Explaining the dotcom bomb to avoid any repeats
The recent spate of new-economy failures has prompted much finger-pointing among members of the dotcom community worldwide. Internet start-ups have blamed greedy private equity investors for unrealistic expectations of quick and easy profit in a few short years. They have criticized venture capitalists (VCs) for being too easily influenced by a downturn in the investment climate as investors now withhold first and second rounds of financing. Similarly, VCs have cited the need for additional caution with funding risky dotcom start-ups in an unfavorable investment environment. Moreover, they have accused Web entrepreneurs of frivolously spending their money and mismanaging finances.
Both groups agree, however, that the crash of the U.S. tech-heavy Nasdaq Composite Index last April sparked reverberations on both sides of the Atlantic. Even though the drop affected only a small group of stocks, it served as a wake-up call for investors to view all tech companies, especially Internet start-ups, with extra caution. As a result, VCs have stopped throwing lavish amounts of cash at new dotcom entrants.
But beyond the initial blame game, Web executives and VCs now acknowledge their own mistakes as the finger-pointing has turned into soul-searching.
In the wake of the dotcom debacle, Internet entrepreneurs now say they should have curtailed unnecessary expenditures, such as hiring extra staff members, from the get-go. Due to high operational costs, many start-ups have been forced to fire employees and to cut as many other corners as necessary to save money. Dotcom entrepreneurs also say they erred in spending too much time in lengthy negotiations with prospective investors when they should have grabbed the cash while it was on the table. Others say they should have found a strategic partner with fat financial reserves at the outset of their ventures. Finally, they say they should have stayed focused on their original business plans, especially in tough financial times.
VCs say that they, too, have learned from their funding mistakes. Instead of eager and gung-ho young bloods lacking start-up experience, they will now look for seasoned management teams. They also will scrutinize and monitor business plans with extra diligence to ensure soundness and look for companies with first-mover advantage and unique selling points that separate them from their peers. They will carefully examine financial projections for operational costs, marketing expenses and revenue streams, and look for strong business models based on sensible market research. VCs say that with e-retail start-ups they will seek out companies that have physical infrastructures with distribution channels, order fulfillment services and delivery alternatives.
Despite these acknowledgements of past errors, investor pessimism will persist and remain unchanged in the risky Internet start-up sector, especially in Poland where the crash has already caused several casualties. At present, hardly any Polish online start-ups are receiving new funding.
Both web entrepreneurs and VCs here must now take into consideration the Polish Internet market's particular conditions and limitations. First, the fact remains that only about 20% of Poles have access to the Internet, although only 13% use it at least once a month. Furthermore, several established companies already dominate the country's portal and vortal segments, making it almost impossible for newcomers to steal significant market share. These big players receive the bulk of the negligible online ad spending, upon which most portals depend for income. Last, e-commerce in Poland has made little headway despite predictions that it should "take off" at any moment. Many Internet users are not comfortable with unsecured online payment transactions on existing Polish e-retail sites.
