On such a full sea are we afloat
And we must take the current when it serves
Or lose our ventures
- Shakespeare
The invincible trio seems to be no longer so. The information, communication and entertainment stocks, popularly known as ICE stocks, are on a meltdown. Of late, the bourses have been reminding investors that information technology stocks need not always move up. They can also fall. And when they do, they fall rapidly taking the whole market down with them.

When sound ICE stocks fall, there is not much worry. For, there are bound to be corrections. After all, corrections are routine phenomena in stock markets around the world.

However, the cause for concern is this: with every sound ICE company that falls, a bunch of weaker companies crash. "There are basically two categories of ICE companies," says Sudhir Sethi, director, Walden Nicco India Management.

Category A ICE companies are those with clear vision, good corporate governance norms and an efficient management team. From a momentum perspective, category A companies are those with an economical size of business and the capability to sustain an ongoing concern globally.

"I am really worried about the categoryB companies, which do not have a management team in place. Intellectual and capability gaps between the promoter and the next layer are huge in these companies. I do not know whether these companies would be able to gain and retain investor confidence over time. "Compounding the crisis are make-haste and fly-by-night infotech companies. As information technology stocks hit the roof on the bourses, several software companies readied themselves with their initial public offerings (IPOs).

Not just that. Several non-banking finance companies switched over to software overnight. Says Sethi, "The big danger about the hype for ICE stocks is this: all ICE companies are clubbed together. When the bubble bursts, all of them might go down," says Sethi.

Bleak prospects
Such predictions make IPOs by Internet companies a difficult ballgame. No one knows for sure what the success of an Internet IPO would be. Skumars.com is the only Internet company to tap the market to date. But, Skumars.com is an exception. For, its IPO was so small that over-subscription was guaranteed.

While the primary market in the US is already saturated with Internet IPOs, the IPO fever is yet catch on among Indian Internet companies. Indications are that a host of indian internet companies are just biding their time to plunge into the IPO market.

What is preventing the Indian Internet IPOs from taking off? The problem: most Indian Internet companies do not have a sustainable business model. Such companies should be clubbed in category B. Internet companies with sustainable business and revenue models will be among the first to hit the IPO market. Sound dot-com companies such as Rediff.com, Fabmart.com and Indiainfoline.com should figure in the list of IPO probables.

Even these sound dot-com companies have little to cheer about. For, payment problems are galore thanks to the absence of clear payment gateways. Most Indian banks are yet to go electronic and thus electronic fund transfer is still the preserve of only a few private sector banks.

Adding to these woes is the issue of e-tailing logistics. Most e-tailers are not able to deliver the goods and close a buy-sell transaction. For, Indian couriers and the logistics industry are just not ready to handle rising volumes of online purchases.

That is why the IPO market might not see Internet companies in a favourable light. The chances of an IPO succeeding before an Internet company develops strong business and revenue models are certainly bleak. The American markets recently witnessed a sell-off in those Internet stocks, which seemed very strong just the other day. This phenomenon could well be replayed in the Nasdaq-obsessed Indian bourses.

Exploring options
That means Indian Internet companies need to be cautious about launching their IPOs. They should wait until they are able to build up strong business and revenue models, and then go for an IPO. The question now: do Indian Internet companies have financing alternatives during the pre-IPO phase?

Certainly, Internet companies are not capital-intensive and call for a small start-up capital, unlike their counterparts in traditional brick-and-mortar business.

However, Internet companies need steady infusion of cash once their sites and portals are launched. These companies rely heavily on advertisements to bring in traffic. And to sustain the traffic, they typically need heavy cash inflows to fund their advertisement campaigns.

Consider this example: Indya.com is reported to have spent around a crore on advertising in the first couple of weeks after its launch.

Estimates are that funds of similar magnitude need to be sunk in advertising in the future too. After all, the site or the portal has to keep its recall value high. Remember the dot-com cliche that competition is just a click away.

Take a look at hoardings put up in Mumbai or other metros. Hoardings from dot-com companies easily outnumber those put up by companies from the brick-and-mortar industries. Perhaps, for every hoarding from a brick-and-mortar company, there are four to five hoardings from dot-com companies. On an average more than 80 per cent of anInternet company's total expenditure is on advertising and marketing.

