Dot-Com Venture Creation
The author presents a case study: wrestlinggear.com, founded by Jeff Pape. This was a highly successful online venture, as the sport of wrestling is widespread, but small in each community, and the demand for gear seasonal. As a result, the wrestlers who went to local retailers each fall were frustrated by the lack of selection. The online store filled this need, and within two years was turning $1m in annual revenue.
He contrasts this to other retailers who failed, and even Amazon.com (the granddaddy of internet retail) had high top-line revenues but struggled to translate them into bottom-line profits.
He also states that Pape followed the traditional path of small business - finding a niche not served by the present market and stepping in to capitalize on the situation - whereas many other firms merely rushed to the Internet as a novelty, selling goods that could be purchased from other (physical) retailers already.
Another contrast is that Pape eased into business, starting with himself only and growing his business as demand increased, whereas other retailers rushed online full-bore, expecting to "get big fast" (GBF) so that their margins would cover their considerable overhead.
The author's assertion is that the failure of most internet companies has not been because they were bad ideas. In fact, many are good ideas, poorly executed. Many opportunities existed (and still do) on the Internet, but they are of modest scale - profitable, but not worth taking public - and that it was the overselling of the ideas and the ambitious scope of their plans that caused most dot-com startups to fail.
Conventional Wisdom about GBF in the Dot-com Era
Between 1996 and 2000, GBF was the preferred strategic choice to enter the Internet. The presumption was that there would be a significant first-mover advantage, and that rapid expansion was necessary to preempt competition.
The craze was also fueled by the media - north only the hysteria-prone mass media, but also the industry trade periodicals - which showed a preference for big numbers and a tendency to aggrandize the top-line revenue figures without a mention of the bottom-line profits.
Even when GBF succeeded at drawing a large audience, retailers often fumbled: web sites crashed from excess traffic, deliveries arrived late (especially during the 1998 Christmas season) - even those who wanted to generate large-scale demand were ill-prepared for the volume when their plans actually succeeded.
And venture capital flocked to bigness. One VC was quoted as saying "Number one is great; number two is pretty good; number three, why bother?" And so, funding for start-ups flocked to those with GBF plans, without heeding the bottom line.
Characterizing the Iceberg of Dot-com Venture Creation
The author asserts that most dot-com ventures were below the "waterline." The giants that went public early (IPO) get a lot of press, but the author places those at the tip of a pyramid, with three lower and increasingly larger layers: VC-backed, angel-backed, and bootstrapped ventures.
The author describes (in too much detail) a statistical analysis of these various dot-com ventures, and compares them to evolution of other industries, but his results seem entirely unimpressive: the Internet, as an industry, evolved more quickly than other industries, which makes the dot-com crash seem all the more dramatic. However, when you scale out the timeline to match other industries, the failure rate is somewhat lower for dotcom ventures.
In the five-year span between roughly 1995 and 2000, there three were unprecedented levels of entrepreneurship, capital investments, and IPSs of companies in the technology sector. Correspondingly, there was in the public perception an equally unprecedented level of cataclysmic failure, but this is largely a matter of perception.
Primarily, attention was focused on the companies with the most radically ambitious plans for rapid growth, with little attention to the many smaller firms whose business plans were more sound, both in their scope and their time frame.
Approximately 50,000 start-ups were funded in the US between 1998 and 2000 alone - and the survival rate is about 48%, which is in line with the survival rate of other emerging industries, albeit over a longer time span.
This is not to state that 48% were successful - that they generated profits, met investor expectations, achieved the goals set out in their initial plans, etc. - merely that they did not fail and go out of existence.
The facts presented point to the conclusion that, in spite of appearances to the contrary, entrepreneurship was largely successful in the technology industry, in terms of small companies and small-scale ventures.