Dazzled by Dotcom Dollars

Although founding an Internet start-up and taking it public has made a lucky few very rich very fast, it should not be forgotten that it's not easy and it's not common.

"The ratio is well over a hundred to one of failures to successes," says Gartner Group analyst and co-founder of Asia On Line in Hong Kong Joe Sweeney.

Like any traditional bricks-and-mortar operation, Sweeney cites a sound business model, experienced management and partnerships, and an effective, targeted marketing campaign as the keys to success in dotcom land.

"I spend my time working with venture capitalists looking at business plans. I made my money as an entrepreneur, so I've been on the side of the dotcoms," Sweeney explains.

"A lot of the time the reason the business can't move forward is because the business plans suck! Forget the vision thing - people think that all you need is a good idea, but they're wrong.

"You need a good idea but you also need to show how you're going to make money. A lot of people fail because they don't get the business plan right."

Once the dotcom has taken the seed capital, the next challenge is to get the right management in place - and more often than not, the founders need not apply.

While company founders tend to be entrepreneurs - full of ideas, initiative and possessing high technical expertise - they often lack the strong management skills that are so attractive to prospective financial suitors.

Another common failure point on the path to dotcom success, Sweeney notes, is when the founders try to hang on to control of the business for too long. And even those who are less reluctant to hand the reins over to a management team face another common hurdle - the ever-present skills shortage. "Even if the founders want to get the right management, they might not be able to. There aren't enough good managers to run dotcoms and there are more positions than people."

As a result, good managers tend to be both hard to find and expensive, he says.

George Colony, CEO of US-based research and analysis company Forrester, recently did a series of interviews with CEOs, one in five of whom were heading-up dotcoms.

Colony is scathing of the general standard of dotcom management.

"The business thinking of those [dotcom] CEOs centred on simplistic and cliched mental models: 'Be like Amazon!' 'Advertise, advertise, advertise!' 'It's a land grab!' 'We don't want to be profitable too fast.' 'B2B is the place to be.' There was a fanatical focus on valuation - getting public and liquid - while value - what the customer eventually gets - was a back-seat discussion. In many ways, these companies felt hollow, lacking some of the fundamental ingredients of long-term success," Colony says.

Partnerships are equally crucial, as Dion Wiggins, New Zealand-born chief technology officer for US-based start-up Control-Shift, can testify.

He says entrepreneurs and company founders should thoroughly investigate their partners' character and background, and outline an exit strategy on paper early in the process. Wiggins speaks from personal experience when he says a company's business partners can be its greatest asset or biggest pitfall - it's a lesson he learnt the hard way.

A co-founder of Asia On Line with Sweeney, Wiggins went on to found Active X Factory, an Internet software factory in the Philippines. That company eventually experienced financial difficulties and Wiggins was forced to flee the country when he discovered his investment partners had possible links to an Asian Triad organised crime syndicate.

"With Asia On Line there were a lot of legal tricks with partners, and people like Joe and myself lost a lot of time and money. It could never happen again, but back then I was young and I made mistakes," recalls Wiggins. "Active X Factory was a software company created after Asia On Line. We chose the Philippines because it was hard to find good programmers in Hong Kong, but the Philippines had them in abundance. Again I didn't have good luck with partners - they didn't keep their promises and there were money issues. I went to the New Zealand Embassy and they told me to leave the country immediately because my life was in danger. In the Philippines law is not law as you and I know it; law is who you know and how much you pay them. It's very cheap to knock someone off and that is a common solution to business problems. I went home, packed my bags and the Embassy put me in a safe house for the night with armed guards."

Wiggins, who is now based at an Internet start-up in San Francisco, says that while he didn't succeed financially from his experiences in Asia, he got a lot of recognition for his work, including the Chairman's Commendation Award for best software development in the Philippines, awarded personally by Bill Gates.

"I learnt a tremendous amount. It's the school of hard knocks. In fact, venture capitalists (VCs) in [Silicon] Valley find you more attractive to invest with, if you've had a failure because you know the pitfalls. VCs don't invest in technology, they invest in people."

VCs are also becoming more jaded and smarter about who they invest with.

With some VCs receiving up to 200 business plans every week, it's no wonder funding is becoming harder to come by.

"It doesn't matter if you've got the best business plan in the world, it's getting to the stage where you need a personal referral," Wiggins says. "The dotcom buzz is not all it's cracked up to be. Everyone is trying to get on board, but for every start-up funded there are 1000 that aren't. I personally know 500 people who are trying to get funding."

Among those is Wiggins' own company, Control-Shift, which is building an Internet software product called the Personal Internet Enabler. In his drive to succeed, Wiggins is currently working 9am to 4am seven days per week, while his wife cares for the couple's baby boy.

