Young
Entrepreneur Ryan Allis |
|
My Sites: IntelliContact My
Book:
|
Home > Favorite EssaysThe Dynamics of the Information AgeAn Excerpt from the book Zero to One Million: How to Build a Company to One Million Dollars in Sales by Ryan Allis Six years ago I was somewhat mad that I was born in 1984 and not 1979. I knew that if I had been born in ’79 that I would have been out there in the late 90’s with my own four hundred million dollar .com company. Staying true to the grass is always greener proverb, now, in 2006, I feel lucky to have been able to watch one of the greatest business lessons in the history of the world play out before my eyes, without losing the shirt off my back. Back in 1999, many writers and journalists boldly proclaimed that new rules would require new strategies for businesses to effectively prosper. While they were partially right, business owners were not quite sure which rules were effective principles and which rules were just hyped up chaff. Magazines like Business 2.0 and Industry Standard proclaimed that if you did not get venture capital funding in the hundreds of millions and spend it rapidly to gain market share you could not succeed. They seemed to have forgotten that most entrepreneurs that end up succeeding start out small, bootstrap their way toward success, and focus on profitability throughout. Mark Brier, the former VP of Marketing for Amazon.com and CEO of Beyond.com said in his early 2000 book The 10 Second Internet Manager that “In the Internet World, it’s all about mind share and market share. Profitability will come later.” It’s interesting to note that Beyond.com filed for bankruptcy on January 24, 2002.1 Even one of the most respected Venture Capitalists, Tim Draper from Draper Fisher Jurvetson, can be found proclaiming in a 1999 speech, “If you are on the Web, build market share fast. Grow. Move… Use whatever you can to be the biggest one fastest... Win. Grow big, fast, and just win. Be the winner. You don't want to be number two. [You] just don't..”2 It took a 77.9% drop on NASDAQ and a 35.4% drop in the Dow Jones Industrial Average3 for people to finally overcome these years of “Irrational Exuberance,” the term coined by former Federal Reserve Chairman Alan Greenspan in his December 5, 1996 speech. According to Fortune, on September 27, 1999, there were eight American billionaires thirty-five or younger. Of this group, today, only three remain billionaires: Michael Dell of Dell Computers, Jeff Bezos of Amazon.com, and Pierre Omidyar of eBay. So what did these entrepreneurs do right to propel their companies from an idea to household names? And how did they keep their company solid when so many other technology and Internet stocks were faltering? Simply put, all three effectively implemented the benefits of ebusiness, managed their growth, and adapted their business models. Just as in the 1847 British railroad bubble, the businesses that played their cards right, came up with business models that actually made sense, and effectively leveraged the power of the new medium rose as champions. Further, these companies did not make the mistakes of Beyond.com, Webvan, Etoys, Pets.com, Peapod, or any other company on the infamous lists of f**kedcompany.com. They did not overload on debt, they did not spend endlessly simply to gain market share, they did not make the mistakes of Enron and WorldCom; they kept their accounting clean, and they utilized the advantages of ebusiness while keeping within classic business logic. The fundamentals of business are still very much the same. One must still have a source of capital to start up, provide a product or service that the market desires, build a quality team, market a product or service, and accurately account for sales and expenses. While the advent of computers, the Internet, ecommerce, and ebusiness may not have changed the underlying fundamentals of business, the techniques used to execute the goals of a business have changed, however. The Information Age has brought improved supply-chain management, enterprise-class database solutions, better customer relationship management, and productivity-increasing Intranets. While the fundamentals of marketing have held constant, the techniques used to manage the four Ps of marketing (product, place, price, promotion) have been radically altered, new markets have opened, laws have changed, and what was once the smart distribution method often is no longer the most profitable. If you do not understand these changes, no matter if you are a Fortune 500 CEO or a small time entrepreneur you will be hard pressed to succeed. You will very soon begin to feel just like Mahathir Mohamad did in late 1997 after the Asian financial crisis had put his Malaysian economy in ruin. “This is an unfair world,” he stated.4 This new