Ding! Time's up for the illusion that dotcom guarantees success. If you're still in the game, lucky you. If you're not, take solace in knowing the rest of us are learning from your mistakes.
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Gail Klein Bentley was on top of the world-actually, wayhigher than that. The 30-year-old Charlottesville, Virginia,entrepreneur had zoomed out of nowhere to land $1.2 million inangel funding in the fall of 1999, and her Web site,WorkingWeekly.com, was the subject of heavy buzz. It had quicklygrown to 60 employees and had a potentially huge customer basebecause its focus was on the changing workplace-on helpingpeople find meaning and fullfillment in their working lives. Howcould it fail?
Then one day the bottom fell out. "I had a commitment for$2 million in additional funding. The day they were supposed to putin the money, they withdrew the offer," recalls Bentley. Notgood-and the ride became stomach-turning bumpy. "Ofcourse I went to other funders, but nobody else would invest,"says Bentley, who served as chair, president and publisher. "Ihad to lay off all 60 employees. I had never failed in my life.That was just a terrible time."
As we've all seen in the news, Bentley's pain isn'tall that unique. Last year, the talk was about the mushroomingnumber of dotcom millionaires. These days you hear more about allthe dotcom disasters. Even big names are among the casualties:Living.com, Boo.com (although Fashionmall.com did buy and reopenit), Pets.com and even ToySmart.com, a onetime Disney subsidiary.But countless lesser-known companies went under, too. Entire Websites have sprouted to do nothing but maintain death watches onsputtering dotcoms. The upshot is that what had seemed a no-brainerroute to riches suddenly looks more like a dead end. But is it? Isdotcomming only for kamikazes determined to flame out? Is therestill money to be made online?
Mistakes Dotcommers Made
You bet there's money-and you can say that loud andproud. But the game has changed: The ones who'll prosper arethe ones who've learned from the failures of first-round dotcompioneers. And there are lessons aplenty to digest. "I made somany mistakes," admits Bentley, whose story is one that dozensof dotcommers can relate to. "Nobody thought we could failuntil we did, and this has taught me many lessons."
In the words of early-20th-century philosopher George Santayana,"Those who cannot remember the past are condemned to repeatit." That's why it's so crucial to dig into themistakes committed by the first generation of dotcoms. Here's asampling of their biggest flubs:
- They did stupid things. "How smart is it for astart-up to run Super Bowl ads? Is that stupid, or what?" asksBrian Farrar, president and COO of Xpedior, ane-business consulting firm in Chicago. He says the many millions ofdollars companies spent on high-profile advertising (such as SuperBowl minutes) produced little on their bottom lines.
"Many dotcoms say they want branding, but they don'tknow what that means," adds Rena Kilgannon, a co-founder andprincipal of The Ad Incubator, an Atlanta marketing firm that workswith start-up tech companies. "Bright people are running thesecompanies, but they're clueless about low-cost ways to market,the kinds of strategies start-ups should be implementing."
- They underestimated the importance of real-worldknow-how. "Much vertical know-how is needed to succeed inretailing, and e-tailing is no different," says Ron Dayan, CEOof Net consulting firm Complete-e Strategies in New York City. "You needto be good at sourcing and pricing products, for instance. Faileddotcoms never developed that expertise." You also can'toutsell an established brick-and-mortar player if you know nothingwhatsoever about the industry. "But," he continues,"many dotcoms thought they could do just that."
- They overestimated consumer demand. "Consumers havebeen slower to adopt the new technologies than many entrepreneurspredicted," says Rohit Shukla, president and CEO of Larta (formerly LosAngeles Regional Technology Alliance). A byproduct: "Manydotcoms incurred horrific expenses simply trying to persuadeconsumers to shop online," says Shukla. A start-up doesn'thave to spend one dime explaining to consumers how to shop at alocal mall. But it's different online, where most consumersstill haven't made substantial purchases. Most dotcomentrepreneurs never factored that into their thinking, says Shukla,and the result is that they haven't made a convincing case forconsumers to change their long-standing habit-that is,shopping at brick-and-mortar malls-in favor of buyingonline.
- They never achieved a business model that covered the costsof customer acquisition. "And they weren't gettingrepeat business," says Mark McDonald, a partner at AndersenConsulting and a co-author with Peter G. Keen of eProcess Edge: Creating Customer Value and BusinessWealth in the Internet Era (Osborne/McGraw-Hill). Manydot-coms managed to eke out some sales-by offering freeshipping and/or extraordinary discounts that priced merchandise ator near wholesale cost-but none of this developed an iota ofloyalty on the part of buyers, who quickly moved on to whateversite offered the lowest price the next time they wanted to buy.Just as bad, continues McDonald, many of these dotcoms shotthemselves in the foot: "With the ones that did make sales,many faltered when it came to customer fulfillment," meaningthey shipped merchandise late or not at all, or they shipped thewrong merchandise. Says McDonald, "Few dotcoms have made anyprogress in terms of developing economical ways to build repeatbusiness."
- They lacked fiscal controls. "Many of them hadabsolutely no discipline about spending," says BillO'Connor, head of the creditors' rights practice at the NewYork financial institution practice office of law firm Buchanan Ingersoll.O'Connor, a man who has witnessed the dismantling of severaldotcoms, says many dotcoms grossly overspent on everything fromoffice space and decor to freebies for workers (which sometimesincluded lavish free lunches, free massages, free yoga classes andmore).
