From the June 2001 issue of Entrepreneur

In nature, the only criterion for success is survival. How unnatural, then, was the world of Internet business for its first several years, because many of those considered extraordinarily successful just last year are extinct today.

Now that dotcom business has returned to a more natural state, the hottest topic of conversation among those who fund, advise, sell to and run small dotcoms is, What is it going to take to be one of those who make it? To find out, Entrepreneur talked to a selection of experts and entrepreneurs and came up with the following traits that will allow you to survive where so many companies have failed:

Sell Things Suited to the Internet

"The dotcoms that survive will be ones that sell digital goods and services, where the experience of handling the actual merchandise is not an issue and where logistics of delivery are not much of an issue," says Eugene Lowenthal, a veteran venture capitalist at Sanchez Capital Partners in Austin, Texas. Information, including software and music, is suited to Internet delivery. Bulky items like furniture are not, given customers' propensity to know what they really look and feel like.

Sell Your Internet Expertise and Technology

Last year when funding dried up, customer acquisition costs soared, and the difficulty of finding repeat online customers was clear, Internet companies had to look closely at what they had. Many found their main asset to be their knowledge of what was required to do business on the Internet.

 
HOW DOTCOM SURVIVORS PROMOTE THEIR WEB SITES
 
Search engines top the list of online marketing methods preferred by surviving dotcoms, according to a study by marketing research firm ActivMedia. Paid banner ads ranked last among online marketing tools. On a list of offline marketing methods, print ads claimed the top spot, while TV and radio commercials and contests took the bottom slots.

Online promotional methods, by rank in popularity:

1. Search engine and directory positioning
2. Online PR and press releases
3. Buttons and links
4. Reciprocal ads and links
5. Affiliate programs
6. Paid banner ads

Offline promotional methods, by rank in popularity:

1. Paid print and display ads in newspaper and magazines and on billboards
2. Trade shows, conferences and seminars
3. Brochures and other collateral materials
4. Direct mail and catalogs
5. Paid TV and radio commercials
6. Sweepstakes and contests

SOURCE: ActiveMedia Research LLC's "Real Numbers Behind Successful Web Site Promotion 2000"

"Dotcoms saw the specter of death and adjusted their business models; instead of selling products, they [sold] technology to other businesses," explains Lowenthal. "The technology they built to [make themselves] good e-commerce companies are things other companies want to buy. Typically these are brick-and-mortar companies that also have an Internet presence." Many successful offline firms are only now expanding into online commerce. Backed by ongoing revenue streams, they're capitalized better than online-only stores and have money to spend on e-commerce software. And smart dotcoms are selling it to them.

Have a Business, Not an Idea

Many departed dotcoms came on the scene with promises to revolutionize the world through communication, community-building, online trading and so on. Those left standing have ideas for businesses, not revolutions, says Bill Hunt, executive vice president of online strategies at Farmington, Connecticut, consulting firm Outrider North America Inc. "It's not a pie-in-the-sky, whiz-bang idea," Hunt stresses. "It's a business like any other and has to be run like one."

Ideas for promising dotcoms tend to be nonrevolutionary, focusing on transferring activities from the offline world to the Internet in a sensible way, like Yahoo! did with directories successfully until recently. They also look at how people are already using the Internet. Hunt says survivors ask, "How do people engage that product or service offline, and how can we adapt a version of that online so it's better?"
For example, Amazon.com lets readers post their comments.

 

 
:: The Party's Not Over
1. What Now?
2. Get A Grip
3. Take My IPO...Please!

Get Customers to Come Back

Companies that build repeat sales reduce their average cost of customer acquisition and increase the average lifetime value of their customers. Dotcoms that can effectively deal with this universal business fact will make it when others fall by the wayside.

Dotcoms with a future develop site visitor databases. "They segment purchasers, nonpurchasers, whatever segmentation is appropriate for their business," Hunt says. And they find ways to contact those customers and prospects with coupons, free offers and information, often by e-mail. They test various messages and contact schedules to determine what brings customers back, and they persuade visitors to become customers.

Develop an Understanding of Customers, Not Just Computers

Dotcoms here for the long term are more than technologists, stresses Jack Shaw, president of consulting firm eCommerce Strategies Inc. in Marietta, Georgia. They're also experts on the needs and wants of their customers. "If they sell to a particular industry, they understand its business processes and issues," he says. "The ones who don't understand represent a substantial percentage of the unsuccessful dotcoms."

To find out whether a given dotcom is likely to survive, check out the backgrounds of key executives. "Typically a number of key people in the organization have spent years working in the customer industry," says Shaw. "Having the technical expertise is not enough."

Be Slow to Spend Money

Chris MacAskill, founder and CEO of Santa Clara, California-based Mightywords, an online content provider spun off in March 2000 from Fatbrain.com, raised $36 million in venture capital and partner investments-after the crash. That accomplishment suggests he knows how to be a survivor. "Sometimes when companies get bigger, they can afford bigger corporate offices that have bamboo in the lobby," says MacAskill, 47. "But if you're a start-up, you'd better be lean and mean."

