Remember when Jeff Bezos of Amazon.com was on the cover of Time Magazine?
Remember when we had seventeen dot-coms advertising during the Super Bowl? Some of them spent $3 million they didn't have for a thirty second spot they hoped would be the magic key to building traffic to their website.
The numbers are staggering. Of the great wave of Internet companies that have gone public since 1997, only 367 are still trading. 86% are trading below their offering price. That's according to Thompson Financial.
Layoffs have been big news, too. Since the firm Challenger, Gray and Christmas started tracking layoffs in December 1999, more than 75,000 dot-com employees have found themselves in the unemployment line. Countless others have watched their once-vaunted stock options shrink in value to where they might have more value as historical oddities.
How did we get from dot-com to dot-bomb so fast? What happened to turn Silicon Valley into Lake Wealthbegone?
When the dot-com investing craze was at its craziest, there was one conspicuous hold out. His name is Warren Buffett and he happens to be one of the great investors of all time--a man who's been called "The Oracle of Omaha."
Here's how he put his investment position in the annual letter to shareholders of his Berkshire-Hathaway company. "We have embraced the 21st Century by entering such cutting edge industries as brick, carpet, insulation, and paint." Now, understand, Buffett is no head-in-the-sand" Luddite.
This is a man who not only has made more money from the market than just about anyone in living memory. It's also a man who's friend and advisor to Bill Gates. And whatever you think about Bill, he's tech-savvy and he's earned a lot of money from it.
That's why it pays to be clear about what Buffett's position was. He wasn't saying, "Hey, none of these companies will make money." Instead, he was saying, "I don't know how to sort out the ultimate winners from the losers at this stage."
Still, up until the middle of last year, Buffett's stance didn't win him any praise at all from the "now" crowd of investment advisors. They'd say it was too bad that he didn't "get it," that the Oracle of Omaha used to be a great investor, but now he just didn't understand the "New Economy."
I think he didn't understand it because there is no "New Economy." There's just an economy.
And that economy is experiencing the rise of a brand new technology, similar to the rise of the automobile industry early in this century. Now, like then, it looked for a while like the rules had changed. Then, like now, we had a star-burst of companies, most of whom burned out.
What Warren Buffett understood and what lots of the pundits, and analysts, and dot-bomb executives and investors didn't get was that what was going on was speculation. Speculation involves taking a risk against the possibility of dramatic, astounding success.
The dot-bombers didn't see it as speculation, though, they saw it as a slam-dunk way to get rich. They took the promise of the Net for a guarantee of success. This is particularly nasty because speculation is at it's riskiest when it looks like a sure thing.
The dot-bombs got in trouble because they didn't see the risk. And they got in trouble because they thought this "New Economy" made it unnecessary to pay attention to the basics.
The dot-coms whose bones litter the trail simply didn't do the things that good businesses have to do to succeed. The values and efforts were often in entirely the wrong place.
Great businesses concentrate on delivering value to customers. Many of the dot-bombs seemed to be more concerned with delivering value to the folks who ran the companies. The emphasis was on getting founder's stock and options for the execs. For the folks who helped them go public the emphasis was on underwriting fees, $2.1 billion since 1997 according to Thompson Financial.
Some offered consumers something they'd never shown the slightest interest in, just because technology made it possible. Others offered products for less than cost.
And some firms just didn't do their homework. Webvan offered service that simply couldn't be delivered in urban areas with significant traffic problems, like the San Francisco Bay Area. Most standalone online pharmacies came online even though the drugs they sold weren't covered by many insurance plans.
Great businesses build long-term strategic advantage. Long term? The dot-bomb effort was decidedly short term. The idea was to get venture capital, get to the Initial Public Offering and then cash out. That made the business plans change as often as the fashion of the moment, moving from B2C to B2B to portals to exchanges and around again.
Standards were compromised a bit to get these firms public. After all, that's where they payoff was. For a long time, the rule of thumb was that you didn't take a company public until they had at least three straight quarters of profit. That rule, like many about oversight, when straight down the tubes and companies came to market with the ink still dry on increasingly fantastic business plans.
Great businesses do it at a profit. Profit was hardly mentioned. Some pundits, and most dot-bomb CEOs told us that profits didn't matter any more. The emphasis was on growth, using other people's money. Amazon's Bezos, in fact, proudly stated that he didn't see profit on the horizon while he handed out tee shirts at Amazon picnics with the legend "Get Big Fast" and rounded up yet another couple of billion worth of venture capital.
Let's look back at those 367 firms that went public and are still trading. In once sense they've done better than many of their peers. They're still alive. But only 15% of them have made any money for investors.
Like Warren Buffett, I think picking a winner among the battalions of new companies is a speculative play at best. But I do know that the companies that will win, the ones that will succeed, will do what great companies have always done.
They'll deliver value. That means they'll offer something folks have shown they want, need and are willing to pay for.
They'll build long-term competitive advantage. That only happens when you do things the competition isn't doing, and do it effectively, and do it profitably.
And they'll do it at a profit. Profit is necessary and it only comes by generating an excess of revenue over expenses. Delivering value efficiently helps. Acquiring good customers at a reasonable cost and then keeping them for life.
In the end, though, success won't be about fancy business plans. Success will be and always has been about executing a basic strategy of delivering value at a profit.
This feature appeared on 9 April 2001
