From the March 2001 issue of Entrepreneur

"Let's be quite honest," says Neil J. Closner, president and CEO of BabyUniverse.com, a 12-person Fort Lauderdale, Florida, e-tailer of infant products. "Anybody who got involved in this business had their eye on an exit strategy, either to be acquired or go public. That was in our game plan as well." Now that a public offering is unlikely and many potential acquirers are struggling to finance their own operations, the game plan is to stay on and run the company for several more years. How does Closner, 27, feel about that? "Honestly, I don't know," he says. "My mood changes day to day."

Others are more philosophical. "I didn't anticipate it to be a get-rich-quick scheme," says Betsy Burlingame, founder and president of Expatexchange.com, a New York City-based Web service for expatriates. "It's a very long-term focus. You build relationships and a community and then later bring in e-commerce and make money."

Burlingame, 29, met with venture capitalists before the April meltdown to discuss funding for her 2-year-old company. She was told she wasn't asking for enough money and didn't plan to spend it fast enough. "Now you have to have revenues that go to the bottom line," she says, "which we're working on."

That statement sums up the central experience of the post-crash Internet entrepreneur. It has two prongs: Spend less, make more. It's not easy, and it's not as much fun as the spin-and-spend techniques that transferred countless millions of dollars from the pockets of investors and entrepreneurs into the bank accounts of Web site designers, online advertisers and others in the dot-com boom. But it's necessary. And according to early indications, it seems to be working-as evidenced by the fact that not every dotcom is bankrupt, and some are actually healthy and growing.

Cutting Back on Advertising

The first way entrepreneurs are bringing their spending under control is by scrutinizing advertising outlays, says H. Albert Napier, a management professor at Rice University in Houston who sits on the boards of two dotcom start-ups. The emphasis is now on focused advertising as opposed to the mass-market campaigns that blanketed the media in 1999 and early 2000. "[In early 2000], I could drive down the freeways and it seemed like every other billboard was a dotcom," says Napier. "I don't see those anymore. They're also cutting back on the TV and the radio."

What's taking the place of mass-market advertising is a better-targeted, more cost-conscious promotion style. "We keep a very tight lid on our advertising budget," says Closner. "We make sure the dollars are spent as effectively as possible." For BabyUniverse, that means purchasing banner ads and featured sponsorships on family and parenting Web sites instead of Super Bowl spots shot-gunning the entire population. "I don't want a 24-year-old single guy coming to my site," he explains. "I spend the dollars to attract the specific user that I need."

Dotcom entrepreneurs are also more careful, testing ads to see which are most effective before committing to full runs. They're emphasizing targeted direct e-mail campaigns to people who have opted to receive them. They're putting more public relations into the promotion mix and replacing expensive outside PR agencies with in-house communications staffs.

One of the biggest changes has to do with online banner ads. Whereas dotcom entrepreneurs once bought advertising willy-nilly, they're now paying close attention to their banners' performance as a result of high costs and low rates of delivering paying customers. Mike Domek, president of TicketsNow.com, a 24-employee online entertainment ticket broker in Woodstock, Illinois, says he's cut his online banner budget by $330,000 for 2001 and is only pursuing campaigns when tests show double-digit click-through rates. "Anything under 10 percent we're dumping for 2001," he says.

An increasing number of dotcoms favor commission-based referral programs with other Web sites. These marketing arrangements require advertisers to pay for placements only when customers actually make purchases after clicking through to the advertiser's site from the banner ad on the partner's Web site. "It's basically pay-for-performance advertising," explains Domek, 31. "You have no investment, so it's limitless how much you can do."

Focusing on Profitability

Even while they cut costs, surviving dotcommers are trying to increase revenue in a new-to-them rush to achieve profitability. It's quite a switch from the days when entrepreneurs like Burlingame were told they weren't spending money fast enough. "The investment community and venture capital industry have shifted from growth at any cost to profitability," says Alessandro Isolani, CEO and co-founder of ebates, a 50-person San Francisco online shopping portal. "The only metric to whether a company is doing well or doing poorly today is whether that company is profitable."

"Monetization" is the term you hear dot-commers use to talk about profits today. Basically, monetization refers to finding a way to make money off all the visitors to your Web site. That has meant a push to sell ad space to companies eager to expose themselves to millions of surfers and site members. While many dotcoms have been laying off staff, Isolani, 34, has actually increased his sales force from one rep to four.

Pursuing profits has also meant, in many cases, hiking prices. Closner breathes a sigh of relief as he recounts this trend. "A lot of companies have started raising prices to decrease losses," he reports. "That's allowed us to act like any retailer in the world and start selling products to make money, as opposed to simply attracting customers."

The hikes aren't always large or easy. "If we're getting a 10 percent commission from a merchant, we're trying to get it to 11 or 12 percent," says Isolani. "But we don't want to be perceived as a leech. So we'll try to tie increased payments to increased performance."

In a trend counter to Internet tradition, dotcom freebies are also drying up. Closner once offered free shipping on every purchase. Now he only ships free on orders of more than $25. "And we're going to be raising that to $75," he says.

