Betting on New Businesses

Capital goes to the dot-coms instead of companies with old business models because it means efficiently starting from scratch.
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The denial phase of the non-dot-coms makes so much sense. When one of their own tries to make the switch, all they get is grief. For example, I can't believe how well Barnes & Noble's (BKS) - Get Report dot-com is doing, but nobody gives a darn. Yesterday's buyback doesn't seem to matter much to anybody.

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Cramer's Latest. We know firsthand that the bricks-and-mortar toy companies, as much as they want to be taken seriously, have sites that are unreliable and crash at the most awful of times.

But the worst may be when a company gets it, knows it has to move and is hamstrung by our old favorite bugaboo, earnings estimates -- something that nobody really still cares about when it comes to B2B or e-tail players that are in the brand-building phase.

For example, have you noticed how many mundane parts and tools and pieces of machinery are now being procured via the Web? That was always


(GWW) - Get Report

bread and butter, and I figured that nobody would get it more quickly than Grainger.

And indeed, the company is moving forward with development of its Web site. It is doing so swiftly and with alacrity. But sure enough, it is killing the earnings. An excellent


note on the subject by Martin Sankey said pretty much everything that faces the dilemma of even the most perfectly positioned bricks-and-mortar souls: "We are reducing our fourth-quarter and 1999 EPS estimate by 5 cents per share as costs remain high, outpacing revenue acceleration. Grainger is in the process of establishing year 2000 spending budgets and one item is an $80 million increase in e-commerce outlays vs. the $35 million to $40 million budget for 1999."

So Grainger gets no respect for its efforts, and meanwhile the

B2B plays are funded with Monopoly money and can spend Grainger into the ground.

The amazing thing about this dot-com movement is


that it is occurring, it is that it is so well-funded. A company like Grainger, as strong as it is, can't possibly outspend a



or a

Commerce One



In fact, either one of those could do a spot secondary and raise enough money to block Grainger's profitability for as far as the eye can see. Capital is efficient. Capital doesn't want to fund companies with old business models, even well-run ones, if it can start from scratch with new ones.

The best way to understand this is to consider two nations, one with a strong tradition of cavalry and another with no cavalry and an orientation toward new technologies. You would bet on the latter, even if it had nothing but plans on the drawing board, because to bet on the former is to meet resistance, sloppy allocation of capital and compromise.

That's where we are in the dot-com world right now. It is where we have been.

It shows no signs of changing.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Goldman Sachs and VerticalNet. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

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