What went wrong with dotcom?

Written by: Jonathan Briggs

October 31, 2004 [12328 views]

To accompany my lecture this week on Business Modules I have updated a previous lecture on dotcom failure. It was an interesting time and we were involved with a couple of the companies mentioned here. To understand what happened you need to read around the history of that time. This will prevent you from designing your own business without knowing a few of the pitfalls.

Why did people get excited about the prospects of dotcom businesses?

1. It was easy to have an idea
2. Barriers to entry were very low and people with ideas could get started easily
3. Funding was relatively easy to arrange as venture capital companies wanted to be part of any success
4. Many people thought that the rules of business were about to change
5. People were greedy and thought that they would become millionaires very quickly
6. It was easy to copy or adapt an idea that someone else had had
7. There were lots of enthusiastic people around including colleagues, staff and support companies
8. Many people recognised that “network effects” were genuine
9. So many people just did not get it
10. Other people were excited about it and clearly getting involved

Key misunderstandings

1. If you build it they will come
2. Doing business on the net will be cheaper
3. Virtual businesses meant you could be faster
4. Old businesses don’t get it
5. Your visitors will build your content
6. Advertisers will pay to reach niche audiences
7. Your company will be worth money somehow in the long term so don’t worry about your burn rate
8. The first to market will dominate any sector so get big fast
9. Every thing, every type of business is going to change
10. Ideas are worth everything

but some of these can contain a grain of truth.

Setting up a dotcom

1. Have an idea
2. Set up a company where you (and a few friends) own everything
3. Draw up a business plan
4. Sell your idea to first round investors and swap 20% of equity for $200,000
5. Build a web site
6. Market the idea like crazy spending hugely on PR, partnership deals and advertising
7. Arrange second round funding and sell further 20% for $2 million
8. Prepare for public offering (because VC investors want their money back)
9. Market the idea even harder
10. Go public (sell shares to individuals and funds) by selling 20% of business for $200 million
11. Business is now worth $1 billion!

Who was involved?

1. IT, software and database suppliers
2. Hosting, router and bandwidth companies
3. Telecommunications companies and cable companies
4. Banks, pension funds and unit trusts
5. Commercial property and office supply companies
6. Web designers
7. PR, advertising and marketing
8. Magazine and media companies
9. Fulfilment and shipping companies
10. Management consultancies
11. Employment agencies and headhunters
12. Venture capital companies
13. Private investors (widows and orphans)

But…

1. Most companies could not go public quickly enough to return their initial investment
2. Advertising costs went through the roof and it become harder and harder to be heard above the noise
3. Most business plans were nonsense and based on rates of growth that were impossible
4. Very few business plans showed where money was really going to be earned
5. Other people had the same ideas
6. The people who made money if anyone did were the initial external investors not the founders
7. Consumers continued to behave as they had always done

and then

1. VCs turned up the heat on poorly performing companies demanding faster profitability
2. They withdrew phased funding
3. They sacked key managers and directors
4. Share prices fell
5. Confidence fell
6. Redundancies
7. VCs closed down least profitable companies rather than continuing funding or tried to sell them to other similar businesses
8. Funding dried up for all new ventures
9. IPOs stopped
10. US/European stock markets tumbled

Bad ideas?

There were lots of strange ideas and perhaps you know some yourself. I’ll cover a few of these in the lecture. You may want to research some more of them yourself. Many have now changed their money losing strategies. Others have been acquired (often for their traffic) and turned into different businesses.

1. Second hand golf balls www.lostgolfballs.com
2. Diary manager (manage your calendar on-line): www.diarymanager.com
3. Urbanfetch – deliver anything (a cup of coffee) for free read about it on www.news.com
4. Flooz, Beenz – internet currency that could not be spent, the only people who used it were Russian mafia who used stolen credit cards to buy Flooz and then bought stuff with them. Flooz sold $1000 of Flooz for $800 read about Flooz on www.ecommercetimes.com archive images of beenz on disobey.com
5. CueCat.com Barcode readers www.digitalconvergence.com
6. Babynames.com – pay to have someone produce names for your child www.babynames.com
7. Freemoney.fm – give away money to people who answer marketing questions www.freemoney.fm
8. Freeserve – give away internet access by wholesaling connection minutes read about the original model on news.bbc.co.uk
9. Freedrive/xDrive – give away free disk space in return for banner advertising www.freedrive.com
10. LetsBuyIt – goods can be cheaper if twenty people buy the same thing www.letsbuyit.com now an ordinary shop
11. DrKoop – US surgeon general sets up health www.drkoop.com
12. Space.com – CNN’s head of finance quits to set up a site all about space www.space.com read about it on www.forbes.com
13. SixDegrees – list all your friends and discover amazing new people who are only a few ‘degrees’ apart brief mention on www.thecompost.com (itself defunct)
14. Breathe.com – one of many unified messaging companies read about it on www.autonomy.com
15. Worldsport.com read about it on www.guardian.co.uk
16. QAZ - the creator of this site stopped being a journalist to start this search engine www.qaz.com
17. Eyestorm www.eyestorm.com
18. Adcritic – income at one stage did not cover the broadband cost of delivering the video content www.adcritic.com

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