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Damn Dotcoms!

Sick of those IPO-hungry, venture-capital-depleting, media-attracting darlings of the tech world? Moan all you want, but while you're whining, the real winners in traditional business are positioning themselves to ride the e-coattails.
August 1, 2000
URL: http://www.entrepreneur.com/article/30950

Things are going good for you-or at least they should be.

Your 10-year-old company is going great guns. You're one of the region's top companies in your industry, with plenty of work and money pouring into your bank account. Your kids are healthy. Your spouse adores you. even the company softball team is coming around. So why can't you shake that lingering bitterness, even anger? Easy-you're not a dotcom company with a windfall IPO and three years of heavy losses. Let's face it, the media doesn't love you the way they do the Web folks. Same with Wall Street and its army of analysts, most of whom swoon and lapse into lovestruck gibberish at the sight of a new Internet IPO. The venture capital folks? Not today, friend. Even the American public is letting you down. They nod your way when you walk down the street, but you know what they're thinking. You're no dotcom.

You don't do e-commerce the way the mavericks do. You don't have a market capitalization equal to the annual budget of Portugal. You're just so . . . pedestrian, aren't you?

Dotcom Failures

Don't sweat it, you're not alone.

"Oh sure, there's some resentment," says Greg Walker, the 31-year-old president and co-founder, with wife Gina, of Supercali Snacks, an Oakland, California-based distributor of snack foods that had $10.5 million in sales last year. "The dotcom money came too fast, and you have to question whether they deserve it. The only Web companies I've heard of making money are Yahoo! and America Online. The rest of them may look good to the market [at times], but it's phony money."

Walker may have a point. Some say that the dotcoms are sucking up all the venture capital while their market capitalizations hold the stock market hostage for the rest of the business world. Walker's one of them. "The distribution business is tough enough on its own, without the challenge of fighting Web companies for money," he says. "I'd like a piece of the action, but I'd have to wait in line behind the dotcom guys."

Lots of others see things Walker's way, adding that Wall Street's infatuation with Web companies is in a way akin to Alice when she stepped through the looking glass. "You've got to leave reality at the door when you look at a lot of these Internet companies," says 34-year-old Joel Osterloh, president of Suwanee, Georgia-based Timber Valley Forest Products, which saw sales of $14 million in 1999. "Our operating costs are a small percentage of our revenue, and we have to fight to make a profit. I don't understand how a dotcom company can be more efficient than we are, but everybody seems to love them."

Osterloh doesn't buy the investment analysts' spin that Web companies will make money "sooner or later." "How do they know that?" he asks. "I keep hearing the analysts say these things, but let's look at reality. It's easier to walk down the street and go into a store, and buy a lawnmower or a suit. What happens if you want to return something? What happens if a dotcom's site crashes, as most of them do? I think the dotcom craze will come back to haunt investors who can't answer these questions. I think investors are being sold down the river."

Mistaken Market Valuations

If so, it's one crowded river. After all, who can blame investors for falling for the new kid in school?

Take the application-hosting industry-the companies that build and maintain the sites that are used by e-commerce companies. The market valuations for some of these companies are so out of whack they make no sense to the untrained eye.

Consider Irving, Texas-based Data Return Corp., a Web hosting company that counts First USA, RadioShack and Pier 1 Imports among its customers, as well as Compaq Computer and Microsoft among its financial backers. In October 1999, the company's stock climbed a measly (for Web IPOs) 26 percent in its IPO. But, based on traditional valuations, the company still boasted a market capitalization disproportionate to its size. The company lost $1.3 million on sales of $1.9 million in its fiscal year ending March 31, 1999. But with the IPO, it was worth $564.9 million at the end of its first day of trading.

Its founders-Sunny C. Vanderbeck, 27, and Michelle R. Chambers, 32-basically had a license to print money, earning a combined $241 million that day in paper profits. Not bad for a company that has lost over $1 million this past year alone.

"It's hard not be jealous, but I wish [the dotcoms] well," offers Marvin Eisenbath, 48, owner of Fair Market Inc., a Wentzville, Missouri-based food distributor with $24.5 million in 1999 sales. "The only problem I have with the Web IPOs is that I'm not getting any of the action. Otherwise, what are you going to do? I run a good, dependable business that should earn $30 million in 2000-and it's not overvalued. If you ask me, the media worries about things too much."