Mightywords has avoided dotcom excesses, such as giving every employee $1,000 chairs; failing to scrutinize executive travel costs; and, in particular, spending too much money advertising to mass consumers when more focused and more profitable alternatives were available by allying with strategic partners.

Survivors' frugality extends to their computer software, the furniture in their offices and the style in which their execs travel on business. They don't throw away money on unproven marketing opportunities. "When Netscape came up with the idea of charging $5 million to be on their home page, Yahoo! wouldn't pay it," says MacAskill. "Other companies did pay, and they've disappeared."

Be Able to Turn on a Dime

Doing business at Internet speed requires small firms to be flexible. At AHA! Interactive Inc., a provider of online learning products for the K-12 market, co-founder and COO Todd Carter says his firm makes a virtue out of necessity. "We're a small company, [so we're able] to listen to our customers and change our strategy on a dime," says Carter, 30, whose Chicago company has six employees. "We still make changes on a monthly or bimonthly basis."

Partner Well

One of AHA! Interactive's earliest shifts involved dropping its initial plan of emphasizing direct sales to end users. "Now we're going with partnerships with larger publishers," says Carter. "It's taken the sales out of the sales process and made it a business-to-business arrangement." Established customers go with established names, so sales occur faster and in larger volume. "We're getting publishers to pass us some of the fees upfront and the rest on the back end," he says.


46%
of B2B sites in business at least three years are profitable (compared with just 32% of all B2B sites).
SOURCE: ActivMedia Research LLC

Strategic partners can provide dotcoms with important resources, such as distribution channels and brand recognition. Some even invest cash, and they tend to take a longer-term view than venture capitalists. That's why dotcoms that effectively partner with larger, usually offline, companies are likelier to survive than their go-it-alone brethren.

For example, Mightywords gets more than just funding from Barnes & Noble Inc. It gets promoted in many Barnes & Noble and B. Dalton bookstores nationwide. If you want to find a strategic partner, MacAskill recommends you get to know people in your industry and make sure they know you. "Big strategic partners," he says, "are always looking for the next big things." For more on partnering, see "What Now?"

Find a Way to Raise Money When Nobody Else Can

You can't convince anybody to invest in a dotcom these days, right? Wrong. Just ask Nirav Tolia, 29-year-old CEO and co-founder of Epinions Inc., a 65-person online distributor of product reviews written by consumers. In February 2001, the Brisbane, California-based company raised $12 million from new and existing venture capitalists in its third round of financing. What does your company need to accomplish the same thing? Tolia says what you need is a solid value proposition and a business model that delivers revenue at low cost. "Epinions is the place where consumers go before they buy anything-that's a very large, specific value proposition," he says. "And we have a scalable business model, similar to eBay, where our users provide the labor for us. In the last six months of 2000, we grew our revenues 375 percent, while simultaneously reducing our costs 50 percent."

Epinions generates revenue by charging retailers for shopper referrals, reselling its reviews as content to other online companies and licensing its technology. The combination of low costs for generating revenue and multiple revenue sources makes Tolia optimistic that Epinions can become profitable by the end of 2001, two-and-a-half years after start-up.

Sometimes You Have to Be Lucky

e-Tail Racks Up Big Gains
THERE'S STILL PLENTY OF SALES revenue for surviving dotcoms to tussle over. Retail e-commerce sales in the last quarter of 2000 were up by more than two-thirds the level of the year before. For the first time, e-tail amounted to more than 1 percent of total retail sales.

SOURCE: Census Bureau

"I don't mean to be flippant," says Tolia, "but good fortune is always a part of it." Serendipity is often more valuable than strategy, and a large part of any successful venture is chance. "At the end of the day," he points out, "it's incredibly difficult to build a successful company. A lot of things need to go right at the same time."

Few people would disagree that surviving dotcoms need to be lucky. But how lucky must these companies be? Jonathan Avedikian, vice president of design at Portaris Inc., an end-to-end online business solution in Austin, Texas, says being in the right place at the right time is definitely important, and there are more right places than you probably think-even right now, which seems like the wrong time. "We always say it's all been done before," muses Avedikian. "But then something new comes out, maybe a new twist on an old idea. There are new markets out there-niches that haven't been tapped yet-and there are current markets that haven't been exploited fully."

Survivors Prosper

Tomorrow's survivors will likely exhibit other traits-tireless passion for their businesses, skills for building online customer communities, and the ability to effectively merge online and offline promotions. But when the good times come back around, those still making it work will look back fondly on the traits that got them through the dotcom equivalent of mass extinction-and allowed their businesses to survive.


Austin, Texas writer Mark Henricks has covered business and technology for leading publications since 1981.

Contact Sources

ActivMedia Research LLC
(800) 639-9481, ext. 125
research@activmediaresearch.com

AHA! Interactive Inc.
toddc@ahainteractive.com

eCommerce Strategies Inc.
jack@e-com.com

Epinions Inc.

Mightywords

Portaris Inc.
info@portaris.com

Sanchez Capital Partners

Wallace Resources
(480) 948-0029