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For every dotcom filing Chapter 11 or laying off employees in packs of 20, a few newcomers arrive on the scene. Will they ever learn, you ask? Well, they think they have. And with Internet start-ups to thank for past wages, many are that much higher on the learning curve.
"We're not blinded," says Manvinder Saraon, co-founder and CEO of Palo Alto, California, media darling (everyone from CNN to InStyle has touted the venture) Surprise.com Inc., an online community sharing gift ideas in an array of categories. "After the Nasdaq market crash last March, people thought it would be time to quit, but we're a close-knit group that's passionate about this project," says Saraon, 37. "And we're very realistic about the opportunity."
Realism is the key this time around, and to fully embrace it, entrepreneurs have analyzed industry failures rather than successes. "In the early days [of an industry], when resources are fat, people are doing well and think everything they're doing is a good idea, but it's not," says Anne Miner, professor of management and human resources at the University of Wisconsin, Madison School of Business and co-author of the research study "The Fruits of Failure." "They're living through this grace, and when [money] becomes tight or there's a threat, it's difficult to figure out what things were helpful or not. That will be the main challenge for the third generation [of Internet entrepreneurs]."
One lesson Saraon learned from his experience as a lead investor in NetPharmacy.com, which became PlanetRx.com, is how following in the footsteps of competitors (as PlanetRx.com did in changing its focus from targeting consumers with chronic illnesses to selling toiletries like Drugstore.com does) can hurt. "Listen to your customers and follow them," he says. "Using your competitors as proxy for customers is a fatal flaw."
Saraon is sticking to his game plan, hoping service gifts like dinner for two will become as big as sending flowers. He also vows to avoid PlanetRx.com's other mistake: spending more to attract customers than he'll make back in profits.
The lesson Jan Andersen, founder and CEO of Saint Paul, Minnesota, home lighting and accessories site Bellacor.com, has learned is not to bet the farm on traffic metrics like "time on site." Formerly senior vice president of sales and marketing at NetRadio.com, Andersen, 48, has found conversion rates-how many visitors turn into paying or active customers-to be more relevant. "Bellacor has relatively low traffic because we've not spent a lot on marketing, but we have more important things such as revenue," he says. Sales for the site, launched in September 2000, are undisclosed, but Andersen says it's generating "more per head" than other companies that have made their sales public.
Saraon relies on the originality of Surprise.com and revenue from merchants to whom the site directs customers. Andersen rejects the dead-end models of Furniture.com and Living.com, which offered a limited range of "touch and feel"-type products at roughly the same prices found in brick-and-mortar locations, by selling impulse-driven items, like candle holders and mirrors, that are easy to ship. Kevin Nakao, founder of MusicBlitz Inc., puts his faith in a diversified business model. The Culver City, California, music company funds and develops recordings for artists ranging from unknowns to Grammy-winners, then offers them as exclusive free downloads. Most revenues are generated by licensing popular singles to TV and film studios.
Nakao, 39, left his stint as general manager for music content company Launch.com (he developed Launch's first
Web strategy) to launch MusicBlitz on Grammy night in February 2000. The lessons he took from his time at Launch were primarily good ones. He admired the company's ability to filter and aggregate the music that major and independent labels provided, but he saw even more promise in picking up established artists who weren't part of the major-label system. Without marrying the offline business (recording) with the Internet, none of it would be possible.
For each company, keeping the infrastructure small has been integral. MusicBlitz has 12 full-time employees, while Surprise.com and Bellacor.com have six and 15, respectively. MusicBlitz keeps burn rates to a minimum, grounds financial expectations in reality and bases its brand on customers and revenue. The obstacles of running a dotcom still exist, but the company meets them head-on.
Most important, technology is viewed as an aid to, not the reason for, business. "In technology, as long as you make it smaller, faster and cheaper, [customers] will come," says Andersen. "It doesn't happen like that with consumer marketing. We all assumed [selling] on the Web would create a completely new dynamic, but now we know that's not enough."