Study: Net Start-Ups Ignored Economics 101
By Antonio A. Prado
Investor's Business Daily
Many dot-coms have failed because their managers didn’t have a good grasp of their markets, a new study says.
The heads of many e-commerce firms didn’t understand the basis for competing in their industries, Clayton Christensen, a Harvard Business School professor, says in the study, titled "After the Gold Rush: Patterns of Success and Failure on the Internet."
Many investors thought the Net was an end in itself, where business could be done just like it is in the brick-and-mortar world, says Christensen. But times changed fast.
"Much of the short-lived success that we saw in cyberspace was about luck, optimism and timing," said Christensen. "That kind of success isn’t sustainable."
He compiled the 54-page report for Innosight, his Woburn, Mass., research firm. The study aims to show why some business models didn’t work online and to identify markets best suited for the Net.
The Internet isn’t dead, Christensen says, but the fever pitch of speculation is over. Now it’s time to ask how the Net can be useful for doing business, he says. "This isn’t a time to relax," Christensen said.
Dot-coms failed to follow simple laws of economics, says Christensen.
He says companies of all kinds compete on five levels.
First, consumers must find a firm’s product or service to be useful. This is functionality.
Then, Christensen says consumers want products or services to be reliable. No. 3 is convenience or speed, and fourth is responsiveness and customization. Price comes last.
Many dot-coms jumped straight into business models based on convenience or price, he says.
Trouble For Web Banks
Take banks that do business solely on the Net. The Innosight report says pure-play online banks likely are doomed.
In everyday retail banking, clients look for reliability and convenience, Christensen says. Online banks are trying to lure customers with functionality or price.
But brick-and-mortar banks already have both, and convenience.
E-Trade Bank, a unit of online broker E-Trade Group Inc., is trying to get over the convenience hurdle, the study says. It’s buying a network of automatic teller machines to make up for its lack of physical branches.
The study suggests online brokers are more of a natural for the Net because they tap an unserved market.
Christensen says companies that are the first with a new product or service do best in the functionality and reliability levels of competition. Rivals that come in later, he says, can succeed if they make something easier – faster or cheaper.
The study notes that Dell Computer Corp. was able to use the Net to offer convenience and customization with competitive prices.
The leaders of many failed dot-coms couldn’t grasp these economics, says Bill Reichert, president of Garage.com Inc. in Palo Alto, Calif.
Garage.com acts as a broker-dealer, raising capital for tech start-ups in much the same way traditional investment banks raise money for companies.
IPO The Wrong Focus
Reichert says the most successful tech firms are those that do well tackling the first basis for competition. They offer innovative products and services that clients find useful.
And they know their markets. He says one of the "lies" he hears most often from start-ups is: "There is no competition in our space."
Linda Fayne Levinson, a partner at venture capital firm GRP in Los Angeles, says she often hears the same thing. "What that says is that you don’t know much about your market," she said.
Levinson says the heads of many start-ups talk more about their perceived markets rather than about their ability to compete within them.
That’s among her biggest beefs when firms come to her looking for funding. She says it’s a huge red flag.
Some failed dot-coms had their sights set on cashing in big on an initial public offering, when their focus should have been on their economics, says Safi Qureshey, president of Skyline Ventures, a venture capital firm also based in Palo Alto.
"If you plan that way, then you’re not building a good company," Qureshey said.
Now that it’s clear why many Net firms crashed, it’s time to look at what others did right, says Bob Slapin, executive director of the San Diego Software & Internet Council, a regional trade group.
Rather than referring to the big slowdown as a tech wreck, he views the dot-com shakeout more like a fall during a morning of surfing.
"You get up. You may not see things straight for a while," Slapin said, "but you move on and you go out again." |