Problems For Traditional Companies

Ouch. But Eisenbath has a point.

Sure, looking for big problems in a roaring economy where there are massive amounts of money being made is a cynical pastime. But the dotcoms do present difficulties for traditional companies-difficulties that transcend hogging all the venture-capital money and artificially inflating stock-market prices.

Consider the problem of hiring-and keeping-good help. The Internet world has absconded with some top-notch corporate talent recently. A check of some of the Internet job-hoppers highlights the crème de le crème of the Fortune 500.

It's a wholesale shift in career moves, much to the detriment of traditional companies-and other venerable institutions. Of Harvard Business School's class of 1999, only 39 percent went to investment banks or consulting firms, compared with over half in 1994. And, critics say, the dotcoms are luring potential business-school talent away before they get a chance to absorb some of the old-fashioned professorial wisdom found inside the ivy-covered walls of post-graduate business schools.

"I was intrigued by what the company was doing and by slugging it out in the e-commerce market" explains Meredith Brown, who became chief administrative officer at Bodylogix.com, an online women's health products startup, after bailing out of a similarly titled position at Merrill Lynch. "As an executive, you want the money, you want the challenge, and you want the opportunity to get involved with a company that has long-term growth potential."

Keep a Good Attitude

Many traditional companies say that competition is the name of the game in the business world and that entrepreneurs should whine a lot less and grind a lot more.

"Being angry isn't going to get you anywhere," says Steve Meltzer, the 41-year-old founder and president of Utopia Distributors, Inc., a Coconut Creek, Florida-based wholesale distributor of perfumes with 1999 sales of $25 million. "Traditional businesses are going to have to face the fact that things are changing and nobody knows where it'll lead. But getting yourself more oriented toward the Internet can only be a good thing. That's what we're doing: building a business-to-business Web platform to help us compete."

Ever the optimist, Meltzer feels that traditional brick-and-mortar companies that have been run successfully for years are in a unique position to battle the Web-starts at their own game. "I believe brick-and-mortar companies with solid earnings can take out, or at least diminish, their dotcom competitors," he says. "How? By leveraging years' worth of substantial bottom-line net worth. The dotcoms that are struggling with revenues are already finding that they're also struggling with new sources of capital as a result of poor earnings. So who will the venture capital firms and the investors turn to if both companies have a Web presence, but only one has a great earnings track record? That's an easy decision."

Meltzer has a lot of company. At Leading Edge Air Logistics LLC, a Morris-town, Tennessee-based air-charter management service, CEO Robert Hunter says it's old-time business savvy that counts. "The fact that Web companies are dominating Wall Street doesn't bother me," says the 62-year-old, whose company garnered $30 million in sales in 1999. "I look at the Internet as another way to conduct business. Only someone smarter than me knows where dotcoms are going, but you've got to love these young CEOs' ambition."

Hunter believes that, in many ways, the success of Internet firms could mean a bigger cash cow for everyone. "Look at the venture capital world," he adds. "They're sitting on billions of dollars that they haven't even used, thanks to the money they made off the Internet firms-there's more money to spread. And those who get it will be the smart folks with the best ideas."

That sentiment sums up the thoughts of wizened CEOs who've been around the block a time or two. "Traditional businesses should be stimulated by dotcoms," says Farley Blackman, 34, CEO at StrategIM, an information-con-sulting and software-development company, and a former heavy-hitter at General Electric. "It's true that big companies feel the pinch when startups poach talent and attention, but the result should be a positive one focused around the customer, speed to market and implementation of change. It's this process of change that results in a more competitive and agile company."

Blackman speaks from experience. "During my tenure at GE, I viewed dotcoms as a catalyst for change," he adds. "They forced me to reinvent roles, hiring and management to combat the dotcom mystique. Traditional companies owe it to their shareholders to put aside bureaucracy and to keep up."

There you have it. Solid advice on how to slay the monster that's living in every individual who never saw the value of their stock options hit triple digits.

So be of good cheer, traditionalists: With a few moves, maybe you'll be the one with the Rembrandt hanging in the fifth bathroom you always wanted.


Brian O'Connell is a Framingham, Massachusetts, freelance business writer; His most recent book is Generation E: How Young Entrepreneurs are Changing the Corporate Landscape (Entrepreneur Press).