Failed Technologies: 	Dot Com's.

The end of the 1990's spelled a very important time for communications across the world. Mobile phones were becoming commonplace, and for the first time ever a cheap alternative to letters, faxes, and telephone calls was emerging. The Internet revolution was beginning, and it was now possible for the small businesses and especially the home user to afford to connect to the Internet, browse websites and use electronic mail.

With a large usage of the Internet emerging, the possibility of being able to reach a large number of consumers at a relatively cheap cost was realised by groups of entrepreneurs. The Internet appeared to be an ideal medium for selling goods or services from websites, because overheads would be extremely small compared to a standard high street chain store and the possibility of reaching not just a local but a national or worldwide market. The dot.com boom as it later became known, had just begun.

Within 2 years, dot coms had hit the news, mainly because of some catastrophic failures. San Francisco based Webmergers, which provides matchmaking services for buyers and sellers of technology companies, said the plugs were pulled on at least 537 Internet outfits in 2001, more than double the number logged in the previous year.

The two main reasons many of these novelty websites have vanished was because of their failure to secure capital and of rampant spending with little calculated projection for return on investment. Many thought that investing huge amounts of start-up capital to acquire customers would lead to retained market share in the future. Instead, the huge investments blitz only contributed to their demise. The wild successes and dismal failures of Internet initiatives have presented a wealth of learning opportunities and new ideas. 

So what actually happened to the huge potential that the dot.coms were founded to take advantage of? The answer to this question gives a valuable insight into the reasons behind the failure of the majority of the Internet retailers, and more generally to why high technology innovations can very easily fail.

The single most fatal miscalculation investors made regarding the Internet was to massively overestimate the speed at which the marketplace would adopt dot-com innovations. That assumption of speed, dictated the rapid pace and scale of investment by both venture capital (VC) firms and public investors, and the resulting over-investment led to the inevitable bubble and bust. Too much money was the downfall of many companies as they "fell victim to the temptation to gin up business plans to meet the size criteria of the typical venture capitalist. A typical VC firm, in order to justify the time it spends on an investment, needs to dispense fire-hose amounts of cash, implying that the recipient business must be fairly big - able, say, to generate revenues of $50 million in three years. The resulting dynamic creates a sort of theme park of co- dependency. VCs dangle big carrots to encourage bigger thinking on the part of entrepreneurs whose DNA already is programmed for grandiosity. The sad result is that many of these inflated business plans were over-funded. They were never destined for the $50 million world, but would have made nice $10 million to $20 million businesses had they been more appropriately financed. The dot.com frenzy was fueled by dreams of extreme wealth - for executives, employees and investors. This greed driven by the founders and VCs helped these new businesses to become public limited companies (plc) which then attracted the private and pension fund investors to speculate and add more money to an already vastly over funded bubble. It soon however become apparent that nearly all Internet retailers were making huge losses as they continued to invest in more resources as they budgeted for huge projected growth. 

Billion-dollar statistics tell the tale of many dotcoms' ability to burn through enormous amounts of funding (a.k.a. - other people's money) with little consideration for or accountability to spend wisely or earn a profit. Many dotcoms seemed more like groups of kids spending lavish allowances while playing with someone else's technology and sitting in someone else's designer office-chairs. Compare this with more patient large companies, or the thousands of small businesses whose owners start and maintain companies on personal lines of credit and shoestring budgets than demand mindfulness about which expenditures are the most cost-effective.

This financial oversight both by investors and founders helped to contribute to the final downfall that occurred within the next two years. Once investors saw no change in the initial losses made by Internet retailers despite grand financial plans, panic set in and shareholders tried to recoup their money before it was too late. Neither party had taken into account the real economic conditions at the time, and soon the rapid economic boom that had bought the dot coms to their height so quickly, led to their demise. Current investigations suggest that Wall Street analysts, immersed in a conflict of interest, issued false reports to encourage small investors to buy stock. Unfortunately the hole in the economic bubble that had artificially been created by the massive hype of dot coms, had been one of the contributing factors to the failure of this extremely innovative technology.

The financial issues that the Internet retailers eventually suffered from, were caused because they believed there would be a never-ending stream of money from investors and their market base was so large since they could reach consumers worldwide. This led to some failed dot-coms believing that Internet-based companies were insulated from economic cycles. Mortgage.com started as a company providing home mortgages over the Internet. During its early history, interest rates were falling and people rushed to the Internet to find the best possible refinancing for their home mortgages. When interest rates began moving up, however, people seemed much less attracted to originating mortgages on the Internet. As a result, Mortgage.com saw its customer traffic dwindle significantly. Despite attempts to refocus the company to gain added origination mortgage business, the company simply had to cease operation. The companies had not accounted for the change in economic conditions, and this oversight led to a number finding themselves out of business almost overnight since the market had disappeared as quickly as it arrived.