- They settled for unimpressive management. "Therejust aren't that many good managers out there," says WendyHaig, founder and CEO of Washington, DC, GlobalStrategy Corp., a consulting firm that specializes in helpingdotcoms retool. According to Haig, when times turn tough,management inexperience and inadequacies become glaringlyobvious.
- They didn't execute. "They were started basedon ideas-often good ideas," says George Russell, CEO,co-founder and president of e-commerce consulting firm e-CommerceSolutions in Stamford, Connecticut. "But companies neverexecuted the ideas." Where did execution falter? You name it,says Russell, who indicates that failed dotcoms often haveconsistently failed to execute well in any portion of theirbusinesses. It's a harsh indictment-but it's also abelief that's widely shared. Slipshod execution seems to havebeen a failing of just about every failed dotcom you can pointto.
Who's to Blame?
It's easy to throw bricks at the founders of failed dotcoms,but according to Scott Blum, that aim is way off. "Ipersonally don't think dotcoms made mistakes," says Blum,36, founder and former CEO of B2C and B2B e-tailer Buy.com. Blumrecently founded Enfrastructure, an Aliso Viejo, California,company that provides a range of outsourced solutions todotcoms.
Sure, mistakes were made, admits Blum, but "it was thebankers who made them, not the dotcoms," he says. "Therewas a time when every dotcom was getting financed."
Perhaps Blum is oversimplifying-many dotcom executivesmade manifold mistakes-but he has a valid point nonetheless.Venture capitalists, supposedly shrewd investors of otherpeople's money, took wild plunges with dotcoms. "There wasan overflow of VC capital into companies that didn't have goodfundamentals," says Chris Karkenny, CEO of NetCatalyst, aLos Angeles firm that helps dotcoms grow.
"Investors didn't do due diligence," agrees JamesGutierrez, founder and president of MagicBeanStalk.com, a SanFrancisco-based consulting firm that targets dotcoms. "Therewas a herd mentality, and they invested wildly."
Too much investment money chasing too few good dotcom businessplans set the stage-but, says Gutierrez, investors aggravatedfailure rates. How? "Many dotcoms reacted to the changingmoods of their investors by altering their business plans," hesays. "When they did this, they failed to stick with theircore business." What resulted was a flood of companies withill-defined goals and little chance of accomplishing any ofthem.
Add it up and, by any yardstick, promiscuous venture capitalfunding of poorly conceived dotcoms played a substantial role.Granted, the dotcom executives drove their businesses into theground-but the fuel in most cases was provided by VCs, whoinvested incautiously. One upshot: "VCs are being much moredeliberate," explains Gutierrez. "They're now askingfor weekly cash-flow summaries. A year ago, they never asked to seethem. When some dotcoms crashed, they started requesting monthlyreports. Now it's weekly. They're staying much closer totheir investments."
Don't worry, though. There's still plentiful VC fundingfor promising Net start-ups. Case in point: OhGolly.com, a NewportBeach, California, Web design and hosting company that targetssmall businesses. Started with a business plan that called forgiving away hosting services, OhGolly junked that model when itbecame apparent that, sure, it was easy to sign up"customers"-but they weren't paying a thing,and it was much harder than previously envisioned to get them tobuy additional services. So OhGolly shifted its business model andadopted a structure in which customers pay as they go.
After a few uncertain months, "the company turned cash-flowpositive," says Frank Kavanaugh, the 40-year-old president andCEO of OhGolly. And as Net businesses go, having outgo smaller thanincome is a rarely attained state. "Now that we don't needmoney, investors are coming to us, offering us cash," quipsKavanaugh, who admits he spent "many sleepless nights"wondering whether the company had any kind of profitablefuture.
The lesson? Look profitable, or about to become profitable, andinvestment money usually isn't hard to land. "Investorsare insisting on seeing business models that include sustainablerevenues," says Andrew Nuttney, an analyst with Datamonitor.Give them that, and their checkbooks will open.
Future Focus
The question is, Is the epidemic over? Will we no longerregularly see headlines reporting the death of yet more dotcoms?Don't bet on that, says Ron Harris, 47-year-old founder and CEOof database company Pervasive Software Inc. in Austin, Texas. "Westill have a lot of shaking out to do," predicts Harris."We haven't reached a steady state yet. Many dotcoms aresimply doomed, to be quite honest. A lot of these entrepreneurslack an understanding of how to make a business modelwork."
There's an irony, though, says Harris: "For everydotcom that closes, 10 new ones will launch." Why?Unquestionably, the Web is changing how business gets done, andit's an exciting frontier for entrepreneurs eager to make theirmark. And these entrepreneurs will surely find businesses worthdiving into.
"There definitely are addressable niches open to dotcomstart-ups," says Shukla. "The Internet remains anefficient conduit, and dotcoms with real strategies will find waysto succeed."
Adds Haig, "Watch and you'll see many dotcoms withrevenues survive. In the early days of the Net, many entrepreneursignored the importance of revenues. They had none, or very little,and when the investment cash ran out, their businesses died. Nowmore companies are newly focused on revenues. The Internetisn't going away, and there will be more successstories."
Robert McGarvey is Entrepreneur's "WebSmarts" columnist.