Failed Technologies: Dot.coms ============================== In the past 2 years, we've heard stories of dot.coms dropping like flies. 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 last year, more than double the number logged in 2000. The two main reasons many of these novelty websites have vanished is 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. We shall now examine more closely some of the factors which have contributed to the downfall of many a startup company and try to understand what went wrong and how they happened: The "Lots of Money, But No Vision" Dilemma ------------------------------------------ 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 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 dotcom frenzy was fueled by dreams of extreme wealth - for executives, employees and investors. All resources were focused on fast-tracking to IPO, without adequate emphasis on a viable business plan, solid mission and inspiring vision. Paradoxically, the allure of riches brought waves of talented people, but studies suggest that employees are ultimately most rewarded - and show higher rates of job satisfaction and loyalty - by contributing to a workplace that has a larger purpose that aligns with their beliefs. The focus? Greed. The result? Employee turnover was reported to be as high as 75-percent, a few people got rich, employees got laid off with little notice, companies failed and most investors lost a lot of money - in some cases, life savings. Current investigations suggest that Wall Street analysts, immersed in conflict of interest, issued false reports to encourage small investors to buy stock. Products sold below cost ------------------------ Although this might seem obvious, 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. Advertising ----------- Many dot-coms failed in part because they spent millions of dollars in venture capital and IPO money on the task of building brand awareness and acquiring customers. They had a philosophy of unlimited advertising. This seemed to be based on the assumption that the more money spent on advertising, 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 meager return on its enormous advertising investment. The burn rate ------------- 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. Economic cycles --------------- Some failed dot-coms seemed to believe that Internet-based companies are 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. Non-unique product: “The Lemming Syndrome” ------------------------------------------ Many failed dot-coms provided 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 "Business as Web Site" Approach ----------------------------------- Lacking 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). Why else would someone become - much less remain - a customer? The Speed Trap -------------- "Getting to market first," "urgency" and "speed is a competitive advantage" were 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.