How to Start an e-Business

Remember the waves of glum news of internet hopes gone awry that washed over us a few years ago? You'd be forgiven for thinking dotcom dreams are just another route to bankruptcy. Probably the scariest finding came from Webmergers.com, which tracks the merger and acquisition activity of technology companies. In a recent report, Webmergers found that since January 2000, some 962 internet companies have shut down or declared bankruptcy. Yikes! That's rotten news to read over your morning coffee. But is it news that should get you thinking about another business direction? Should you tear up your dotcom business plan?

Probably not. Webmergers' findings may be hard to swallow, but many of those 962 companies were heavily funded blockbuster dotcoms that entered the scene spending wildly (buying everything from Super Bowl advertising minutes to multipage spreads in People magazine and multiyear exposure deals on AOL) in a madcap race for "mind share," or customer awareness. The big trouble: Many of these dotcoms had little (often no) cash flow and only investment money to spend. As those dollars began to run out, wise heads started looking at the outflow and the income of these dotcom enterprises--and very quickly realized the businesses as presently conceived could never prosper. There's no way around the fact that when you consistently spend much more than you bring in, sooner or later you'll find yourself with angry creditors beating down your door.

You're likely not a richly funded dotcom and need not sit around worrying about the day the VCs show up at the door demanding some kind of return. So breathe normally--but don't make the mistakes the dotcoms that crashed and burned made. Like what?

• Bad balance-sheet math: At no point did these companies generate financial statements that indicated any reasonable relationship between income and expenses. And yet they spent wildly, renting expensive offices in Silicon Valley and New York's Silicon Alley, hiring deep staffs (and often paying salaries upwards of six figures for minor positions), and buying fantastic exposure in ads of every medium. No genuinely small startup could long afford these lush business habits.
• No revenue model: The core question that is supposed to be asked of dotcom startups is, What's your revenue model? This is shorthand for, How do you envision bringing in income? What will your revenue streams be? In the past, dotcoms have vaguely explained that their revenue model involved a mix of ad dollars and e-commerce, and in most cases, that answer was accepted. It was a mistake because, as the failed dotcoms proved, nobody had ever really put flesh on the revenue models.

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  Never open a business without understanding your source of revenue. This seems so elemental, but in the heady days when vaporous businesses such as Yahoo! and eBay quickly snagged multibillion-dollar market caps, so many people abandoned this axiom.

• Building market share to the detriment of the business: Market share is not God, although CEOs of the many failed dotcoms who pursued a strategy of building market share at any cost wanted you to believe otherwise. Look through the financial filings of many of the best-known dotcoms, and what's stunning is that a common practice is selling merchandise for less than they paid for it. Pay $300 to a wholesaler for handheld computers, and no matter how many you sell for $250, you won't do anything but go broke.
• Ignoring stakeholders: Who has a stake in your business? Investors, your employees, management, your vendors and your customers. Long debates can explode around attempts to prioritize these stakeholders--whose stake is meatiest or weakest?--but probably the best strategy for most dotcoms is to assume that all stakeholders carry equal weight.

  To succeed, businesses need to satisfy all stakeholders. That doesn't mean all will get what they want (stakeholders quite commonly are in conflict with each other, and a management task is seeing that everybody gets enough to feel happy), but it does mean you need to stay aware of your stakeholders, their wants, and what you're delivering. Failed dotcoms often had little or no awareness that any stakeholders existed (at least any that were not on Wall Street), but stakeholders always exist and will always get their due.

• Forgetting what industry you're in: Guess what--your online store is still a store, meaning you're competing in a retail universe. Yet CEOs of stumbling dotcoms talk as though they're in any industry but retail, throwing around terms like new media, content and consulting. Never fool yourself about your industry.
• More ego than profits: Not only did many CEOs of defunct dotcoms forget what industry they were in, some seemed actually to forget that they were in business at all, and that the essence of a business is to make money from revenue--not from bedazzled stock market speculators and frenzied angel investors pouring cash into the till. The sad fact about many failed dotcoms is that they could have been successful--maybe not quite on the lavish scale hoped for by the founders, but profitable nonetheless. And they blew it by forgetting that, in the end, business is business. While it might be fun to make it on the cover of a magazine, it's ultimately more fun to be on top of a steady stream of black ink (and it's no fun at all to manage a business that's dripping red ink).

The message for you: Don't be discouraged by the stumblings of the name-brand dotcoms. They had it coming. That sounds cruel, but really, they did. You can avoid their mistakes and thereby create a very different outcome for your business.

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