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Our primary mission in creating the Business Plan Archive is to enable entrepreneurs of the future to learn from the lessons of the past. In the interest of sparking discussion and ideas, here are ten lessons we take from our observations of the dot com shakeout.
- Nothing changes overnight.
- New stuff doesn't replace old stuff.
- Too early to market? Too bad.
- Many startups were fundamentally uncreative and "un-Internet
- All we, like sheep, will go astray (with enough pressure).
- Free is folly.
- We used narrowcast to broadcast.
- The $50 million rule can kill.
- It's hugely difficult to build chicken and egg simultaneously.
- Prediction tools must improve.
Ten Lessons from the Internet Shakeout
The past boom and bust of the Internet sector is one of the biggest business events of the past several decades. In the interest of finding lessons that help us avoid similar debacles in the future, here are ten observations about the dot com shakeout.
1) Nothing changes overnight. The single most fatal miscalculation investors made regarding the Internet was to massively overestimate the speed at which the marketplace would adopt dot com innovations. That assumption of speed dictated the rapid pace and scale of investment by both VCs and public investors - and the resulting over-investment led to the inevitable bubble and bust. We somehow believed it was different this time. It wasn't. It will always simply take time and lots of it for people to integrate innovations into the way they do things.
2) New stuff doesn't replace old stuff. History tells us repeatedly that innovations almost never replace existing products but rather typically worm their way into the mix and inhabit their own niche. Yet, many dot coms and their funders persisted in modeling businesses that assumed a zero-sum game in which, say, online retailing displaces a significant percentage of existing retailing. In retrospect, all we had to do was look at the history of catalog marketing to predict that e-tailing might wriggle its way into some minority of purchases, eventually reaching its natural saturation point. Recognition of historic precedent could have spared some large and costly investments.
3) Too early? Too bad. Timing issues continually pop up in the post-mortem of the dot com shakeout. Many of the web's wrecks came to market with high-cost products well before the infrastructure was ready to receive them. The digital entertainment category is one good example. Companies like Z.com, Pop.com, Icebox.com, Digital Entertainment Networks and Pseudo Networks all may have had good products, but they were much too early for the broadband marketplace.
4) Many startups were fundamentally uncreative and "un-Internet." Many failed Internet startups began with ideas that involved little more than shoveling an existing business model onto a web site - or copying another company that did it. Just as "shovelware" in the content world involved transfer of magazine or other traditional media formats directly to the Internet, so too did much e-tailing simply export catalogs to the web. Online retailing of "stuff" is perhaps the most obvious and uncreative use of the Internet, and like shovelware, it largely fails to take advantage of the interactive features that give the Internet its power. The more creative - and sometimes successful - e-commerce startups leveraged Internet tools to produce such innovations as pricing "bots," collaborative purchasing, person-to-person trading, e-procurement systems and name-your-price bidding systems for perishable inventory.
5) All we, like sheep, will go astray (with enough pressure). Amid speculative bubbles that last as long as the dot com one we have recently witnessed, even the most disciplined investors can conclude that the rules really may be different this time and eventually give in to the wicked ways of the herd. Ironically, it is many of those most righteous hold-outs that inherit the iniquity of us all - those that capitulated and invested just as the bubble was about to burst lost both their shirts and their integrity. By contrast, the prodigals that jumped on fads with the alacrity of 13-year-olds had already cashed out handsomely. Few of us are immune from speculative frenzies.
6) Free is folly. The junkyards of many innovation cycles are piled high with business plans built around the idea of giving something away free and "making it up on XYZ." A decade ago while I was working at Ziff-Davis we received a business plan that called for giving away free fax machines and "making it up" on faxed advertising. That's only one step sillier than giving free exercise machines to health clubs in order to sell advertising blasts to sweaty boomers. The numbers simply don't work out for most free models. The Internet's low incremental distribution costs nourished a large crop of freebie wannabes - and now the "F" section of our shutdowns list is very long indeed with names like FreeInternet.com; Freerealtimeworld; Freeride; FreeTaxPrep.com; freeWebStuff.com; freeworks.com - you get the picture. Next time around - we'll focus on our value proposition a bit more closely.
7) We used narrowcast to broadcast. A surprising number of entrepreneurs, presumably in the search for the big play, decided to use the Internet, the ultimate narrowcasting medium, to reach the widest and most undifferentiated consumer markets imaginable. In using the WaterPik of the Internet to water the broad consumer garden, entrepreneurs bypassed the many rich demographic lodes that the Internet enabled them to mine for a fraction of the cost of the big play. Many of the big and broad consumer startups ranging from Value America to Webvan went aground on the inherent low margins and the massive marketing and infrastructure costs of such ventures.
8) The $50 million rule can kill. Many dot com casualties fell victim to the temptation to gin up business plans to meet the size criteria of the typical venture capitalist. A typical VC firm, in order to justify the time it spends on an investment, needs to dispense fire-hose amounts of cash, implying that the recipient business must be fairly big, able, say, to generate revenues of $50 million in three years (hence the $50 million rule). The resulting dynamic creates a sort of theme park of co-dependency - VCs dangle big carrots to encourage bigger thinking on the part of entrepreneurs whose DNA already is programmed for grandiosity. The sad result is that many of these inflated business plans were overfunded. They were never destined for the fifty-mil world, but would have made nice $10 million to $20 million businesses had they been more appropriately financed. In retrospect, angel investing, with its ability to funnel smaller jets of funding, would have been more appropriate for many of shoulda-been-niche plays.