How does an Internet company find finance to meet all these overheads? For Internet companies, there aren't many financing options. "Loans are out of question," says Munesh Khanna, country head of Arthur Anderson India. For, dot-com companies do not have any assets and are yet to register profits. Then, on what basis can the financial institutions lend money to them? The only financing option before dot-com companies is venture funding.

A necessity
Venture funding is the most suitable financing option for Internet companies for quite a few reasons. One, venture capitalists assume the whole risk and thus are more concerned about the venture.

Two, venture capitalists are mostly past entrepreneurs and are capable of lending a direction to the company's management. And finally, they act as value-adding investors playing non-financial roles of financial advisors, corporate strategists, sounding boards, marketing info-providers and management recruiters.

Certainly venture capital is a necessity for nurturing entrepreneurs in a climate of free initiative. A Coopers and Lybrand study indicates that a majority of venture-backed companies feel that had they not been backed by venture funding they would have neither existed nor grown fast (see chart).

The study also reveals that a venture-backed company showed a more consistent growth in employment creation in investment creation and even in exports. A strong venture capital market is what is supposed to be the driving force behind usa's spectacular growth in technology. Companies such as Intel might not have been possible without venture backing.

Despite venture capitalists, dot-com companies are starved of cash. Reasons: their continuing inability to access loans, be it for working capital or long- term funding needs. Compounding the crisis further are higher ad-spends aimed at fuelling growth and keeping the company's image alive in the minds of browsers.

This is a major drain on an Internet company's finances, which are already slender. Consider the example of a domestic player such as Satyam Infoway or an overseas player such as Yahoo.com. In a bid to gain critical mass which could ensure profits, Internet companies are gobbling up players to grow bigger and faster. This eats into the capital funds, even into the profits of an Internet company. The need for funds, therefore, becomes all the more acute.

The non-cash option
Internet companies have found a way out of this predicament. They are reverting back to the barter economy. Shares are being increasingly used to finance mergers and acquisitions and pure cash deals are becoming rare. The dot-com companies have gone a step further.

They have signed agreements with prominent media players to buy advertising space and time through issue and allotment of shares. Yes, shares have become the new currency in the dot-com world.

Several such share swaps have taken place during the last couple of years in the US. Prominent media players active in such share swap deals are NBC and CBS (see box). The latest to join this league: New York Times and Time Warner's CNN.

Most online companies try to extract extra value from network television partners. They clamour for advertisements targeted at specific consumer groups. For instance, according to iVillage's Securities Exchange Commission (SEC) filing, NBC's agreement with iVillage obliges the network to run iVillage advertisements in programs that are targeted at women aged between 25 and 49.

A few other deals are structured to offer the television networks different ways to work out the price of investments. During June last year, CBS acquired a 35 per cent stake in Switchboard.com, an online telephone directory and search engine, for $135 million.

It wasn't all in the form of bartered advertising and promotions. Switchboard got rights to use the CBS name, which the network thinks is worth $40 million over the next ten years.

This deal offers Switchboard name-recognition and credibility. But, the image polishing works both ways. Associating a dot-com company with CBS, a network known for its aging viewers, can bring many benefits.

One major benefit is this: it helps them to get a foothold in the dot-com revolution without taking large risks. Anyway, most of the deals are productive ways to unload unsold advertisement time.

Such deals are also catching on in India. Business Standard, a financial daily, recently entered into a share-and-cash deal with Pugmark. The details of the deal: Business Standard will use the services of Pugmark for site-hosting and site-maintenance in exchange for providing free advertisement space besides cash payments.

Some Indian public relation agencies are also offering their expertise for shares instead of cash payments. Consultants such as Arthur Anderson are active participants in these non-cash arrangements. As most start-ups lack the ability to meet the fat bills of a consultant, they pay for the services by issuing stock.

There is nothing to lose in such deals. These deals benefit both sides. While vendors of services are able to get a foothold in the emerging dot-com boom, the dot-com ventures are able to finance their working capital needs. Sounds like a win-win situation.

Barter deals by NBC and CBS
NBC