From the January 2001 issue of Entrepreneur

Gail Klein Bentley was on top of the world-actually, way higher than that. The 30-year-old Charlottesville, Virginia, entrepreneur had zoomed out of nowhere to land $1.2 million in angel funding in the fall of 1999, and her Web site, WorkingWeekly.com, was the subject of heavy buzz. It had quickly grown to 60 employees and had a potentially huge customer base because its focus was on the changing workplace-on helping people find meaning and fullfillment in their working lives. How could it fail?

Then one day the bottom fell out. "I had a commitment for $2 million in additional funding. The day they were supposed to put in the money, they withdrew the offer," recalls Bentley. Not good-and the ride became stomach-turning bumpy. "Of course I went to other funders, but nobody else would invest," says Bentley, who served as chair, president and publisher. "I had to lay off all 60 employees. I had never failed in my life. That was just a terrible time."

As we've all seen in the news, Bentley's pain isn't all that unique. Last year, the talk was about the mushrooming number of dotcom millionaires. These days you hear more about all the dotcom disasters. Even big names are among the casualties: Living.com, Boo.com (although Fashionmall.com did buy and reopen it), Pets.com and even ToySmart.com, a onetime Disney subsidiary. But countless lesser-known companies went under, too. Entire Web sites have sprouted to do nothing but maintain death watches on sputtering dotcoms. The upshot is that what had seemed a no-brainer route to riches suddenly looks more like a dead end. But is it? Is dotcomming only for kamikazes determined to flame out? Is there still money to be made online?

Mistakes Dotcommers Made

You bet there's money-and you can say that loud and proud. But the game has changed: The ones who'll prosper are the ones who've learned from the failures of first-round dotcom pioneers. And there are lessons aplenty to digest. "I made so many mistakes," admits Bentley, whose story is one that dozens of dotcommers can relate to. "Nobody thought we could fail until we did, and this has taught me many lessons."

In the words of early-20th-century philosopher George Santayana, "Those who cannot remember the past are condemned to repeat it." That's why it's so crucial to dig into the mistakes committed by the first generation of dotcoms. Here's a sampling of their biggest flubs:

  • They did stupid things. "How smart is it for a start-up to run Super Bowl ads? Is that stupid, or what?" asks Brian Farrar, president and COO of Xpedior, an e-business consulting firm in Chicago. He says the many millions of dollars companies spent on high-profile advertising (such as Super Bowl minutes) produced little on their bottom lines.

"Many dotcoms say they want branding, but they don't know what that means," adds Rena Kilgannon, a co-founder and principal of The Ad Incubator, an Atlanta marketing firm that works with start-up tech companies. "Bright people are running these companies, but they're clueless about low-cost ways to market, the kinds of strategies start-ups should be implementing."

  • They underestimated the importance of real-world know-how. "Much vertical know-how is needed to succeed in retailing, and e-tailing is no different," says Ron Dayan, CEO of Net consulting firm Complete-e Strategies in New York City. "You need to be good at sourcing and pricing products, for instance. Failed dotcoms never developed that expertise." You also can't outsell an established brick-and-mortar player if you know nothing whatsoever about the industry. "But," he continues, "many dotcoms thought they could do just that."
  • They overestimated consumer demand. "Consumers have been slower to adopt the new technologies than many entrepreneurs predicted," says Rohit Shukla, president and CEO of Larta (formerly Los Angeles Regional Technology Alliance). A byproduct: "Many dotcoms incurred horrific expenses simply trying to persuade consumers to shop online," says Shukla. A start-up doesn't have to spend one dime explaining to consumers how to shop at a local mall. But it's different online, where most consumers still haven't made substantial purchases. Most dotcom entrepreneurs never factored that into their thinking, says Shukla, and the result is that they haven't made a convincing case for consumers to change their long-standing habit-that is, shopping at brick-and-mortar malls-in favor of buying online.
  • They never achieved a business model that covered the costs of customer acquisition. "And they weren't getting repeat business," says Mark McDonald, a partner at Andersen Consulting and a co-author with Peter G. Keen of eProcess Edge: Creating Customer Value and Business Wealth in the Internet Era (Osborne/McGraw-Hill). Many dot-coms managed to eke out some sales-by offering free shipping and/or extraordinary discounts that priced merchandise at or near wholesale cost-but none of this developed an iota of loyalty on the part of buyers, who quickly moved on to whatever site offered the lowest price the next time they wanted to buy. Just as bad, continues McDonald, many of these dotcoms shot themselves in the foot: "With the ones that did make sales, many faltered when it came to customer fulfillment," meaning they shipped merchandise late or not at all, or they shipped the wrong merchandise. Says McDonald, "Few dotcoms have made any progress in terms of developing economical ways to build repeat business."
  • They lacked fiscal controls. "Many of them had absolutely no discipline about spending," says Bill O'Connor, head of the creditors' rights practice at the New York financial institution practice office of law firm Buchanan Ingersoll. O'Connor, a man who has witnessed the dismantling of several dotcoms, says many dotcoms grossly overspent on everything from office space and decor to freebies for workers (which sometimes included lavish free lunches, free massages, free yoga classes and more).
  • They settled for unimpressive management. "There just aren't that many good managers out there," says Wendy Haig, founder and CEO of Washington, DC, Global Strategy Corp., a consulting firm that specializes in helping dotcoms retool. According to Haig, when times turn tough, management inexperience and inadequacies become glaringly obvious.
  • They didn't execute. "They were started based on ideas-often good ideas," says George Russell, CEO, co-founder and president of e-commerce consulting firm e-Commerce Solutions in Stamford, Connecticut. "But companies never executed the ideas." Where did execution falter? You name it, says Russell, who indicates that failed dotcoms often have consistently failed to execute well in any portion of their businesses. It's a harsh indictment-but it's also a belief that's widely shared. Slipshod execution seems to have been a failing of just about every failed dotcom you can point to.

