Steve Harmon bills himself as the first Internet stock analyst. In 1994, he started covering the fledgling Web industry for Paul Kagan Associates and later for Jupiter Communications. He subsequently developed a following among online investors by predicting, on the eve of its 1996 initial public offering, that Yahoo! would become a major Internet force. He also was an early fan of such hot Net stocks as CMGI and eBay. In August, Harmon, 35, started his own venture-capital and investment firm in San Francisco,, with backing from such Silicon Valley heavyweights as Netscape Communications co-founder Marc Andreessen. Personal Finance Editor Susan Scherreik spoke with Harmon about his two new funds, which he plans to launch this spring: the e-harmon Net 30 Index Fund and the e-harmon Internet Fund.

Q: You devised the index for your Net index fund. What is it based on?

A: There are roughly 300 public Internet companies. The e-harmon Net 30 index will track the top 10% of these companies based on sales. The index will be rebalanced quarterly.

Q: Why sales?

A: Sales are the most important measure of an Internet company. If there is no revenue, there is no company. The problem with ranking Internet companies by other valuations, like market capitalization, is these stocks often have thin floats and too many investors piling in. So Web companies with the largest market caps can have little or no revenue but be the investing flavor of the week.

Q: What sort of stocks will you buy for your other fund?

A: Our goal is to invest in market leaders that will be around in three to five years, like Yahoo!, eBay, and Commerce One.

Day-trading isn't what we're about--that has nothing to do with uncovering value or understanding the best business models on the Internet.

Q: What do you look for in a Net company?

A: The company must meet a real need--like offering free e-mail--and grow rapidly because customers will tell their family and friends about it. You can't create a successful Web company simply by making a big branding and marketing push. I also want to see sales growing, at a minimum, in double digits and preferably in triple or even quadruple digits.

Q: Any other qualities you deem important?

A: I look at how big a universe a Web company can tap into. Auctions and e-mail, for instance, are massive opportunities. But if it's, the market segment isn't large enough to support a couple of companies. I also want to know how many other companies are doing the same thing. First-mover advantage is important. Lastly, I want to see management experience, though of course there was no seasoned management in the early days of the Internet.

Q: Any Internet sectors you would avoid?

A: Right now, e-retailers. Competition is high, margins are low, and brand-building is expensive.

Q: Isn't it late in the game to launch Internet funds?

A: We are at the start of a business-to-business e-commerce revolution that will unfold over the next 10 to 15 years. The process of businesses buying from and selling to each other will be totally automated. The wireless Net will also be huge. Computers at work and at home will be integrated. There's a lot of innovation to come.

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