9) It's hugely difficult to build chicken and egg simultaneously. Many of this past year's disasters stemmed from business models that required the startup to build both a critical mass of buyers and a critical mass of sellers - and do it at the same time. Many B2B marketplaces fell into that category, as did collaborative purchasing models, rewards programs and many others. It requires huge amounts of money to create either half of the equation in a many-to-many model. Investors that want to create the next eBay had better plan to spend a lot of time and even more money to do it.
10) Prediction tools must improve. As we observed above, the biggest mistakes of the dot com bubble were mistakes of timing - of misjudging the speed and direction of development and adoption and placing investment bets accordingly. In order to avoid those mistakes in the future, we need better predictive tools to plot the speed at which new technologies will spread. Spreadsheet gymnastics by 20-something b-school graduates should not dictate our investment decisions. We can produce better predictions. We have the data - from decades of technology innovation. We have the ability to analyze the data - after all, Everett Rogers wrote "Diffusion of Innovations" 40 years ago. We have the history. The dot com bust suggests we should begin to learn from it.
A Statistical Summary of the Dot Com Shakeout
If we can't learn from our mistakes, it has been famously said, we are doomed to repeat them. One of the main objectives of the Business Plan Archive is to help entrepreneurs and researchers learn from both successful and failed strategies of the past. The dot com boom and bust have left us with a rich source of data regarding the assumptions and strategies of these companies past. The following article from Webmergers provides a statistical overview of the shakeout. In order to help stimulate discussion, we offer a related commentary that provides some initial observations about lessons we can learn from this historic business cycle.
Summary - The Internet Shakout
- li>Since January, 2000 at least 835 Internet companies have shut down or declared bankruptcy.
- The dot com shakeout peaked around the middle of last year and has been on a slow decline ever since
- The purge started first within the cash-hungry business-to-consumer (B2C) sector and later migrated to the software and services companies in the business-to-business (B2B) sector.
- As the shakeout tapers off, we are beginning to see signs that the marketplace is beginning to rebound from the intense aversion to the Internet that developed as a result of the painful Internet bust.
The Internet Shakeout
The rapid emergence of the Internet fueled a historic investment boom that led to an equally historic shakeout as inflated investor expectations came up against marketplace realities. The Internet shakeout began in March of 2001 after Internet stock valuations began to decline sharply. Dot com failures followed on the heels of the stock market downturn as venture investors, watching their exit opportunities dissolve, abruptly shut their doors on cash-hungry startups.
Since January of 2000, at least 835 Internet have shut down or declared bankruptcy. The number of Internet failures peaked last year and so far in 2002 has been gradually tapering off. April, 2002 marked the fifth consecutive month in which we saw the number of shutdowns decline. So far this year, 66 Internet companies have failed, less than a third of the 220 that closed in the first four months of 2001.
Q1 Shutdowns
2000 6
2001 220
2002 66
Source: Webmergers.com
Consumer Audiences Dominate
As the below table indicates, B2C companies dominate as a percentage of total shutdowns, even though the purge has recently moved into B2B companies, defined as those that sell software and services to business audiences.
Shutdowns by Major Audience
Between Jan., 2000 and April, 2002
Audience/Number/Percent
Business 303 36%
Consumer 423 51%
General 109 13%
Source: Webmergers.com
Content and E-commerce Properties Account for the Bulk of Shutdowns
More than two thirds of all shutdowns in the past two years involved content or e-commerce properties, including entertainment sites, online news providers, e-tailers, B2B marketplaces and other commerce properties.
Internet Shutdowns by Month
January, 2000 through April, 2002
Month Shutdowns
04 2002 12
03 2002 17
02 2002 18
01 2002 19
12 2001 23
11 2001 21
10 2001 36
09 2001 33
08 2001 46
07 2001 40
06 2001 61
05 2001 64
04 2001 56
03 2001 49
02 2001 59
01 2001 56
12 2000 49
11 2000 50
10 2000 36
09 2000 22
08 2000 10
07 2000 20
06 2000 17
05 2000 13
04 2000 1
03 2000 2
02 2000 2
01 2000 1
Unknown 2
Total 835
Source: Webmergers.com
Does the Decrease in Shutdowns Mean there Are No Dot Coms Left?
It may appear on the surface that the decline in dot com shutdowns is simply a result of the fact that are no dot coms left to shut down. That is not the case, however. We conservatively estimate, based on several data sources, that between 7,000 and 10,000 Internet companies have received some sort of "formal" funding, which suggests that at most, ten percent of significant Internet companies have shut down or declared bankruptcy. It may be safer to say that the Darwinian process has left many fewer WEAK Internet companies. But to say that the decline in shutdowns is because there are no dot coms left is a bit like saying a decline in rabies rates is due to the fact that all the dogs are dead.
The Internet boom and bust of 1996 to 2002 was the most important business phenomenon of the past several decades. In the wake of this historic period, we have an unprecedented opportunity to learn from our past mistakes and successes.
To help us learn from history, we are creating the Business Plan Archive (BPA) to collect business plans and related documents from the dot com era. These plans – the “blueprints” that lay out the assumptions and strategies of Internet entrepreneurs – will enable entrepreneurs and researchers to conduct both qualitative and quantitative research.
The business plans we collect will ultimately be stored in the Archives and Manuscript Library at the University of Maryland, College Park. We zealously protect the privacy of all contributors and provide them with control over how and when the documents are made accessible.
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