world is indeed unfair if you do not understand the changes Globalization (increasing free trade, capital flows, and interconnectedness of markets) and the Information Age have brought to markets and business over the past decade and a half. Welcome to the Post-1989 WorldOn October 11, 1998, Merrill Lynch stated in a full-page ad in major newspapers, the world is only ten years old. “It was born when the Wall fell in 1989... The spread of free markets and democracy around the world is permitting more people everywhere to turn their aspirations into achievements. And technology, properly harnessed and liberally distributed, has the power to erase not just geographical borders but also human ones.”5 Today, this world is approaching its eighteenth birthday. The Industrial Age ended and the Information Age began in 1989 with the fall of the Berlin Wall, and continued with the breakup of the U.S.S.R., the opening of new markets, the democratization of finance, the mass-utilization of the Internet, the advancement of telecommunications, and the spread of globalization. Since we began to reap the benefits of the peace dividend, more or less intact since 1974, there have been three breeds of entrepreneurs. The first consists of people like Oracle CEO Larry Ellison, EDS billionaire Ross Perot, and yes, even Bill Gates, now over 50. These guys “got it” back in the day before the Internet. They were the “transformation entrepreneurs” and were integral in bringing the United States into the Information Age. Next on the scene were the guys and girls that grew up with Commodore 64s, Atari, and Ronald Reagan. From this first breed of Internet Age entrepreneurs came people like Jerry Yang, CEO of Yahoo!, Pierre Omidyar of eBay, and Jeff Bezos of Amazon.com. All born more or less in the late sixties, these guys grew up watching the development of computers and were prepared to jump on the opportunity they saw in late 1994. They did well, and their companies tripled and quadrupled each year from 1995-1999. These guys were the frontrunners and were intelligent enough to see the possibility of the Internet twelve or thirteen years ago, perhaps the reason why all three of these companies are still around today. The Joys of Irrational ExuberanceWhile these three companies have survived, there have been thousands that have not. On November 13, 1998, Theglobe.com was one of the first .com’s to go public.6 It offered its Initial Public Offering shares at $9. By the end of that day, its valuation was 605% higher at $63.50 a share. Today you’ll see that highly sought after stock just eight years ago is now just a few pennies per share on the Over the Counter (OTC) market. In mid 2002 their web site proclaimed, “In 1995, theglobe.com confirmed the Internet's power to connect people worlds apart. Unfortunately, after six amazing years, theglobe.com closed its doors on August 15, 2001”7 During these high flying days, profligate spending on things such as Aeron® chairs, flat-screen televisions, game rooms, pizza parties, and massage breaks was the norm. It seemed like it would never end. Many thought it would not. So what was it that caused the speculative bubble between 1997 and 2000? During this time, it was commonly believed that because of new technology, great gains in productivity, and the potential market size the Internet opened up, that company valuations, and in turn the stock prices of those companies, were not confined by the same Old Economy rules. Valuations were based upon multiples of hits to a web site instead of net profits. Alan Greenspan, the former Chairman of the Federal Reserve, first noted the development of this speculative bubble in late 1996. Much mystique surrounded Greenspan during his tenure, and for good reason. He was the maestro of the United States Central Banking System from 1987 to 2006. Euphemisms referring to Greenspan ranged from simply “Superhuman” to “ the Delphic oracle of global financial markets.” He was perhaps the second most powerful man in the world during his time in office. On December 5, 1996 at The American Enterprise Institute for Public Policy Research in Washington, D.C., Greenspan gave a speech in which he made the following important statement, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions, as they have in Japan over the past decade? And how do we factor that into monetary policy?" Although missed by most in attendance at the time, press reviews and later remarks made it clear that Greenspan was implying that irrational exuberance existed in the market and that the financial markets were overvalued. Between October 16, 1990 and the date of Greenspan’s speech, the Dow Jones Industrial Average (DJIA) had increased by 170.3% and the NASDAQ was up 299.5%.8 Further, at the time of his speech, the historical