• 30 Apr 2001
  • What Do You Think?

Dot.Com Shakeout: Chess or Roulette?

by James Heskett

Summing Up

What's so unusual about the current shakeout occurring among dot.com organizations? It's business as usual, a combination of both chess and roulette (perhaps following a round of "pin the tail on the donkey") offering the kind of opportunity that accompanies major change of any kind. That's the consensus among those responding to my recent questions concerning the future of the best and brightest of the Internet entrepreneurs still in business who have yet to achieve cash flow breakeven.

As Yung-Hi Lim put it, "It's all about risk; it's all about profit and loss; it's all about timing; it's all about wit and hard work; it's neither business disaster nor business opportunity BUT just plain business; it's the same ol' stories that span centuries of commerce."

Wilson Kimutai commented that those who figure out what customers want and charge for it would indeed survive—as always. In his words, "Out of every disaster, you can create an opportunity. The shake-up is realignment in the offing, the Internet still provides a window of opportunity. The only problem is that to remain competitive in this cut-throat business, one has to create value for his customers, who determine your success in the marketplace."

The consensus was, business as usual or not, the shakeout represents a big opportunity, albeit one requiring an unusual amount of due-diligence—an ingredient lacking in many of the original dot.com investments. Typical of these comments was that of T. N. Rao: "There is an immense business opportunity now for all the investing companies to pick up some very good dot.coms that have very sound business models. It is just that the principles of assessing the health of the dot.coms, like fiscal prudence, robustness of the business model, clientele, client perception, and overall market share must be more than thorough."

It may be small consolation to those dot.com entrepreneurs struggling to keep their heads above water, but there appears to be a sense that those who are still alive may have a growing likelihood of survival. The question is whether the form of survival will meet even their modified expectations. What do you think?

Original Article

In recent weeks the media have covered a number of stories about the merging, closing, or bankruptcy of high-profile dot.com organizations. We haven't seen anything yet. One reason is that the better-backed ventures had twelve to eighteen months of financing when the market for Internet-based start-ups tanked a year ago. Another is that, through relatively astute management, less well-financed organizations managed to survive by carefully husbanding their funds—avoiding the urge to make a Superbowl ad and paring down expenses—to lengthen the start-up "runway." However, without new infusions of funds or positive cash flow, literally thousands of these remaining organizations, even with the best and brightest ideas, management talent, products, and technical capability, are destined to face the same fate over the next six months.

At one level, one might take the view that this is free enterprise at work. Organizations that deserve to survive will do so. Of course, this assumes a near-perfect market, one in which the information is arrayed like pieces on a chessboard. It assumes that the most deserving dot.coms will get financed or bought. The question is, are the venture capital or strategic investment markets as perfect as the stock market? In their current states, are there sufficient investors able or willing to shell out relatively small amounts of money for control of the most promising dot.coms subject to this fire sale?

On another level, the question might be raised whether or not this game resembles roulette. For example, the corporate histories of the most famous start-ups of the last thirty years tell us that many required three years or more to achieve positive cash flow. Start-ups on "Internet time" don't appear to have that luxury. A number of the best of these start-ups are confronted with the chicken-or-the-egg dilemma. They are on the verge of closing the "marquee" deal that will produce the necessary financing but only if they can prove that they have the necessary financing. Still others are trying to negotiate a "marquee" deal with large organizations that are not marching (or running) on "Internet time." By the time these organizations are ready to close these highly attractive deals, they may find that their prospective partners no longer exist. By the time they are ready to transact or invest, that talent they found so attractive may be gone.

What is happening here? Is it free enterprise or pin the tail on the donkey? Chess or roulette? A business disaster or business opportunity? What do you think?