Who wants to be a dotcom millionaire?

The well-publicised collapse of pioneering dotcoms such as Boxman and boo.com have not destroyed internet startups' chances of attracting investment. But they have changed investors' focus.

Almost half of all multinationals are investing in dotcoms - many of them putting money into electronic procurement joint ventures, which promise to save them lots of money, according to a recent survey conducted by KPMG's Economist Intelligence Unit.

UK pension fund managers are also continuing to show faith in the sector as a whole, with Advent Venture Partners, for one, still attracting investors for its £300m technology venture fund - it raised £162m in its first six weeks of business.

And other high-technology venture capital funds, particularly in the US, raised funds before the plunge in internet stock valuations, so still have investors' money waiting to find a home.

But the most significant industry trend was indicated in a study undertaken by Ernst & Young (E&Y). This showed that investors are increasingly using non-financial performance indicators when looking for evidence of an organisation's viability.

A quality management team and evidence of executives' ability to implement effective future strategies lie at the top of the analysts' requirements, but market positioning, innovation and leadership qualities are other key factors.

Value management
What it comes down to, according to E&Y, is a company's current net value and the potential behind its future options for growth. "This equation is what shareholder value management in the New Economy is all about," explained Andrew Tivey, a partner in E&Y's Strategic Finance division.

"The old shareholder value management model, which concentrates exclusively on tangible assets and sales growth, profits, cashflow and return on investment is no longer enough. Our new model takes account of the hidden value of intangible assets and the business thinking that will lead to sources of future wealth," he said.

"Analysts have told us time and again that they are as interested in the excellence of 'soft' features such as strategy and management as they are in the excellence of a company's hard numeric models," Tivey added.

About 35 per cent of organisations that investors' currently include in their portfolios have been chosen because of these non-financial performance indicators. And the dependence on non-financial information rises in direct proportion to how unstable a sector is.

Such information focuses primarily on the quality of intellectual assets and how well protected they are. Investors also want reassurance that competitors are behind in the game, fearing that too many dotcoms will lead to dead dotcoms

But these findings reinforce other research conducted by PricewaterhouseCoopers (PwC). PwC argues that too often internet startups ignore the basic principles behind how to run a good business.

Ignoring customers
Many online companies have ignored their customers, focused on strategic partnerships and how to become market leaders, but overlooked fulfilment and even basic issues such as website design.

Where 31 per cent of traditional enterprises rated first-class fulfilment as essential for dotcom businesses, only 15 per cent of the dotcoms themselves believe that this is important.

Some 49 per cent of traditional organisations and 57 per cent of online companies also think the European dotcom sector is led by opportunists, who are keen to win short-term gains, but do not have the capacity to develop long-term strategies.

"Traditional companies' emphasis on fulfilment is the result of years of experience, whereas the dotcoms believe that strong marketing will persuade customers to log on to a website and order goods that never actually get delivered," says Bill Bound, ebusiness consulting partner at PwC's management consulting services.

"The lack of focus on traditional business skills is holding dotcoms back - their biggest challenge is to achieve financial credibility in the marketplace," he added.

In future, Bound suggests, investors will demand that internet startups turn in a profit more quickly and look for a management team that is capable of faster, more flexible and more cost-effective ways of operating the business.

Time is running out
The PwC survey also found that the profit amnesties given to internet startups in the early days are rapidly disappearing. They now have two to three years before their shares have to demonstrate acceptable price/earnings ratios - and some companies expect this fall to as little as six months.

"We would not back a company seeking funding from our incubator programme if it cannot prove it will be a profitable organisation in its first year of business," Bound explained.

Other research that has just been published by the European Commission suggests that European executives will have to look mainly to venture capitalists rather than banks for funding.

It also found that new European technology businesses are being held back in relation to the US and Israel, because less venture capital is available to them.

And European banks cannot fill that gap because borrowers need to have greater equity to be able to attract loans. The banks themselves are usually unable to judge the technical merits of companies applying for loans, while bankers generally do not have the skills to assess the value of their intellectual property.

And owning intellectual assets is not a substitute for holding cash in the bank when it comes to raising funds.

Ideas and business propositions
E&Y's Tivey suggests that analysts are developing more sophisticated tools for assessing the viability of internet startups, however. He believes that they are now starting to concentrate on the uniqueness of ideas and the quality of business propositions.

"A lot of the investments they are looking at are highly valued and have large amounts of intangible products attached to them," he says. "These investments are growth stocks and the analysts have to get their heads around how much is there."

"There is evidence now to suggest they are looking at what tests to use on the business models. These tests vary from house to house. I don't think analysts have been particularly focused on this, but now they have to be," Tivey continued.

"Credit Suisse First Boston really does seem in the technology sector to be putting more focus on strategy and how to value this. Some of the bigger houses are showing efforts to get into this. That is changing,"

So it seems that internet entrepreneurs with good proposals can still raise the funds to makes their dreams become reality. But they now have to answer a lot more questions to get their hands on the cash.