| Nuclear winter is a theory that
the smoke and dust produced by a large nuclear war would result
in a prolonged period of darkness and cold on the earth, obliterating
plant life and threatening the existence of the human species.
Dot-com winter is similar to nuclear winter but somewhat more
limited in scope. Following the explosion of the "dot-com bubble"
in the spring of 2000, a period of prolonged darkness and cold
has descended on the dot-com world. It has already obliterated
the market valuations of Internet startups and threatens the existence
of many more. Venture capital for dot-coms has become nearly impossible
to find. And what if venture money is found? The valuations of
dot-coms is so low that successful IPOs seem unlikely. Nearly
any wild idea with "dot-com" in its name could find funding in
1998 and 1999. It has become very difficult for even promising
dot-com business plans to get funded today. Furthermore, dot-coms
that have received one or two rounds of venture funding and must
raise more prior to going public are finding their sources unwilling
to provide more funds.
There are four primary alternatives for dot-coms today.
- They can try to find additional venture funding. It's
very hard to find.
- They can be acquired. 2000 was a very busy year for
dot-com mergers and acquisitions with over 900 according to
webmergers.com. 2001 promises to be busy as well.
- They can simply go out of business. There are primarily
two reasons for going out of business rather than being acquired:
either there is no value to be purchased or management delayed
the search for a buyer too long allowing cash to run out before
one could be found.
- They can make a profit and stay in business. This alternative
is the most attractive. For many, profitability is simply not
possible within the time that available funds provide. For many
others, however, it is. We can expect to see many dot-coms becoming
profitable in 2001.
The appearance of the Internet has been described in superlative
terms. It's often seen as one of the most significant events in
business of the century. It was seen as virgin territory. The
Internet bubble of 1998 and 1999 was a landrush into that territory
under the theory that a first mover advantage would go to the
first to establish a brand in each market in cyberspace. Noting
that dominant consumer brands tend to last for decades, the theory
was that the immediate priority for each dot-com was to establish
an online brand even at a cost that would be considered unthinkable
in traditional markets. There would be time to figure out how
to make money later.
Which company becomes the dominant brand? Often, the first brand
to dominate maintains its leadership position. But that doesn't
necessarily mean that the first business in a market will be the
dominant brand in that market. It's the first brand that customers
accept as the dominant brand. This is where the trouble begins.
Even though there may already be competitors in an emerging market,
if no one competitor is seen as dominant by the customers, other
competitors are encouraged to jump into the fray hoping that they
still have time to become the dominant brand. And their chances
are thought to be better if they promote themselves more strenuously,
perhaps even to the point of selling product at a considerable
loss or not even selling product at all. Soon the market is overfilled
with far more capacity than it can support. Companies that are
investing prudently, growing at a manageable rate, have a difficult
time competing with others who operate their businesses in a non-economic
way. It's difficult to compete with a company that sells at a
loss. Oversupply and non-economic operations means that investors
soon realize that many and probably most of the competitors in
these overcrowded markets will not survive. So, why should they
be willing to invest for the long term? Most are not. Unload while
you can. The bubble bursts. Stock prices plummet. New venture
funding becomes nearly impossible to find. Just as irrational
exuberance took valuations to astronomical levels, emotion drives
disappointed investors to dump anything that smells of dot-com,
at least until reason returns (to whatever extent reason exists
on Wall Street).
Back to alternative four, profitability. The businesses with
their goals set on early profitability and positive cash flow
are relatively immune to the changing whims of investors. Their
biggest problem is surviving the period when heavily funded competitors
operate at a loss, effectively subsidizing each customers' purchases.
The good news is that Dot-Com Winter is only an investment crisis,
not a revenue crisis. The Net continues to be a vibrant and potent
place to do business. Sales continue to grow. Traffic continues
to increase. New users continue to get on the Net. Difficult as
Dot-Com Winter is, it's a much better situation than if all the
customers quit using the Net. As long as the customers are there,
companies will be motivated to create and build sustainable businesses.
It's back to business fundamentals. That game may not be as much
fun as the high risk, high stakes game of landrush market share
grab, but a lot more players get to play a lot longer.
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