Similar trimming is going on at OpenAir.com, a 43-person Boston company that offers an online service for handling payroll and other business management and reporting tasks. The company once offered free subscriptions to its service to as many as five people at any one company, but it has now trimmed that to a 30-day demo account for only one user, says William O'Farrell, CEO and co-founder. "We found that having one user was as good as five, and we were leaving a lot of money on the table," he says.

The first reaction to the bust for many companies was to back away from the troublesome consumer market and start selling to other businesses. Burlingame is one of those; she has accelerated Expat-exchange's efforts to offer online communities tailored to the expatriate employees of large companies, charging the companies for the service.

And while they develop their new B2B clients, dotcoms are benefiting from less intense competition and lower costs for marketing and attracting customers. Weaker and fewer rivals are some of the tastiest fruits of the bust. "A year ago, where there might have been six national companies in my space, now there are probably four," Closner says. That's done more than allow him to cherry-pick customers and raise prices. Fewer advertisers in a given category has meant falling costs for advertising.

Despite all this, few dotcoms are actually profitable. "We're very close," Closner says, reporting that Baby-Universe's sales have been going up despite a shrinking budget.

At ebates, too, "all the key metrics have been climbing at a healthy rate," says Isolani, who, however, declines to describe the company's profit stance.

Domek, whose online venture is a spinoff of a traditional ticket-seller he started in 1991, is hoping to be well into the black early this year, largely due to cost-cutting. Says Domek, "I anticipate doing the same amount of business next year, with at least half a million dollars less in expenses."

Eliminating Outrageous Perks

If there was one icon of dotcom excess, it was the outrageous employee perks. Foosball tables in break rooms, cappuccino machines on every floor, new BMWs for just-hired marketing representatives-take your pick-it seemed as if every dotcom included an impressive, if sometimes quirky, array of frivolous-sounding perks as part of its offer to prospective workers. Interestingly, surviving dotcoms report having offered few of those delicious add-ons.

Closner says BabyUniverse employees never signed on to the Internet gravy train. "It comes down to what you prefer," he says. "Would you rather have those creature comforts and see 15 of your friends laid off, or buckle down and save money?"

Today, given that thousands of dotcom workers have lost their jobs, fantastic benefits are not as necessary. There are more employees available, and they're easier to hire, says Isolani. "The questions people ask are different now. A year ago, it was 'What is your exit strategy?' Now it's 'What are your long-term plans?'"

Experts warn, however, that remaining dotcoms should not overreact and expect employees to suddenly be happy working in Spartan environments for low pay. It's still a tight labor market overall, reminds Napier. Entrepreneurs may turn off the waterfalls in their office lobbies, but they shouldn't trim too many employee comforts. "In terms of saving expenses, some of that is penny-wise and pound-foolish," Napier says. "You want employees to stay." If a firm has issued key employees stock options that are now valueless, the company should consider repricing the options to make them more appealing, he says.

Perhaps it shouldn't be shocking that survivors tend to be located in modest quarters where the main attraction is low rent. Closner snorts at the suggestion BabyUniverse is putting on airs with its address. "We rent some excess space from a law firm," he says. Burlingame, even more economically, runs her company out of her brownstone apartment on New York's Upper West Side.

Betting on the Bust

And, as the survivors of the boom are finding, busts can also have upsides. In addition to fewer rivals, lower costs and an expanded employee pool, some dotcom start-ups are finding that demand for their offerings is on the rise. Jeff DeCoux, chair and founder of Internet software and services firm eCustomers Inc. in Austin, Texas, provides online retailers with the ability to tailor their offerings to respond to customers' interests and preferences. The technology fits well with the increasing online presence of traditional brick-and-mortar retailers who are used to tailoring their stores based on their geographical locations, and also with the desire of all e-tailers to do more than attract eyeballs.

"Online businesses are realizing that just driving more traffic to a site can actually reduce their sales," says DeCoux, 29. "We focus on attention and retention extensively. And with this transition, that became the number-one point that the customer base we're going after was receptive to. It looks like everybody's budgeting for this type of solution."

What Does the Future Hold?

One feeling shared by survivors is thankfulness that they didn't bag a pocketful of venture capital when it was there for the taking. Given that venture capitalists typically only offered their backing if the entrepreneurs committed to a growth plan that would likely have bankrupted them by now, it makes sense.

"We never raised venture capital, so we didn't feel pressure," Burlingame says. She found the crash "kind of reassuring," she adds, speaking for those who failed to secure venture backing while the getting was, seemingly, good. Those who did get venture money unfailingly raised it, as ebates did, before the crash. But Isolani and other survivors report benefiting from unusually sensible and patient venture backers who didn't push them to chase unsustainable market share goals.

Of course, being thankful for still being in business doesn't preclude them from hoping that their long-term goals of exiting in a blaze of millions will still come true. "It'll be a steady growing business, and we could still potentially be bought out," figures Burlingame.

Closner reports being in frequent contact with potential buyers of Baby-Universe, but none have made an attractive offer. Meanwhile, he's looking at the day-to-day job of running a company. "I've definitely climbed a very steep cliff and come a long way," Closner says. "But basically my mindset now is that I'm settling in to grow a business."


Mark Henricks is Entrepreneur's "Cutting Edge" columnist.