A good valuation exercise is based more on an estimate of future potential than on track records of financial success. This valuation tenet holds good for new economy companies. The new economy companies hardly have assets or revenues worth talking about. They bank heavily on their future potential. Values here depend on the speed of Internet companies and their knowledge of the market. That is, Internet companies should be efficient to exploit opportunities that lie ahead. Only those companies that are quick to recognise the future potential will have the first-mover advantage.

Consider this example. Sensing the untapped potential in the online book store business, Amazon.com ventured into it much ahead of others. And within a couple of years, its pioneering efforts paid off: Amazon.com could create a niche for itself in online book selling. Even Barns & Noble, which later forayed into the online market, could not march ahead of Amazon.com.

One thing to be remembered here is this: first-mover advantage does not offer you profits on a platter. To make the best out of an opportunity, the Internet companies should be in a position to assimilate technological changes. Not just that, they should be flexible enough to adapt their business models to the changing environment and be able to control the cost of customer acquisition.

What should be given a greater weightage while valuing Internet companies? Most new-economy analysts feel weightage given to customer base should be greater than what is assigned to profitability figures. Their justification: in future, it is this customer base that is converted into profits for the Internet company. is accent on customer base gets a few Internet companies into trouble. In a bid to widen the customer base, these Internet companies advertise heavily. Consider the case of the Bangalore-based Indya.com which has been promoted by Pradeep Kar of Planetasia.com. Indya.com must have spent at least Rs one crore on press advertisements during the first week of its launch. "The company has spent too much money in a medium where shelf life is so short, sometimes just a day," says an industry analyst.

What determines profits in such a medium? Internet valuation experts argue that the difference between revenue per customer and the cost of acquiring him is one of the main determinants of profits.Over a period of time, revenue per customer tends to rise while the cost of acquiring a customer tends to slide down. Value of an Internet company depends on how fast this happens.

A caveat here, however. There is no versatile valuation methodology that could cover all Internet company variants. Consider this: methodology used to value Internet service providers (ISPs) is different from the one used to value portals and e-commerce companies. An e-commerce company gets a better multiple to its revenue from customer base compared to an ISP.