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STREET SMARTS

Bubble.com

Sure, some people are making millions starting Internet companies, but the path to success is a tricky one. Here are some rules that can keep you from getting burned.

Norm Brodsky is a veteran entrepreneur.

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Yes, some people are making millions by starting Internet companies, but the path to success is a tricky one, and it's easy to get burned

I'm getting worried about some of our readers. Judging by my mail, a growing number of them are planning to drop everything and plunge headlong into starting an Internet business---specifically, the type with a name that ends in "dot com."

Not that it's hard to understand their enthusiasm. The Internet is looking like a bonanza these days, and it appears to cost peanuts to get in on the action. All you need is a computer, a modem, some technical know-how, and a good concept, and in a couple of years you could be joining the ranks of the Internet multimillionaires. So why not give it a shot?

Well, no doubt, some people should give it a shot. If you have an ongoing, viable business, for example, you'd probably be foolish to pass up the opportunities that the Internet offers to boost your sales and improve your customer service at a relatively low cost. My brother-in-law, who owns an inn in Cooperstown, N.Y., estimates that 25% of his bookings come through his Web site. Bobby and Helene Stone (see " The First Salesperson," December 1998) have used their Web site to increase sales at their computer-supply business by 20%. Next to them I'm a laggard: my company won't launch its Web site until later this year.

Nor would I discourage anyone who has a job and a steady income from starting an Internet business on the side. For people who know they want to go out on their own someday but aren't sure where or how to begin, a sideline Internet business makes a lot of sense. They're not risking more than they can afford to lose, and who knows? They may get lucky. Even if the business fails, they'll still have their livelihood, not to mention a good education. When somebody finally figures out the formula for Internet success, they'll be in a better position to take advantage of whatever opportunities may be around.

But most of the mail I'm talking about comes from people who intend to go into business full-time and who see the Internet as their road to financial independence. For them I have major concerns.

Listen, it's a big mistake to think that just because a bunch of 26-year-olds have gotten rich by starting Internet businesses, anybody can go out and do the same thing. Business bonanzas are seldom what they seem, and the Internet boom is no exception.

What we're seeing is, in fact, a classic bubble. By that I mean the phenomenon that occurs whenever investors become so enthralled with a particular category of business that they throw caution to the winds and start paying absurdly high prices for the stock of the companies involved.

Such bubbles come along fairly often. There was a biotech bubble in the early 1990s and an electric-light bubble a hundred years before that. I can remember an antipollution bubble in the late 1960s, when I was first getting into business.

By comparison, the Internet bubble is unusually big, partly because the Internet itself is so accessible and partly because the number of people involved in the stock market has increased tremendously. No doubt genuine excitement over the Internet's potential economic impact also plays a role.

But whatever has caused this bubble, and however big it becomes, it hasn't "changed the rules of business," as some people contend. Rather, it has created the same basic business opportunity as every other bubble. I'm talking about the chance for a start-up to survive and prosper, at least for a while, not by generating profit like other businesses but by taking advantage of investor euphoria.

Under normal circumstances, you don't have investor euphoria. You have investor caution. You start your business with limited capital, and the whole idea is to make it last long enough to determine whether or not the company is viable--that is, capable of sustaining itself on its own internally generated cash flow. The overall volume of your sales doesn't matter nearly as much as your gross profit margin. You want nothing but high-margin sales, because low-margin sales will deplete your scarce capital too rapidly. The term market share isn't even in your vocabulary. You care only about achieving viability--or finding out you can't achieve it, in which case you can move on to something else. (For a more complete explanation of the process, see " How to Succeed in Business in 4 Easy Steps," by Bo Burlingham, July 1995.)

The path to bubble success is altogether different. Determining viability isn't all that critical. Instead of relying on internal cash flow, you expect a substantial portion of the cash you need to come from outside sources. As a result, your potential investors become, in effect, your target customers. Success depends on producing whatever they think is the key to future earnings and doing it before they wake up and realize they're paying too much for what they're getting. I'm not saying that you deliberately deceive them. But as a practical matter, you'll do much better if they buy your stock while they still have unrealistically high hopes about the company's ability to deliver future earnings. That's how you win at the bubble game.

My point is that the bubble game does have its own rules, and they're different from those that apply elsewhere in the business world. In the Internet bubble, for example, what gets investors excited is a company with a hot concept that will lead to brand identity, an attractive subscriber list, exploding sales, and dominant market share. Profits are nice but not essential. The important thing is your ability to demonstrate an eager market for your "dot com" concept and to establish your brand name before anyone else can move in on your cyberturf.

So to make your millions, you have to put everything you've got into generating sales or accumulating the right kind of subscribers as fast as possible and reaching as many potential constituencies as possible. In most cases you need a substantial amount of start-up capital to pull it off. You simply can't grow fast enough without outside financing, even if you're profitable from day one, and speed is of the essence. Why? Because both you and your early investors will want to cash out before the bubble goes away.

It's an extremely risky proposition, and there's no reliable formula for success. There can't be; luck plays too big a role--much bigger than usual. You need a solid concept. You need a lot of capital. You need great execution. And even then you'll fail unless the bubble stays inflated long enough for you to sell the company. If you take it public, you'll need still more time, since you can't start selling your stock until long after an initial public offering.

That's not a game most people should be playing. The odds of winning are significantly worse than in a normal, nonbubble business. Yes, some players will hit the jackpot in the sense that they'll cash out in time. But it's much too soon to tell which Internet companies will thrive over the long run, and so we know next to nothing about what it really takes to build a successful, self-sustaining Internet enterprise. Figuring that out is going to take years, maybe even decades. In the meantime Internet companies will be spending a ton of money on education--their customers', their suppliers', and their own--with no assurance that the lessons they learn today will be valid a year from now.

Don't get me wrong here. I respect them for doing it. I think it's great that some people are willing to make that investment and take that risk, but it's not for everyone. In particular, it's not for people whose primary goal is to be self-sufficient, rather than fabulously rich.

My advice to them is very simple: choose a business concept that's been around for a long, long time, preferably 100 years or more. Yes, you'll have a lot of competitors, and you'll have to find your own niche, but at least you won't have to spend your time and money teaching customers what you do and why they should pay you to do it.

Of course, you may prefer to take your chances on getting fabulously rich as soon as possible. In that case, please do me one favor. If you manage to beat the odds and make it all the way to an IPO, drop me a line right before your company goes public. Then at least we can have a shot at getting fabulously rich together.

Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc. 100 company and a three-time Inc. 500 company. This column was coauthored by Bo Burlingham.

Last updated: Apr 1, 1999

Street Smarts columnist and senior contributing editor NORM BRODSKY is a veteran entrepreneur who has founded and grown six businesses.
@NormBrodsky




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