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Lessons From Dot-Com Failures

Lixuan An is president of yo.com, New York. Her e-mail address is [email protected].

Now that “60 Minutes” has done a segment on the dot-com gloom, it must be official – not only is the bloom off the rose for the Internet industry, but the petals are dropping off in record numbers.

The former darlings of the Nasdaq are now portfolio non grata. And people log on to sites that tell about the latest casualty of the dot-com blood bath.

However, look closely, and good news can be found. According to a recent study by Goldman Sachs and PC Data Online, during Thanksgiving week consumers spent $1.3 billion online, an increase of 140 percent over the same week in 1999. Nearly 80 percent of those who bought online during the week said they were extremely likely to continue shopping online. Clearly, the Internet is not dead, and far from it.

But what went wrong? Having seen the industry grow from its gold rush infancy in 1995 to its current gun-shy status, I’d like to share a few lessons learned along the way.

The rise. From 1996 to 1997, the belief was simple: The Internet is the new “new thing,” and any respectable business needs an Internet presence. Furthermore, Internet-based businesses were going to be more successful because these entities could trim massive operating costs through dealing directly with customers. This notion, coupled with the spectacular performance of Internet stocks like America Online, Netscape and Yahoo, helped propel the industry to a boom not seen in recent decades.

For both the venture capitalist and the investment community, traditional due diligence on possible investment opportunities went out the window. Questions regarding inventory management, customer acquisition and retention, fulfillment logistics and revenue were largely ignored. Investors looked for cool, sexy ideas from smart, aggressive entrepreneurs.

I recall many amazing experiences during my stint as a venture capitalist. One time, a smart, young entrepreneur had a great idea for a rich media e-mail platform. He showed me a PowerPoint presentation – and that was all he had. No product, not even a real demo. When I called him back the following week, he thanked me and said that he had just sold his idea for $25 million to another “hot” Internet company.

It was all about the sizzle, and none of the steak – bigger, faster, louder. Whoever could generate the most noise and the most buzz won. And the goal was always an initial public offering.

The fall. The next couple years followed a similar pattern: Companies rushed out the door, spending millions of dollars acquiring customers who never could deliver the lifetime value to support the businesses. These customers arrived at sites that were difficult to use, with no customer support, and they were never too lazy to click away to a competitor. It was never a matter of if the other shoe was going to drop – it was a matter of when.

The attitude from entrepreneurs and investors was that “time to market” was the primary factor in the business plan. In the race to beat the expected implosion of the Nasdaq, more start-ups abandoned any sense of a traditional business plan. And when quarter after quarter passed with no noticeable profitability from the sector, the tide turned. Confidence dried up and, in turn, so did the funding. And the hemorrhaging began.

The survivors. What’s a dot-com to do? Plenty, actually. To survive, businesses need to be smarter than ever and incorporate good business sense while taking advantage of the innovative technologies available in this unique medium.

One effective marketing solution is to refine and add value to your most productive campaigns instead of spending precious dollars testing new ones.

Running any e-mail campaigns? Move beyond segmentation techniques to target your messages more efficiently and get better results by adding personalized offerings.

Have an affiliate marketing program? Make your affiliates work better for you by offering them more effective, cost-efficient technology rather than relying on static banner ads. Also, do not forget to look at your marketing from an integrated point of view. Share information among your operating groups. If one particular e-mail campaign was extremely effective, there is no reason why a similar offering could not be made just as effectively in, say, an affiliate marketing campaign.

The lessons. Hindsight is always 20-20. It would seem to make sense that in our industry, like any other, companies must be accountable for a return on investment in a solid business plan and think through the many aspects of building and scaling a successful business.

Now that the bubble has burst, Internet ventures will be evaluated just like any other business venture. They probably will be scrutinized more than they should be – an unfortunate situation because there will be good companies with great ideas that will not receive needed funding. Internet businesses need to go back to the basics and formulate business models with realistic profit strategies.

Instead of time to market as a primary focus, companies now need to take their time and focus on fewer objectives and execute them well. This will help them validate the business model and gain confidence from investors.

The winners. Plenty of companies are getting it right on the Internet. Lands’ End incorporated the Internet perfectly into its business model. Primarily a catalog retailer, the company did not adopt the herd mentality and forgo its traditional business for the Internet.

Instead, Lands’ End methodically created an online presence and used innovative, cutting-edge technologies to augment the online shopping experience for its customers to become the No. 1 apparel seller online. Amazon.com, where you can purchase just about anything and receive personalized recommendations every time you come back, epitomizes the value of shopping online.

The ultimate winner of the Internet revolution is the consumer. Both as an information vehicle and as a convenient way to shop, the Internet has transformed the way people live.

A woman in Indiana suffering from Crone’s disease can now speak to hundreds of others worldwide for support. A father of three in Seattle can find the best deal among 10 airlines to fly his family to Disney World. And a woman in New York who enjoys underground jazz musicians like Dave Douglas can learn that she also would love electronic music by Mouse on Mars.

A new year is nearly here, and it’s going to be the best year ever on the Internet. The crazy days are gone, but the Internet revolution has just begun. n

• Lixuan An is president of yo.com, New York. Her e-mail address is [email protected].

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