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| THE AWFUL TRUTH ABOUT START-UPS
Joanne Kelley’s article ["The Awful Truth About Start-Ups," April/May 2000], should be required reading for every M.B.A. student, entrepreneur, and prospective investor before they wade into today’s roiled Internet marketplace. For the few World Wide Web-related companies turning a profit today, thousands more—including most big names, such as Amazon.com—are gushing red ink and showing few signs that they will ever attain profitability. Thin concepts and unrealistic expectations take their toll. Abandoned in the name of creating something "cool" are such Old Economy standards as creating shareholder value, finding and keeping satisfied customers, delivering on promises, and making money. Nonetheless, hordes of Pierre Omidyar wannabes [Omidyar is the founder of eBay] continue to persuade scores of credulous venture capitalists and starry-eyed Main Street investors to fund business plans that look as if they were written on the craps tables in Las Vegas. A roaring economy and bull stock market have only fueled such hubris. The Internet is a major medium that will not only transform existing modes of communication, but also supplant some of them in time. But the quickening pace of Internet enterprise mergers, consolidations, liquidations, and collapses point up the fact that the war has just begun. —Bob Diddlebock
Kelley does a good job of taking some of the mystery out of dot-com companies. For mystified traditional executives, I’d like to offer a practical set of rules to distinguish between the "new, new thing" and yet another flash in the IPO pan. As someone who has worked in the on-line industry for seven years and experienced more than a few failures first-hand, I suggest a close, hypercritical reading of prospectuses for the following:
Despite what some media would have us believe, the fundamentals haven’t changed. Companies (start-up and otherwise) are in business to make money. At the same time, the myth of the start-up should not give rise to the countermyth that all such ventures are unworthy of even being called "companies." It’s up to you to figure out the difference. —Bill Lessard
TO INFINITY AND BEYOND! (OR MAYBE NOT) After finishing reading the article "To Infinity and Beyond! (Or Maybe Not)" [The Last Word, April/May 2000], I felt like I’d seen a boxing match. [Wharton Business School professor] Peter Fader would make telling points, then [Fairmarkets Vice President] Bryan Semple’s response would be like devastating counterpunches. Is the Internet causing people to buy more of a certain product than they traditionally would? Maybe in the short term, but probably not overall, as Fader says, based on his extensive historical data. Still, I think the Internet is such a new phenomenon that it is dangerous to extrapolate on historical information. E-commerce is not just another avenue of distribution. Rather, it should be viewed as a method of delivering content and products that traditionally could not be offered in the bricks-and-mortar world. At ARTISTdirect, we realize the value is not in selling CDs. We view that as more of a service. The true value is in connecting the artist with the fan. Where else can you chat with your fans? The successful companies of the future will be those that can employ the full capabilities of the Internet and don’t just view it as a different means of distribution. —Mark Anten
Fader brings out an important point that everyone in the e-commerce industry needs to understand. While the internet may provide a new way to shop, the same consumers are shopping for the same products as always. A change in venue does not necessarily mean that fundamental buying patterns have changed—we did not start drinking more milk when the milkman stopped making home deliveries. The Internet is just the latest in a long series of changes in the channels by which we market and deliver products to consumers. Its arrival may be sudden, but it is the stepchild of broadcast advertising (70 years ago), direct marketing (50 years ago), direct-response television (10 years ago), and so on. Consumers still are driven by trackable behavior patterns that can be measured. Fader is one of the greatest researchers in measuring buying behavior. His technique and knowledge are well-understood and unimpeachable. Discovering that the internet may only represent a temporary shift in buying patterns is not welcome news, but we have every reason to believe that his projections regarding Internet buying patterns (and the tools he has created to help us understand them) should be embraced by the Internet community. The Internet industry is driven by press releases from high-profile research houses promoting their latest telephone polls as the gospel truth. Significant behavioral studies and data analysis are harder to understand and harder to use. It is vital that the industry look to these more substantial techniques coming from academia and begin to apply them to their Web businesses. Only through this sort of work will we extend this bubble of enthusiasm into long-term success. —Andy Sernovitz
THROUGH THE LOOKING GLASS I agree with the general message in the article by Andrew Robinson that new e-commerce business models will arise that integrate a whole range of transactions and services needed to satisfy complex customer desires [CEO User’s Guide, April/May 2000]. You do begin to act like the movie Santa in Miracle on 34th Street when you think about the kinds of customers you serve, not what lines of business you’re in. Santa is actually not a bad metaphor. He can be viewed as a sage, someone experienced by a long life who can understand people’s desires—and can give them what they need. Understanding people requires maturity; the bright young things driving today’s dot-coms understand what people like themselves want. But we all need to "think like our customers." Acting like Santa, though, won’t pay the bills. The definition of a new revenue model is the main issue confounding most large organizations today. Many of today’s bricks-and-mortar organizations are built around size and scale of the "core business." To focus more on the needs of their customers, this will have to change; consortia will emerge where different entities provide a set of services in the overall "wrapper" of total services offered. The technology that we see now as innovative will become as readily accepted as the telephone. By necessity, companies will be flexible way beyond their current fixation on capital assets and people. They will be able to integrate highly valuable, third-party functions and operations, quickly and easily. No one yet has an accurate view of the business models that will evolve to create profits from these operations. But the business models will be completely unlike those we see today. —Clay Brendish
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The numbers: If a start-up doesn’t foresee profitability until the year 2261
and is burning through capital at the rate of $10,000 a second, common business
sense should tell you that eventually it’s going to run out of funding.