Do Startup Internet Businesses Have a Prayer?

By Pam Baker
NewsFactor Network
September 9, 2004 11:32AM

"The dot-com bubble burst for the investor community, not consumers. Investors and startups got creamed because they rushed to exploit technology they really didn't take the time to understand. Established businesses were unharmed because they transferred their business acumen," says Carl Lehmann of Meta Group. 

Dot-coms are dead and buried. So says common lore, anyway. Yet entrepreneurs are still trying to hit the jackpot with the next great Internet business idea. The odds are daunting, but not impossible, say analysts.

"People think that since the dot-com bubble burst, that means the Internet failed. But that's not true. E-business and the Internet are wildly successful, way beyond anyone's greatest expectations," Carl Lehmann, vice president of technical research services for Meta Group , told NewsFactor.

Cold Shoulder

That is not to say that the money is easy, or that a startup is a sure thing. "If you start out with just any wild idea, you don't have a prayer," says Lehmann.

For one thing, venture capitalists look at startup Web-based businesses as something akin to the bubonic plague. "It used to be that venture capitalists could be wooed with just a neat idea. Now they won't even speak to you unless you have a sound business model and lots of happy, paying customers," Rob Garf, retail analyst for AMR Research told NewsFactor.

Finding Money

So what exactly will catch the attention of this once-burned, twice-shy group? "The same thing that catches their attention in the brick-and-mortar world: unique and new products or services, with tried-and-true business practices," says Garf.

"Don't try to sell them on an invention or something needing heavy research and development. Make your widget in your garage, make yourself a Web site or put your goods on eBay  -- or both -- and call venture capitalists when you have money in the bank and enough orders to outgrow your garage. Then maybe, just maybe, they'll entertain the idea," says Lehmann

Startup capital these days come from more traditional sources: mom, dad, a successful spouse, an angel investor with more money than sense. In other words, risk-takers who bank more on the person than the idea.

"There will always be startups. But the days when venture capitalists were throwing money at people with only good PowerPoint slides is gone. Those days may return in 10 years. But not today," said Laurence J. Stybel of Board Options, a consultant to venture-capital firms.

New Equation

It is not just the venture capitalists' equation that has changed. It is the entire definition of what constitutes an Internet business in the first place. "It's less about pure e-commerce as a space, and more about catalog and brick-and-mortar multichanneling," says Garf.

That means first-timers should think of the Internet as more like a truck than a store. You can sell goods off the tailgate one at a time, but it is more profitable to load the truck and haul your goods to market.

"Entrepreneurs need to align themselves with more credible marketplaces like eBay, Yahoo  and Amazon . That way customers are more likely to trust -- and buy -- your product," says Garf.

Really Good Idea

Still, some ideas can stand on their own. "Truly unique ideas that fill specific needs are the best bets -- like something in the liquidation channels, similar to Overstock.com  and SmartBargains, which is going public in a couple of months. Ideas in the digital-music area that build off the success of companies like iTunes and Real Networks could be good too," says Garf.

Look for other attributes that can make your product more attractive than you may have first realized.

"Any local plus can become an international draw. Silk ties from Milan, watches from Switzerland, whatever your region is known for, can be a hit with customers from other areas. Even playing international currency fluctuations can be a big future trend in e-business  once people get savvy to the international currency play," says Stybel.

Danger Zone

Learn the lessons from the past to avoid pitfalls along the way. "Remember the dot-com bubble burst for the investor community, not consumers. Investors and startups got creamed because they rushed to exploit technology they really didn't take the time to understand. Established businesses were unharmed because they transferred their business acumen to the new channel," says Lehmann.

“Don't skimp on technology and process investments. If a customer has a bad experience the first time, that customer is probably gone forever," says Garf.

In any case, starting an Internet company is not for the weak of heart. "It's always been hard to be successful. But 'bucking the odds' has always been a turn-on to real entrepreneurs," says Stybel.