TIME IS NOW FOR HIGH-RISK NET START-UPS, INVESTORS SAY.

Byline: Yardena Arar Daily News Staff Writer

Internet start-ups are still hot on Wall Street, but a chill may set in by year's end.

That was the consensus forecast last week by a panel of investment bankers and venture capitalists at Digital Hollywood, a two-day exposition and gathering for entertainment, communications and technology executives.

"Everybody believes it's play now or don't play at all," said Ann Winblad of Hummer Winblad Venture Partners, an Emeryville company that last year backed 10 start-ups, five of them Internet based.

"By the end of 1996, the venture capitalists who made stupid investments will know it, and will talk about it," she explained. "Those who are sitting on the fence will never jump over."

Lee Jefferies, managing director of Jefferies & Co. Inc. in San Francisco, said he didn't expect to see too many clear-cut Internet successes emerge in 1996.

"This is a transitional year," he said. "There's going to be a lot of scrapping out there."

Winblad said Internet start-up costs are relatively cost-effective, especially with the proliferation of companies leasing web servers and other equipment that would be too costly for a new company. Consequently, they are attracting a lot of venture capital.

"The average start-up check is getting larger - not because the company needs it, but because the money is there," she said. The typical start-up raises $3 million to $5 million, "but a lot of that is put in the bank."

Francine Sommer, general partner in Gabelli Multimedia Partners of Rye, N.Y., said the most difficult aspect of investing in an Internet start-up was the lack of proven business models.

"It's not like other fields, where venture capitalists can define what the business model should be," she said. "That means the risk level is much higher. . . . My only way of dealing with it is to get on the curve as early as possible."

But Alessandro A. Piol, managing director of New York-based Chancellor Capital Management Inc., said his company was less likely to invest in a raw start-up than in a company in the later stages of development.

"The price may be high, but at least you can assess the risk," he said.

All of the panelists said the soaring stock prices and enormous market valuations of Internet companies such as Netscape, DigiCash and Yahoo may backfire for newer companies hoping to emulate these early successes.

"In these deals, there's no logical reasoning for any of these valuations," said Barry M. Weinman, general partner in AVI Capital of Los Altos. "They continue to set expectations which are very unrealistic. . . . For investors in the public market, it seems that there's going to be a lot of disappointment out there that may spill over to people being a little more cautious about these industries."

Weinman cited the recent example of VocalTec Limited, which has developed technology to let people talk long distance over the Internet. While underwritten by a prestigious investment banker, the stock price did not go up the day of the IPO, which is unusual lately for an Internet related business.

"If you get a few of those, people who buy IPO's would worry that that could be the tip of an iceberg," Weinman said.

However none of the panelists was ready to predict an Internet stock crash.

"It (the Internet segment) could actually grow into these valuations," Isgur said.