However artificial economic conditions were not the only factor in the failure of this new technology. Resources were focused on fast-tracking the process to becoming a plc without adequate emphasis on a viable business plan, solid mission and inspiring vision. Paradoxically, the allure of riches brought waves of talented people, however studies suggest that employees are ultimately most rewarded and show higher rates of job satisfaction and loyalty when they contribute to a workplace that has a larger purpose that aligns with their beliefs. This resulted in people joining the companies because they were greedy since they wanted a slice of the financial success, and an employee turnover as high as 75-percent in some cases. The outcome was that company directors got rich from the flotation's, employees got laid off with little notice, companies failed and as already mentioned most investors lost a lot of money - in some cases, life savings. The bad management of resources, and the reason behind employees joining these companies was extremely unhealthy for dot coms. This meant people were uninterested in making a success of the businesses, since their whole motivation was in making lots of money very quickly in the boom bust environment that they were part of.

Another reason that the dot-coms failed was due to their marketing strategies. This might seem obvious, but many failed dot-coms operated under the assumption that selling products below cost is an effective strategy for gaining customers. Although this assumption may gain customers, if the strategy of selling below cost is maintained, failure of the organization is inevitable. A case in point is pets.com. Selling products below cost is often cited as the primary reason that it had to be shut down. For pets.com delivery costs were a primary problem. Shipping products like at 18-pound bag of cat food was very expensive. Some at pets.com believe that patience would have yielded mechanisms to ensure breakeven and eventual profits. Getting beyond the harm caused by selling below cost, however, proved to be too much of an obstacle to overcome.  This marketing gimmick of attracting customers by offering low prices failed to work successfully, and ultimately helped create the huge losses that caused massive financial problems for many Internet retailers. 

Many dot-coms also failed in part because they spent millions of dollars of VC and money from floating on the stock exchange, on the task of building brand awareness and acquiring customers. They worked on unlimited advertising and gimmicks, such as selling products at a loss, to attract more customers, but these failed to be a sound economic decision since they failed to do this. This strategy seemed to be based on the assumption that the more money spent on advertising and marketing, the more successful the company would be. Boo.com, an Internet fashion retailer, was recently sold and relaunched under new management. Many believe that overly aggressive advertising expenditures severely weakened the original company. Originally, Boo.com spent a whopping $223 million in advertising and promotions, including a $42 million print and TV launch program. Overall, the company got a very meagre return on its enormous advertising investment. Essentially by over marketing their companies, the dot coms managed to channel too much money into advertising and running loss leaders, which helped create the financial problems that led to their eventual failure.

A big problem faced by the dot coms during boom, was whether somebody else would set up a company selling an identical product. With the growth of the technology almost overnight many dot-coms found themselves providing goods and services that were much like those of competitors. When the dotcom era blossomed, thousands of investors were only too happy to support an e-commerce start-up or anything with dotcom in the name. The words "online" and "e" gave companies the Midas touch, regardless of industry, resulting in a kind of greed-induced mass hysteria. Rather than following a vision specific to and suited for the organization, dotcoms followed the few seemingly successful e-enterprises hoping to ride their wave. As with actual waves, there comes a time to break on the beach, and the copycats that had no viable business came washing up to shore like driftwood. 

The possibility of this kind of cut throat competition led to "Getting to market first," "urgency" and "speed is a competitive advantage" becoming common business mantras of the dotcom and high-tech world. Yet the faster these organizations moved, the more they ignored signs of severe employee burnout, pending droughts of funding, poor customer service, unfocused leadership, and diversions from the original vision and mission (for those that had bothered to define them in the first place) - each of which helped bring the e-meteor crashing to Planet Earth. The speed element of the competition put pressure on companies to offer services and products without checking if it was what the consumer really wanted, or whether there was a viable business plan for the product. 

The lack of planning at an early stage resulted in a lack of sound business plans and virtually ignoring even basic human-resource and customer-service requirements. Most dotcom leaders focused on expensive, splashy websites and a polished "Gen X" image - an emphasis that didn't bode well for hundreds of the startups. Unfortunately, simply getting funding and building a technology infrastructure doesn't make a successful business. There has to be a need and a purpose to the enterprise (aside from spending someone else's money), for a member of the public to become a customer, and to then continue buying the products offered by dot coms. Communication between the company and customers needs to be good, especially with an e-company where the consumer never meets the staff face to face, and the initial design needs to be successful. The lack of both these key requirements helps contribute to company failure.

The failure of dot coms was not for any singular reason. Instead it occurred for a number of main reasons ranging from economic conditions, and greediness by investors, to the lack of basic requirements such as communication, marketing and design. With too much money and no clear business plan most dot coms were doomed to failure from the beginning. The mad rush by investors because of the marketing hype the Internet retailers created for themselves, helped growth spiral out of control, encouraging people to start companies that were offering similar services so they could simply get a slice of the money from shareholders and VCs. The simple idea of selling goods and services over the Internet, had led to a catastrophic failure that nobody had managed to foresee.