"It's a gamble," Wiggins admits.

Know thy customer

Effective marketing and customer knowledge are, of course, crucial ingredients in the dotcom success recipe, but this doesn't have to mean spending big bucks.

Cashed-up dotcom companies, fat from VC or IPO funding, are wasting vast amounts money on ineffective marketing strategies, according to Forrester's Colony.

"The idiocy of the 'hollow dotcoms' was embarrassingly revealed during this year's US Super Bowl," Colony expands. "By the third quarter the advertisements for dotcoms had become the running joke of the game. With the exception of a few good ads, most were a phenomenal waste of money. They failed to identify the company or critical information like the benefits and features being offered."

In a crowded market like the Internet, guerrilla marketing tactics are not only the cheapest, they also tend to be the most effective.

Sweeney recalls the early days of Asia On Line, which started as a bulletin board in Hong Kong: "We were tiny - basically six guys in a cardboard box - so we had to be very targeted with our marketing. We used guerrilla marketing tactics. I think a lot of dotcom companies now are wasting a lot of cash."

Sweeney says one of the most effective marketing moves for Asia On Line was to obtain the rights from CNet for The Ultimate Internet Tour, a how-to video guide to the Internet. The company produced it in China for $1, packaged it with an Internet installer and one month's free Internet access, and gave it free to video stores to sell for $20.

Because the stores got free revenue, they gave the video top shelf billing and it "sold like hotcakes".

"The average cost of an eyeball is $US150-$350, but we were getting them for $1.50, less than one per cent of the cost," explains Sweeney.

Mark Hollands, Australian general manager of Internet start-up Beenz, is another believer in guerrilla marketing tactics.

"It's really hard to market a dotcom, because it's so expensive and there are a lot of people making a lot of noise. The question is how to cut through to the people you want. Targeted marketing is important, particularly if you're short on cash."

Originally founded in the UK in March last year and established in Australia in November, Beenz provides an outsourced customer loyalty scheme for Web sites.

The Beenz concept is to increase Web site traffic and customer knowledge by providing an incentive to visit a particular site and stay there.

In return for visiting a participating Web site and filling out customer surveys, Internet users are rewarded with 'beenz', which can be cashed in at any Web site belonging to the Beenz program.

Hollands believes customer knowledge is the foundation of any successful dotcom strategy, because e-commerce makes geographic location irrelevant and widens the scope of competition.

While a sports shop may be the only one on the street, there are at least six Web sites selling sporting goods in Australia alone, not to mention in the international arena.

"It's really idiotic to focus your battle plans on trying to sell more than another Web site because you never will," Hollands warns. "You should focus on keeping your customers. The distinction between a fluffy business model and a real one is ownership of the customer, versus 'click and hope'. It's the customer and how much you can earn out of the customer [that counts]."

Another key factor is making sure the fundamental business idea is unique and sustainable.

"Many start-ups fail because they believe they have a good idea - but it may not be sustainable longer term and when an investor is faced with limited cash and an investment choice they will ultimately choose the better business to put their money into," Geoff Barnes, a share market analyst at Hartley Poynton explains.

"Too many companies have a solution to a problem that doesn't exist," Control-Shift's Wiggins adds. "It's not vapourware because they have actually created something, but it's something that's not needed. You also need the ability to keep the product afloat in the marketplace, with sustainable commercial advantage. If someone can copy it tomorrow it's not a good business model. You could be doing brilliantly for six months and then someone takes you out. I knew a company doing online mortgage brokering and they were doing really well . . . until Microsoft brought out a competing product called Home and killed them."

In April this year, the stock market finally put the kybosh on "hollow dotcoms", with what many observers call an "inevitable" and decisive "correction" that wiped $36 billion off the Australian stock market overnight and brought over-inflated dotcom share prices back to earth with a resounding thud.

Hartley Poynton's Barnes says the share price of technology and Internet stocks will ultimately recover, but only for companies with true market value.

"Companies that will survive are the ones that have a real potential to earn money, have a strong business plan and a long-term plan for success," explains Barnes. "The ones that will not survive are those that rely on investors to keep giving them money to spend on their business - as the share prices fall, they will struggle to raise money and ultimately end up cash-strapped."

While the "new economy" is here to stay, many analysts say it's now time to sort the wheat from the chaff.

Forrester's Colony argues that Darwinian forces will obliterate "hollow dotcoms", while long-haul players will end up with a disproportionate share of their respective marketplaces.

"So what's going to happen?" he asks. "Some fantastic companies will be built that end up dominating the Internet economy. But let me emphasise the word built. It's going to take years; blood, sweat and tears; developed wisdom; and enlightened business decisions to construct the truly stellar Internet capitals. The hollow dotcoms will get trashed - along with a sinful amount of venture and day trader capital."

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