Dot Dot Dot

The Hard Truth

Chew on this: Beyond.com, one of the real superstars of cyberspace, logged sales of $36.6 million for the fiscal quarter ending September 30, 1999--and $25.9 million in net losses. For the six months ending September 30, 1999, eToys notched sales of $23.3 million and a net loss of $82.3 million.

Swallow those losses, then inhale this sobering reality: "It's easier to lose $1 million overnight with a Web site than to make it," says Stephan Moen, a vice president at Aspen Consulting, a Rolling Meadows, Illinois, e-business consulting and research firm.

"It is hard to do a Web site right," adds Phil Terry, CEO of New York City-based Creative Good, a Web strategy consulting and research firm. "And there are so many ways to do one wrong."

For instance?

Undercapitalization. "This is a chief reason why e-businesses fail," says Moen. "They don't budget enough money to build a site that can succeed."

The days are long gone when a few kids in a dorm room could put up a Web site and have it become an instant hit. Big money is needed to get a site off the ground today because the technology bar has been raised dramatically higher. That's upped the ante in site design and hardware necessary to operate the site. How much? "Anywhere from $300,000 up to $1 million," Moen estimates. That amount would cover hardware, software and initial site design.

Some sites targeting well-defined niches can get by on less. But just as often, much more cash will be required, particularly when the goal is creating a national brand. "We're budgeting $20 million to build our brand," says Andrew Brooks, 37-year-old CEO of Furniture.com, a Framingham, Massachusetts-based online furniture start-up. "Building a national brand is essential."

And getting ahold of the money needed to create national brand recognition--despite what you read about venture capitalists--isn't easy. "Raising the first money is tough," says Kathy Morell, 26, co-owner
of MakeUsAnOffer.com, an online haggling site based in Lawrenceville, New Jersey. So many tech start-ups are now seeking investors' cash, says Morell, it's difficult to rise above the noise level. While she managed to raise about $1 million in first-round angel funding and currently is closing a larger venture funding round, she reports, "this takes a lot of hard work."

And don't count the money until it's in your pocket, says Andy Oldham, 36, co-founder and CEO of eHome, a Web site where real estate sellers pay lower fees than are charged by conventional Realtors. Once he'd put together a business plan, Oldham shopped it around and quickly found a large escrow company that wanted to be the sole investor for eHome: "They agreed to put up $4 million," he says.

Oldham thought he was home free until . . . "At the 11th hour, they pulled the plug," says Oldham. "Right there, we lost three months--that's how much time and energy we had put into that deal." Oldham eventually bounced back and got start-up funding from Garage.com (http://www.garage.com), which matches good ideas with money sources, but the sobering moral is: Internet funding can vanish, and until a deal is signed, never start spending any investor's money.

Security alert. "Security remains a key issue, maybe the critical issue, and it's where many e-businesses fall down," says Jeff Johnson, president and CEO of Meta Security Group, an Atlanta technology security consulting firm.

How can that be when most Web browsers and e-business server computers use encryption technology that scrambles a customer's credit-card information? Johnson laughs: "That's not the problem. The problem is that hackers break into the Web site's computers and steal the whole credit-card database. It happens more often than you'll ever read about."

When he tells that to clients, many scoff. "[But then] we look through their access records and show them when and how hackers already have broken into their system," says Johnson. "Maybe they haven't accessed the credit-card database, but they've been inside and looked around. Probably, they'll be back, too."

The cure: "Work with security experts," says Johnson. "Usually inexpensive solutions can be implemented that will safeguard your data."

Help wanted. Putting up a professional-quality e-commerce site is rarely a do-it-yourself project. Few entrepreneurs have the knowledge and time it requires. But "hiring talented techies is difficult," says Morell. "They are in such great demand."

They're also expensive: Morell says a $70,000 to $150,000 salary is standard in her central New Jersey location, and higher salaries are common in hotspots like Silicon Valley and Seattle. And as the demand rises for qualified help, you can expect salaries to do the same.

No traffic. Put up a site, and the next step is getting the money bags ready, right? Not hardly. "Nobody will come to it," says Jason Foodman, the 32-year-old CEO of Atlanta-based Trexar Technologies, a software developer that e-tails through its MacAlive Web site (http://www.macalive.com). "Putting it up is only the beginning."

