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Advice for high tech companies: It helps to have a plan

By Scott McCollum
SPECIAL TO WORLD TRIBUNE.COM
Wednesday, August 29, 2001

Andrea Orr of Reuters reported last weekend on how the wave of high-tech failures could become a deluge by the end of this year. The article paints a grim picture of how the New Economy, fraught with high profile dot-com bombs and ever increasing layoffs, is actually going to get worse. The list of high tech failures in the article like NetObjects, Critical Path, http://biz.yahoo.com/n/a/athm.html and 479 other companies are all trading on the NASDAQ at under one US dollar at this moment. All of these companies have outrageous amounts of debt calculated in the tens to hundreds of millions of dollars. Many of these companies were once the darlings of the stock market, the spearheads of the dot-com boom and digital surgeons sent to scrape off the dead skin of the Old Economy. Now, everyone is wondering what happened to make these companies go bust.

Everyone from portfolio managers, Stanford University economic policy academics and investment analysts are on record in the Reuters article as saying "it's going to get worse before it gets better" when asked about the high tech economy. The experts with liberal/leftist political agendas go the extra step of reflexively blaming the Bush Administration's tax cut of Summer 2001 for the high tech slump that began in Spring 2000. Yet none of these experts discuss the fact that few of these companies really had much of a viable business plan for their product or service.

This is not a big surprise to me. Losers like WebVan, Buy.com, VA Linux and the Industry Standard are all in the same boat for one reason. All these web businesses or high tech companies didn't really have a plan. Common sense dictates it really helps to have a plan before you start anything. Would a football team compete in the pros without a playbook? Do generals go to war without battle strategies? Would anyone start a company without a business plan?

Yes, unfortunately many of these high tech companies did. The majority of the virtual businesses are aptly named because they had "virtually" no plan for making a profit. Silicon Valley gambled that offering goods free or at a loss initially would make loyal customers out of the millions of well-educated people on the Internet. Almost all told their investors (a disproportionate number of whom were limousine leftist millionaire venture capitalists with UC Berkeley diplomas) that the Old Economy was dead. The rise of personal computers in the home, ubiquitous Internet access and cheap data storage would usher in a New Economy based on information. In this New Economy, venture capitalists were led to believe, the driving force would be information, the Internet would be an engine for commerce, but most importantly it would be a means of social change. In the New Economy the emphasis would be "mind share over market share" meaning that the more you gave to consumers (free shipping, free plush toys, et cetera) you'd be on their minds the next time they had to buy.

"Hey," the startup CEOs would tell the VCs "the New Economy is a new paradigm in meritocracy! The more you give, the more you're worth! Sure, you'll lose money at first but the IPO will make it all back and then some. Plus, you'll be changing the world by doing business on the Internet. Don't you wanna change the world?" The venture capitalists were convinced and in poured the cash.

In their rush to turn our evil capitalistic Old Economy into the New Economy, the dot-coms inflated an IPO stock price bubble that burst from a prick by reality. Apparently nobody starting up or funding these companies had any real life experience in business. Did anyone honestly think that consumers would get free stuff on-line, be grateful for the freebies and when the prices got jacked up to "Okay, we've lost enough money. Now let's try and make a huge profit"-levels, the well-educated consumers would gladly pay the much higher price out of the goodness of their hearts rather than shop somewhere else that had a better deal? Don't they have Econ 101 classes at UC Berkeley? Who's teaching these classes? Noam Chomsky?

Thinking about starting up a high tech business? Remember to:

  • Have a good product or outstanding service.

  • Charge a fair price for that product or service.

  • Don't lose money on every sale in the hopes of winning friends.

    The lesson of the dot-com bust is that if you sink millions into making a product or service, be sure you can actually make money selling that product or service. All business is cutthroat and competitive. If you try to win friends with your customers by bribing them with free shipping that loses your company money on every item sold, you're not going to make it. If you bribe customers with the free shipping, realize you're losing money and take away the freebies you'll find out just how cutthroat customers are.

    There is hope for some of these high tech companies, but only the ones who wanted to sell a product for a fair price to consumers rather than throw someone else's money at the Internet in the hopes of it becoming an instrument of societal change. Esther Dyson, daughter of physicist Freeman Dyson, former head of the Internet Corporation for Assigned Names and Numbers (ICANN) and current chair of EDventure Holdings who actually does think the Internet will change society said of the dot-com bombs that ''there was a sense that if you're young, you must be smart. I've been amazedÉ by the level of people's ignorance or willful blindness. It was mass-delusionary self-gratification.''

    Playtime is over, boys and girls. Time to act like adults and work for a living again.


    Scott McCollum is an independent consultant and tech industry insider living in Austin, Texas. He is a contributing editor for World Tribune.com and his column will be featured in WorldTechTribune, a new publication by WorldTribune.com, which will be coming soon. His opinions have also been featured at Pure Politics, the NewsFactor Network and on the internationally syndicated Cyber-Line radio talk show.

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