InfoUSA boss says -- Bet on Bootpolishboys.com but don't count on it

InfoUSA boss says -- Bet on Bootpolishboys.com but don't count on it
Vinod Gupta

Just a couple of months ago I was in India. While having my shoes shined, I heard the shoeshine boy say that he, and hundreds of other shoeshine boys in India, are compiling a database of all their customers. He explained how he is creating a website named Bootpolishboys.com that will contain this database, along with the customers' e-mail addresses. He also told me that a local investment banker from Hindman Dachs had valued their enterprise in billions, effectively increasing India's per capita income by $10 per year. This shoe polish boy was already dreaming of a castle, yachts, blondes and a fleet of G-4's to shuttle him around the globe. After listening to him, I knew there was something wrong with this whole Internet picture.

Okay, enough fantasy, I'm just using my Indian fairy tale to help make a multi-billion dollar point.

To get more serious, after I returned from India I looked at my portfolio of Internet stocks. I had a stock called GlobalQuest, in which I had invested $100,000. It then became public and was worth millions of dollars, but I could not sell the stock because of lock-ups. When I asked my venture capitalist, he said not to worry. When the lock-ups expire, you can cash in your stocks. That day came and went, but I still could not sell my stock. My venture capitalist said that if we sell the stock, the prices will come way down. When I asked him what I should do, he responded, "I don't know, hang on to your stock." After a while, GlobalQuest was sold to another portal called National Online, which bought GlobalQuest for a billion dollars in its own stock, valued at 50 times revenue. Shareholders were jumping up and down with joy because that would give them more liquidity so they could sell the stock in National Online and get their real cash in Yankee dollars.

However, we can't sell the stock because it will take three months for the transactions to go through, and now the value of GlobalQuest stock depends upon the value of National Online stock. So here we sit and wait. Meanwhile, National Oneline has decided to buy another media company called Times Jones Corporation. Since the shareholders did not like the merger, the stock of National Oneline has dropped even further; however we can do nothing but wait and watch our value in GlobalQuest keep coming down. But who am I to complain? My venture capitalist said that since I got in the game real early, I would still make a lot of money when I sell the stock -- so long as there are new buyers in the marketplace to buy National Online stock.

When I analyse this, I find it to be like a pyramid valuation scheme. In a pyramid scheme, the people who get in the game early make most of the money. The people who come in last are left holding the bag and lose their investment. There are the same similarities in Internet companies with huge evaluations. There are a few Internet holding companies which have many Internet investments, and they are called "keiretsu", a Japanese word meaning family. And they keep trading companies and stocks amongst each other with funny money or, in other words "Internet valuation" stock. At the same time, the public is so enamoured by these Internet funny money valuations that some are pulling their money out of safe investments and can't wait to invest in these go-go Internet funds. I asked a friend who runs a multi-billion dollar mutual fund, about these Internet stocks. His reply was: "Ninety per cent of them will go to zero, but I have no choice. My investors want me to invest in the Internet. I have to follow theirwish, otherwise I will not have a mutual fund to manage."

My advice to these investors is, hang on to your value stocks like Coke, GE,Disney, IBM, with real revenue and real profits, and do not be mesmerised by this whole pyramid valuation. When the dust settles, there will be a lot of companies going broke and a lot of people who have lost a lot of money.

I hope you all become Bootpolishboys.com billionaires. You can bet on it but don't count on it.

Vinod Gupta, an IIT Kharagpur alumnus, is the founder of InfoUSA Inc, a company that offers online information on firms. A great Indian success story, he also helped start a management school in his alma mater and was in India recently to start a women's polytechnic in his village, Manesar.