Worse, Foodman debunks the notion that once you get your site listed by the main search engines, the work is behind you. "Search engines won't bring you much traffic," he says. And while he's made certain his site is listed in the various engines, "out of 5,000 visitors on an average day, maybe 30 come from the search engines," he says. "That's no way to build a business."

How to lure eyeballs? "You have to promote your site," says Foodman, who buys advertising exposure online and in print magazines. "That's the only way to win on the Web."

They don't buy. But once you've got traffic, profits are within reach, right? You know what's coming. The startling news is 75 percent of online customers who fill shopping carts bail out before clicking the "buy" button, according to research from BizRate (http://www.bizrate.com) and NPD Group (http://www.npd.com).

"For most sites [the conversion rate] is under 2 percent," says Phil Terry, referring to the percentage of visitors who actually buy something.

In other words, a site can be jammed, but the cash register may never ring. "Most sites focus on the wrong thing--they seek traffic, not customer experience," says Terry, who adds that the remedy is to build an e-tailing site, from the ground up, with the goal of enhancing and simplifying the shopping experience.

Outages. Many major Web sites have had them, and the inevitable result is a flood of bad publicity. Sometimes outages are flukes--bugs that surface in software or that occur during a site upgrade. But often, "the problem is implementation of a poor plan at the beginning," says Moen.

Even worse, outages often happen exactly when a Web site begins to catch on. "Many sites simply don't scale," says Moen, meaning a site that works fine when there are 100 visitors a day may show strains at 1,000. "You need to build a site that readily scales as traffic increases," he adds.

Doing so requires nothing more than planning. Always ask your technical consultants, if traffic goes up tenfold, how will we handle it? Make sure you know the answer before putting up your Web site, because once a Web site catches on, it's like wildfire.

Fraud. A dirty secret about the Web is that crooks love it due to the comparitive anonymity afforded by the Internet. Just listen to Jonas Lee, the 33-year-old founder and CEO of GiftCertificates.com (http://www.giftcertificates.com): "From Day One, we've had problems with fraud, but every e-tailer does. Fraud is part of selling on the Internet.

"We're lucky we started slow. As we grew--as public awareness of us grew--we also grew more expert at detecting fraud. Every e-tailer has to do the same."

Fighting off the big dogs. Larry Cuneo, the 48-year-old CEO of Minneapolis-based CarSoup, knew he had big problems from the day he launched his site in 1998. The space he coveted--selling cars on the Net--had already been staked out by big players, including Microsoft (with CarPoint) and Autobytel.com. But Cuneo thought he had a unique twist: His site would be local, targeted strictly at nearby dealers and car buyers. But it was rough going. "We had considerable difficulty gaining credibility," says Cuneo. "That's lowered our recognition and our revenues--from advertisers and e-commerce partners."

Cuneo didn't quit, though. For one thing, he budgeted 50 percent of his gross revenues for marketing and promotion. He also invested substantial time in coming up with local promotions the big boys couldn't
rival. "We'll sponsor cars in parades and little local events," says Cuneo. The upshot: Today his site, http://www.carsoup.com, holds a genuine lead in its market over the national rivals. "But we've had to work hard to get here, and we'll have to work to hold this spot," says Cuneo.

Making partners. For many start-up e-businesses, the surest path to prosperity is to hook up with established businesses and hope their reputations will help. (See http://www.entrepreneur.com, "Find Your Partner," February.)

The biggest problem Jonas Lee at GiftCertificates.com struggled with was finding companies willing to do business with him. His idea to sell gift certificates redeemable at major retailers sounded terrific, but he had problems persuading retailers to do business with him. He now has deals with over 350 major retailers, but "we knocked on many doors before we signed the first deals," he says.

Why? Start-ups are potential pathways to wealth, but they are also fly-by-night, and major, established businesses don't want to risk tarnishing their brands by partnering with start-ups that go bust. "It took me two or three months of persistent calling and explaining," Lee recalls. "You may have a good idea, but you have to also convince people you're a good business person, and that takes time." The broader point: Partnerships are wonderful, but convincing partners to ally with you is nothing short of hard work.

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This article was originally published in the April 2000 print edition of Entrepreneur with the headline: Dot Dot Dot.

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