Some very valuable lessons were gleaned from the dot-com crisis
Houston Business Journal - by Scott Clark
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A scant 18 months ago, many of my students at the University of Iowa were still eager to create dot-com companies, having read about the millions of dollars raised in venture capital overnight and the soaring value of dot-com stocks.
Even some business academics became hypnotized by the opportunity.
One of these, Lyle Bowlin, from the University of Northern Iowa, was profiled last year in a Wall Street Journal article.
According to the paper, Bowlin raised $90,000 for a book-selling dot-com business operated out of his home (http://www.Positively-You.com) which competed with Amazon.com and barnesandnoble.com.
He received glowing write-ups in the New York Times and Time magazine, quickly followed by guest spots on the morning talk show circuit.
Predictably, orders shot up from $2,000 per month to $50,000 per month.
The company had not planned for such growth and was constantly behind the power curve, soliciting friends and their families to help pack and ship books rather than focus on profits and strategies.
Management apparently abandoned sound business principles and assumed its Web-based business was a bottomless well of increasing orders, even though it was still losing money.
It's not hard to imagine what happened next.
Because of a combination of several factors -- which may have included lack of a plan, lack of profits, lack of financial controls, lack of management oversight, inappropriately high salaries, high expenses without controls, inadequate software and or hardware to cope with growth and or competition -- the company ran out of both money and customers, subsequently fading into oblivion.
In all fairness, Bowlin was just one of many dot-com dreamers who started companies to ride the wave of prosperity rather than focusing on plans, profits, or fulfillment.
Large businesses succumbed to the lure of easy money as well.
Remember the disastrous Christmas of 1999 when Toys R' Us created toysrus.com without focusing on fulfillment, thus failing to deliver thousands of Web-ordered toys in time for Christmas?
The Internet bubble finally burst in the spring of 2000.
When the smoke finally cleared, the NASDAQ plunge -- and its accompanying dot-com bloodbath -- had erased 62 percent of the NASDAQ's value, which plummeted from a high of 4260 to a low of 1620 just 12 months later.
BURSTING BUBBLE
In retrospect, the dot-com bubble was fueled by greed, rather than by sound business practices.
Aspiring Internet entrepreneurs thought they could bypass the long haul to success and achieve instant wealth just by hanging out a dot-com shingle.
No need to focus on profits or management or order fulfillment or customer satisfaction -- just launch the business and watch the money flow in.
They learned too late this simple truth: If more money flows out of the company than flows in, eventually the coffers will be empty and the business will die.
As a result of the dot-com rubble, today's crop of aspiring entrepreneurs has a much more realistic picture of what it takes to start a business.
The few who are interested in dot-com businesses are focused on sound business principles rather than on pipe dreams and bandwagons as they assemble their plans.
So the good news from the dot-com crash is that fledgling entrepreneurs -- and their investors -- once again realize there is no quick path to easy street.
As a result, most of today's new crop of entrepreneurs are launching businesses based on sound business principles.
Scott Clark is a Cedar Rapids, Iowa-based columnist. He can be reached by e-mail at mail@saclark.com.
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