What were the mistakes of the days of dot-com mania?

Hi,

What do you think were the big mistakes of online businesses in the days of dot-com mania?

It's been about a year (give or take a few months) since the tech crash, so now may be a good time to reflect on what the lessons of history are for US....

What are your thoughts on this?

- Dien Rice

One of the reasons I've been thinking about this topic was because just yesterday, I saw a documentary about online business which was obviously made at the height of the dot-com boom.... Now, it looked like a quaint slice of history. Times change so fast.

I think one of the mistakes was the focus on "eyeballs" instead of sales. You can have a million eyeballs, but if you don't have any sales it's not much good....

- Dien Rice

I worked in a major international advertising agency at the height of the dot.com boom.

Everybody knew that these cyber folks were crazy, but they had so much money it was impossible to tell them that they were being set up for a fall.

I remember sitting in a conference room with a 23-year old Swedish entrepreneur who had just been given $10m by a venture capitalist to launch a 'new concept in chat rooms.'

We all knew that his idea was rubbish - everyone in the agency had spent a day trying to use the chat room. It took about an hour just to sign on!

Yet, when this spotty lad sat in tattered jeans sat in our boardroom and insisted that we send out for smoked salmon (which he left) and champagne (at 10 am, but he did drink it), did we tell him his site stank?

No. The emporers new clothes appeared before our eyes and we smothered him with fantastically well thought out advertising concepts for targeting online chatroom users.

Did we get the business? No. As he left, he mumbled that we didn't 'get it'. His bankers, he said, would never let him spend the money online - 'they want to see a big splash, you know, TV, Cinema, that kind of stuff.'

That was one of the reasons so many dot.coms failed. They thought (or their investors did) that all it takes to build a trusted and respected brand is to spend huge amounts of money. Forget brand values. Ignore the fact that these things take time to establish.

They saw a simple equation: money in = brand out. More money in = bigger brand out.

Burn rate was the mantra. 'You can't hope to make money in the future unless you are burning enough right now.'

That is what happens when marketing is taken over by financiers, programmers, chancers, and everybody else who should be getting on with their own job. If they had left the sales and marketing to the people who understood it, some of them might have survived.

Just my observations (and by the way, I've nothing against Swedish people).

Martin Avis




BizE-zine: Success strategies that really work.

Thanks Martin, we've had some fascinating answers.... (I'll write more replies later....)

That was an interesting story!

I guess in a way, some of these dot-commers did "succeed" but not in the "traditional" sense....

One of the "laws" of business is "you have to sell something to somebody" (I borrowed that from Jim Straw), and I guess when you think of it, they did sell something to somebody.... They sold their stock.

That seems to have been the essential business model.... Create an internet company, sell the stock, get rich.

It worked for a while, but it's unsustainable - it's a bit like a chain letter or pyramid scheme in that sense, each person gives the people higher up on the chain some money, and you'll get more later yourself. Eventually, it comes crashing down, and just like pyramid schemes, the ones at the end of the chain lose the most.

These venture capitalists were very experienced at business, so I'm sure they know all this stuff. They just thought they'd get rich while they could from the above scheme - not by selling products to consumers, but by selling hyper-inflated stock to a hungry public.

That was a very interesting story, Martin, and I can certainly see how it could be hard to tell many of these people that their ideas would not work. Especially since there was a kind of "arrogance" about it as well.... The standard reply was, "you just don't get it." Of course, you DID "get it," but they were under the delusion of the bubble....

- Dien

Hi Dien --

Just some obvious observations:

1) Too much money. Most of these companies found it way too easy to attract way too much money.

2) Grossly inflated overhead & perks, just because the money was there to spend.

3) An over-dependence on non-sustainable business models.

4) Hyped up projections... And the fact that they believed their own hype.

There's a few to start with. : )

Best Wishes,
Jim Erskine
Homeway Press




Some great LOCAL business ideas for you!

WHERE'S THE MONEY COMING FROM?

