This excerpt is part of Entrepreneur.com's Second-Quarter Startup Kit which explores the fundamentals of starting up in a wide range of industries.
In Start Your Own e-Business, the staff at Entrepreneur Press and writer Rich Mintzer explain how to build a dotcom business that will succeed. In this book, you'll find recipes for success, road maps that pinpoint the hazards, and dozens of interviews with dotcom entrepreneurs who've proved they've got what it takes to survive in this sometimes fickle marketplace. In this edited excerpt, the authors discuss the five primary reasons other dotcom businesses have failed in the past so you can learn from their mistakes.
Before getting your e-business off the ground, it's worthwhile to see why so many dotcoms have fallen by the wayside. Here are the top 5 reasons:
1. Bad balance-sheet math. At no point did the companies that crashed and burned generate financial statements that indicated any reasonable relationship between income and expenses. Too many startups have simply spent money before they earned it. You need to recognize that you have to crawl before you can walk and then take small, baby steps. Yes, you may need a good team around you, but they need to believe in the business and understand that there will be some lean years.
That being said, you don't need the ritzy office, the high-powered law firm or the overpriced consultants. With all sorts of financial software programs on the market, you should be able to keep your expenses in some kind of rational alignment with your income. Hint: Do the math from day one, and never stop doing it until you've earned enough to have accountants and financial analysts doing it for you. And you should still double-check what they do regularly.
2. No revenue model. The core question for dotcom startups is "What is your revenue model?" This is shorthand for "How do you envision bringing in income? What will your revenue streams be? How do you expect to make a profit?" Potential investors will ask this, as will would-be employees, partners and anybody considering a financial future with your dotcom.
In the early years of dotcoms, entrepreneurs could get away with a lot of vaguely explained responses that involved a mix of advertising dollars and ecommerce, and in most cases, the answer was accepted. It was a mistake because, as the failed dotcoms proved, nobody had ever really put flesh on the revenue models. Today, despite the fact that investors are savvier, simple business logic prevails. You need a clearly defined source of revenue. In most cases, you'll actually need more than one revenue stream before you can launch your business website.
3. No clearly defined exit strategy. Every well-conceived business startup comes equipped with an exit strategy for investors. An exit strategy is how investors will get their money out of the business, and when. Founders with hands-on roles in the business should also have a plan for getting out (selling, passing it on to your family, etc.), but angels, venture capitalists and such want to know how and when they'll see a return on their investment.
What are your possible exit strategies?
1. Going public: a prime choice for many dotcoms
2. Getting acquired by a bigger fish
3. Bringing in new investors to buy out others
There's no saying which exit strategy is best, but what can be said is that no CEO needs anxious investors calling every few minutes to ask when they might cash out. And that happens all too often when there's been a lack of clarity--even realism--about the investment. This means that in early talks with investors (even if it's your folks who put up the money), you need to be honest about how you see them getting their money back and when. Be as realistic and conservative in your estimates as possible.
4. Having no marketing plan. Too many dotcom businesses started with great ideas, terrific products or services, and the mistaken notion that if they built the website, visitors would simply appear. Brick-and-mortar businesses base a lot of their future dreams of success on the old adage "location, location, location." For a retailer, being in the right location would generate foot traffic and that could make the difference between success and failure.
Websites, too, need to generate visitors who will hopefully be converted to customers. Marketing is essential, and it must be well conceived and implemented even before you launch your site.
5. Being blinded by technology. You need technology for your online business to exist. But technology cannot, and will not, handle all your concerns. It's a tool with which you run your business, not the brain trust behind your company. Too many e-business owners are so overwhelmed by the possibilities of technology that they forget there's always a human element to business that even the best technology cannot replace.
The sad fact about many failed dotcoms is that they could have been successful, maybe not on the lavish scale hoped for by the founders but profitable nonetheless. And they blew it by forgetting that in the end, business is business and it requires sound financial planning, marketing, and products or services plus excellent customer service. While it might be fun to appear on the cover of a magazine, it's ultimately more fun to be on top of a steady stream of black ink--and it's no fun at all to manage a business that's dripping red ink.
The message for you: Learn from the many mistakes of failed dotcoms.