Price to Earnings (P/E) ratio on the Standard and Poor’s 500, a key indicator of speculation, was 23, far above the historical mean since 1926 of 16.9 The bulls of the markets had been out for the past six years and Greenspan was worried that irrational exuberance was creating a speculative bubble in the financial markets. That night the Tokyo market panicked and closed down 3 percent, its largest loss of the year. Hong Kong fell almost 3 percent. Frankfurt dropped 4 percent, and London was down 2 percent. However, the Dow recovered later that day and would continue its bullish streak. There were no reiterated warnings by Greenspan and for quite some time no monetary policy actions such as increasing interest rates were taken. In fact, the Federal Reserve did not begin to significantly raise the interest rates until August of 1999, nearly three years later. From the date of Greenspan’s speech until March 10, 2000 the NASDAQ gained 288.3%, bringing the total gain since January of 1995 to 579.0%.10 In layman’s terms, this means that after Greenspan’s speech, the market nearly quadrupled. The speculation continued, at an increasing rate. This time, 1996 until 2000, in the United States was one of the most prosperous times in the history of mankind. With the advent of increasingly powerful computers, sophisticated software, the Internet, and other technological innovations, productivity and corporate profits were increasing tremendously and many thought we had entered a New Economy in which these gains could be sustained. With the dot com era exploding, entrepreneurial ventures wildly succeeding, and trillions in capital flowing into U.S. markets, it would have been a very unpopular decision to try to dampen the economy. The bubble grew and grew, pushed by new rhetoric and a new culture of excess. If you could go one day without hearing the words paradigm or revolutionize somehow combined in the same sentence with CRM or ROI, you must have been on a deserted island. The Causes of the Dot Com CrashAfter seeing two years of almost unbelievable growth, by mid 1998 almost every young MBA in America either worked at a .com or was thinking about starting one up. In a figurative sense, Silicon Valley was Mecca and hundreds of thousands of Americans had suddenly become Muslim. An associate of mine and Princeton graduate that I worked with made the trek in late 1999, only to go right back to the east coast six months later. In the Ten Second Internet Manager Mark Brier, former CEO of Beyond.com, tells of his hiring away dozens and dozens of marketing MBAs from traditional consumer product firms like Coca Cola and Johnson & Johnson. He goes on to say, “You really can’t demand that all your employees have Internet experience. It just hasn’t been around long enough.” From June 1998 until March 2000 there was an exodus of high caliber professionals from traditional firms to Silicon Valley. Enticed by stock options and the chance of an IPO, who can blame them? We all know what has happened since March 2000. However, many of us do not know why it has happened. You ask ten people and you may get ten different versions of the same story. In my view, there were four reasons that caused the overwhelming majority of Internet companies to fall flat on their face when the bubble popped. These were:
So what did we learn? First, it is better to be profitable with 50,000 customers than sinking in debt with 100,000. Rapid growth is not the way to build a solid company. There is nothing wrong with doubling the size of your company each year, but doubling the size of your company every month is generally not healthy for long-term prospects. If you’re going to start a company that you hope to gross a billion dollars next year, make sure you have experience, an experienced team, and experienced advisors to guide you along the way.
1 - Financial Market News . Yahoo Financial. BYNDQ.PK . October 16, 2003. <http://biz.yahoo.com/e/030306/byndq.pk8-k.html > 2 - Excerpt from Tim Draper Speech. Draper Fisher Jurvetson , May 6, 1999 <http://www.drapervc.com/about/a_philosophy_frset.html> 3 - Financial Market Data. Yahoo Financial. October 22, 2002. <http://finance.yahoo.com> 4 - Friedman, Thomas L. The Lexus and The Olive Tree . New York: Anchor Books, 2000 . 5 - Ibid, Page XI 6 - Leading First Day Gainers of 1998. CNN Money. July 16, 2002 <http://money.cnn.com/1998/12/21/markets/ipo/> 7 - The Challenge of Central Banking in a Democratic Society . Federalreserve.gov. December, 5, 1995. <http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm> 8 - Financial Market Data. Yahoo Financial. October 22, 2002. <http://finance.yahoo.com> 9 - Ibid 10 - Ibid |
All Rights Reserved. Contents
Copyright 2006 Virante, Inc. Brought to you by the Entrepreneurship Resource at www.zeromillion.com |
|