I know friends who worked at some of these Dot-coms. They had great ambitions, great drive, great plans, and all sorts of startup capital. What they didn't have a *clue* about was where the money was coming from. They were interested in the "new paradigm" (Internet! Freedom! Lotsa Money Floating Around! Everyone Needs One!) and forgot the old paradigm of know what the market is, identify the value to the customer, analyze the need, know how to find where and who the customers are, know what the customer thinks they'll need and what they'll pay for. It was the "if you build it they will buy" mentality and combined with the joy of playing with the venture capital, it was a formula for disaster.

More money must be coming in than is going out. Just common sense.

The high rollers spend all of the venture money and then leave the troops holding the bag.

Even Amazon.com is going to come crashing down if they don't control the comings and goings of their cashflow. If you have a hole in your bucket, it will empty the bucket. You may be able to keep it full by pouring in more water faster than it is leaking out, but once you stop adding water, the bucket will run dry.

Kind of like the monetary policy of some governments...the difference is that they can print the stuff when they need more! I'd go to jail if I tried that myself...

The bottom line is the bottom line.

JDB


The bottom line on auctions...

Greetings,

Way too much money. It is the smaller operations that are still around. Everyone here knows the Internet is a great way to do business. Christmas retail sales are down because of the Internet. But everyone "knew" the Internet was HUGE - and they didn't take the time to build a base to start from and grow. They were willing to spend millions thinking the Internet couldn't fail. Now they know they can - and businesses will start to grow online in a more realistic fashion.

Stephen Dean
ebizknowitall.com
Home of the Tombstone Sales Letter


The Tombstone Sales Letter

...how long the dot-com boom lasted. I mean, a lot of people saw the writing on the wall very early on. But when things didn't start crumbling down right away, it became easier to believe that maybe the economy had changed.

If you were in a high-tech field, I think it took a lot of character to withstand the peer-presure that built up over that time.

Regards,
Phil

> Greetings,

> Way too much money. It is the smaller
> operations that are still around. Everyone
> here knows the Internet is a great way to do
> business. Christmas retail sales are down
> because of the Internet. But everyone
> "knew" the Internet was HUGE - and
> they didn't take the time to build a base to
> start from and grow. They were willing to
> spend millions thinking the Internet
> couldn't fail. Now they know they can - and
> businesses will start to grow online in a
> more realistic fashion.

> Stephen Dean
> ebizknowitall.com
> Home of the Tombstone Sales Letter

Hello,

It is true that during the internet boom, mistakes were made by both investors and entrepreneurs alike. But that doesn't mean the internet doesn't hold some promise. The truth is, the internet does change the way some businesses operate, as transaction costs come down and more specialised "niche" businesses become viable.

There are other advantages for the successful dot com, arising from increased user selection and convenience in the case of Amazon.com, and the possibility of a huge marketplace of buyers and sellers in the case of (profitable) Ebay.

My guess is that many uninformed investors got some sense that the internet held great growth, but without really understanding the sector or the microeconomic factors determining the success or failure of individual companies, many investors blindly invested in the internet sector as a whole, rather than trying to identify superior companies that did have some underlying competitive edge. In this flurry of market action and unbelievable returns, more people subscribed to "momentum investing" and other such methodologies which always eventually crash back to reality when profits fail to materialize.

Seeing this great flow of money to the industry, I think this encouraged entrepreneurs to this modern-day gold field in an effort to speed up their retirements. Of course, this isn't a blanket statement; I know there are entrepeneurs out there that have entered the internet arena due to genuine ideas about viable businesses.

I think the above reasons were the main reason for a prolonged "internet boom". And there are some big companies that are still around today, and I'm sure they will be tomorrow. At the moment, I believe EBay is a company with sound economics that will be around for quite some time; whether it's at an attractive price right now is another story though.

Cheers,

Thomas.

> Greetings,

> Way too much money. It is the smaller
> operations that are still around. Everyone
> here knows the Internet is a great way to do
> business. Christmas retail sales are down
> because of the Internet. But everyone
> "knew" the Internet was HUGE - and
> they didn't take the time to build a base to
> start from and grow. They were willing to
> spend millions thinking the Internet
> couldn't fail. Now they know they can - and
> businesses will start to grow online in a
> more realistic fashion.

> Stephen Dean
> ebizknowitall.com
> Home of the Tombstone Sales Letter