Guest column: Web startups: a wave of creativity or mediocrity?

I keep getting this sinking feeling that the Internet has unleashed not only tremendous entrepreneurial creativity, but also tremendous entrepreneurial mediocrity. How else could so many unprofitable businesses become household names? How else could wanna-be entrepreneurs with no hope of succeeding in regular competitive marketplaces form so many new companies? How else could we have such highly credible people, such as Dr Everett Koop, the former US surgeon general, and Lou Dobbs, formerly of CNN's Moneyline, trying to become instant Internet multimillionaires?

The Internet consists of networks that can grow in numbers and value at geometric rates. Building market share now is clearly more important than earning profits. Therefore, most Internet companies hire quickly, market heavily and run huge deficits. They are supposedly investing in the future. Indeed, some Internet business ideas seem brilliant -- like building browsers and servers, selling books, doing auctions or trading stocks. But even Internet companies should eventually be able to generate enough profits to make the investments worthwhile. Unfortunately, too many of the ideas and companies have mediocre chances of success.

Investors are realising this and have bid down the value of many Internet companies in recent months. The IPO market is also becoming tougher as "angel" investors, venture capitalists and stock underwriters seem less willing to back weak ideas that are easy to copy or have no hope of generating a profit.

Of course, some powerful companies can take mediocre ideas and still make lots of money with their clout. For example, Yahoo and Amazon.com have gone on buying sprees of companies of various quality. But they can post links to the acquired companies' Web sites from their own and make the new companies work better -- much better. In fact, Amazon.com's venture business may be its best hope of turning a real profit. AOL, Netscape, Microsoft, CNET, eBay and other companies with popular Web sites can do the same.

We have seen this type of leverage in other forms for many years. It's not so different from economies of scale or scope. I'm more concerned with the negative implications of the Internet bandwagon. It has distorted careers and dreams. It has distorted the labour market. It has wasted people's time. Over the past few decades, only one of out 10 startups has succeeded, and only one or two business plans out of a hundred make enough sense for a venture capital firm to back the idea. Yet people continue to send thousands of plans to these firms each month. More worrisome is that at leading universities and business schools, too many of our best students aren't going into industry but are joining or creating fledgling startups. Many corporate IT departments are also seeing talented managers and employees start new Internet firms.

I understand that the incredible entrepreneurship we have seen in the US has led to the success of many US industries, and consumers have benefited from new and cheaper products and services. But there are signs that leading US companies will soon be hurting for top-notch IT employees, because so many talented MBAs and computer science graduates, as well as seasoned employees, try their luck in the Internet startup lottery.

The underlying problem may be that too many Internet entrepreneurs don't think enough about their business models because they don't have to. If Amazon.com doesn't buy them, some traditional company or venture firm that wants to jump on the Internet bandwagon will. For investors, the weak firms present a pyramid scheme, or musical chairs. We have seen these games before, too. Many people will be left standing -- with their hands and their pockets empty.

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