Who's to Blame?

It's easy to throw bricks at the founders of failed dotcoms, but according to Scott Blum, that aim is way off. "I personally don't think dotcoms made mistakes," says Blum, 36, founder and former CEO of B2C and B2B e-tailer Buy.com. Blum recently founded Enfrastructure, an Aliso Viejo, California, company that provides a range of outsourced solutions to dotcoms.

Sure, mistakes were made, admits Blum, but "it was the bankers who made them, not the dotcoms," he says. "There was a time when every dotcom was getting financed."

Perhaps Blum is oversimplifying-many dotcom executives made manifold mistakes-but he has a valid point nonetheless. Venture capitalists, supposedly shrewd investors of other people's money, took wild plunges with dotcoms. "There was an overflow of VC capital into companies that didn't have good fundamentals," says Chris Karkenny, CEO of NetCatalyst, a Los Angeles firm that helps dotcoms grow.

"Investors didn't do due diligence," agrees James Gutierrez, founder and president of MagicBeanStalk.com, a San Francisco-based consulting firm that targets dotcoms. "There was a herd mentality, and they invested wildly."

Too much investment money chasing too few good dotcom business plans set the stage-but, says Gutierrez, investors aggravated failure rates. How? "Many dotcoms reacted to the changing moods of their investors by altering their business plans," he says. "When they did this, they failed to stick with their core business." What resulted was a flood of companies with ill-defined goals and little chance of accomplishing any of them.

Add it up and, by any yardstick, promiscuous venture capital funding of poorly conceived dotcoms played a substantial role. Granted, the dotcom executives drove their businesses into the ground-but the fuel in most cases was provided by VCs, who invested incautiously. One upshot: "VCs are being much more deliberate," explains Gutierrez. "They're now asking for weekly cash-flow summaries. A year ago, they never asked to see them. When some dotcoms crashed, they started requesting monthly reports. Now it's weekly. They're staying much closer to their investments."

Don't worry, though. There's still plentiful VC funding for promising Net start-ups. Case in point: OhGolly.com, a Newport Beach, California, Web design and hosting company that targets small businesses. Started with a business plan that called for giving away hosting services, OhGolly junked that model when it became apparent that, sure, it was easy to sign up "customers"-but they weren't paying a thing, and it was much harder than previously envisioned to get them to buy additional services. So OhGolly shifted its business model and adopted a structure in which customers pay as they go.

After a few uncertain months, "the company turned cash-flow positive," says Frank Kavanaugh, the 40-year-old president and CEO of OhGolly. And as Net businesses go, having outgo smaller than income is a rarely attained state. "Now that we don't need money, investors are coming to us, offering us cash," quips Kavanaugh, who admits he spent "many sleepless nights" wondering whether the company had any kind of profitable future.

The lesson? Look profitable, or about to become profitable, and investment money usually isn't hard to land. "Investors are insisting on seeing business models that include sustainable revenues," says Andrew Nuttney, an analyst with Datamonitor. Give them that, and their checkbooks will open.

Future Focus

The question is, Is the epidemic over? Will we no longer regularly see headlines reporting the death of yet more dotcoms? Don't bet on that, says Ron Harris, 47-year-old founder and CEO of database company Pervasive Software Inc. in Austin, Texas. "We still have a lot of shaking out to do," predicts Harris. "We haven't reached a steady state yet. Many dotcoms are simply doomed, to be quite honest. A lot of these entrepreneurs lack an understanding of how to make a business model work."

There's an irony, though, says Harris: "For every dotcom that closes, 10 new ones will launch." Why? Unquestionably, the Web is changing how business gets done, and it's an exciting frontier for entrepreneurs eager to make their mark. And these entrepreneurs will surely find businesses worth diving into.

"There definitely are addressable niches open to dotcom start-ups," says Shukla. "The Internet remains an efficient conduit, and dotcoms with real strategies will find ways to succeed."

Adds Haig, "Watch and you'll see many dotcoms with revenues survive. In the early days of the Net, many entrepreneurs ignored the importance of revenues. They had none, or very little, and when the investment cash ran out, their businesses died. Now more companies are newly focused on revenues. The Internet isn't going away, and there will be more success stories."


Robert McGarvey is Entrepreneur's "Web Smarts" columnist.