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.

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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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