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Number
76: November 3, 2004
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This week in Katydid:
Lessons
from the Recent Past
In his 1906 work, The Life of Reason, the
Spanish philosopher and poet, George Santayana wrote,
"Progress, far from consisting in change, depends on retentiveness…
Those who cannot remember the past are condemned to fulfill it."
The difference between scholarship and naval gazing lies in how we plan
to use the information.
One scholar, David Kirsch, of the University of Maryland hopes to
learn from the mistakes of the dot-com era. The Business
Plan Archive collects business documents for posterity, so MBAs can
remember the past in order not to fulfill it. Kirsch also established CreativeDestruction.org
as a repository for stories from the trenches.
Kirsch was recently interviewed
in the Washington Post:
"History tends to be from the voices of the elites,"
Kirsch says. "I want to know what the receptionist was thinking,
not just the chief executive."
So far, about 200 people have contributed their stories, and Kirsch
says their themes read like a broken record. "They all say it was
about the people. The people, the people, the people," he says.
"They were trying to do well by doing good."
I personally survived four businesses that did not outlast the
dot-com era, which is roughly 1995-2002. Sure, some proposals seemed
insanely bad; however, many were good ideas. They identified a real
problem and proposed a solution. Scanning through the archive of failed
business plans, several common factors scream out:
- Feature-oriented Solutions
- Subscription-based Revenue Models
- Reliance on Investment Capital
One problem with solutions based around features is that they are
rarely unique. It was an economy swelling solely on intriguing ideas and
sold on fervor – try it; you'll like it. Many companies lived in fear of
one of the 'big boys' entering the market. Some hoped a company such as
Microsoft would swoop in and buy them out, so they wouldn't have to
finish it themselves. At the heart of their fear was a tacit
acknowledgement that there was nothing truly innovative.
For example, one of the business plans in the archive is from
Complaintz.com, Inc. (ecomplaints.com); it proposed aggregating customer
complaints into a common repository. Complaintz would compile feedback
from customers for general industry trends, and it would partner with
companies to provide a complaint utility for their web sites. They would
generate revenue by selling market research and through subscription
revenue. Though it was not a bad idea on the surface, almost all of the
features they proposed existed in some form already. Their point of
competitive advantage was that they would gather it all in one place.
The two main problems with this are, first, that it is difficult to
differentiate on features or aggregation; and second, you have to reach
critical mass to be useful.
One common strategy to resolve these two issues is to focus on brand
identity. If you can stake off your territory like Amazon.com, you have
the opportunity to grow fast enough to finally sustain growth. It's a
huge gamble that only now has begun to pay-off for Amazon, which lives
in fear that a bigger boy such as Wal-Mart
will enter their territory.
The second and third common factors to the failed dot-coms relate to
revenue. The plans commonly suggest a phased approach that translates
to, "There ain't no money in it… yet." The company could pay
off big – there's a large potential market – if only they could
establish themselves quickly. Hence the need for venture capital and the
IPO.
We used to have a phrase in marketing whenever we built a large booth
at a convention, bought
a huge advertising order, or personalized thousands of mouse pads
and stress balls. We called it "burning VC money." The money
was going less toward technology or infrastructure, and more toward
branding efforts. Advertising companies were one of the greatest
beneficiaries of VC money, which accounts for some of their sky-high
rates today.
Additionally, subscription models were a way to get clients to buy
into the company – essentially a back-door IPO. Unfortunately (or
wisely), few clients were willing to subscribe to unproven services. In
many models, the services wouldn't be useful until they had enough
customers. Like a pyramid scheme, a client wouldn't get any value until
many others had been suckered into buying.
When faced with tepid investors and low subscription rates, the
response was usually one of increased sales effort. We had to burn more
cash. Market research rarely moved past analysis of market potential. I
can't remember anyone ever asking, "Will people pay for this?"
or "How much would they be willing to pay?" Rarely, would
anyone ask, "Why aren't people buying?" because few companies
survived long enough to get that introspective.
There was a strong ideological commonality to the dot-com companies.
The line from the 1989 film, Field
of Dreams, best sums it up: "If you build it, they will
come." Irrational exuberance in the words of Alan
Greenspan could have been the personality profile of nearly every
dot-com executive. Most of these organizations ran with an evangelical
zeal marked by enthusiasm and blind faith in the product. In a few of
these organizations, the firm belief that they were on the right track
led to an approach where the ends justified the means. If they needed
cash, they could borrow from the 401K funds, bilk investors, or anything
that would stretch the life of the company in hopes that it would reach
that magical tipping point.
That the executives were out of touch was easily detected on yahoo
message boards or sites like f—edcompany.com
that aggregated dissenter opinion. These were often the first dot-com
organizations to reach critical mass.
I had my own canary in the coalmine: the first death knell of a
company was the creation of the concierge position. I saw this several
times. The pitch was that the concierge would provide services to
employees by picking up our dry cleaning and running other errands for
us.
The hire proved that the executives were out of touch. Most of the
employees could think of a more critical hire. It was an arrogant choice
because the rank and file had little dry cleaning of their own. (Like
the BMWs parked in the lot, you could admire them even if you didn't get
to drive one.) It was more of a reminder that the company wanted you to
stay at your desk just a little bit longer. Ultimately, it was symbolic
in that it was another cool idea that nobody needed or knew how to pay
for.
If the companies or their investors had bothered with fundamental
marketing research they might have avoided mistakes, or more likely,
have identified new opportunities. While the venture capitalists might
have had money to burn, the clients were more suspicious. Some even
enjoyed shopping around for free services they could exploit. Most
wanted the dot-com companies to answer one simple question, "What
will it do for me, right now?"
The clients didn't care how cool it was, or how it might transform
the world (eventually). They wanted to know if it would help them
succeed in their goals. They wanted to keep costs down and increase
their ROI.
More importantly, few were willing to become dependent on another
business for a key process. They wanted to maintain security and control.
Most of all they wondered, "Why can't I do this
myself?"
Ultimately, the dot-com businesses failed because of (rather than
despite) their religious zeal. They failed because style ultimately will
not trump substance. In the words of my sister from Texas, they were,
"All hat and no cattle."
I'd like to say that the end of the dot-com era reminded us of the
need for marketing research – knowing what is true about a market – as
foundation for strategy. I still see a great deal of reliance on pure
lead generation in order to reach critical mass. Unfortunately, without
marketing research, few will know what that critical mass might be.
"I'll know it when I see it" is the natural corollary to,
"If you build it; they will come."
Santayana also said, "For an idea ever to be fashionable is
ominous, since it must afterwards be always old-fashioned."
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