index, based in Geneva, recently raised a $180 million fund earmarked for Europe.

Indeed, not all companies are being shut out. Flutter.com, which lets members place wagers on everything from business events (will the ECB raise rates?) to sports, just snagged funding from Benchmark's new European fund and from Chase Capital. The start-up estimates it will be cash-flow positive in 24 months. "To build the company we want to build, we need cash," says CEO Josh Hannah. "Companies like us will have to rely on private markets."

And other start-ups are finding they may be in the right place at the right time. eTango Technology, a Barcelona-based start-up building customer-relationship management tools, is currently looking to raise a first round of $5 million. "Everyone is so turned off to portals and e-tailing," says Scott Ermetti, a co-founder of eTango. "The interest in what we do -- tools and software -- is much higher than it was six months ago."

Nonetheless, some attendees were concerned that Europe's fledgling Internet community was not taking the market downturn seriously enough. Executives at the conference "have been a little too self-congratulatory," says Thomas Hoegh, managing director of Arts Alliance Advisors, a VC fund. "This industry is in crisis."