Ding!

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.

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This article was originally published in the January 2001 print edition of Entrepreneur with the headline: Ding!.

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