The tech bubble bust offered an infinite number of lessons for entrepreneurs. But there's one in particular that many have failed to grasp.
By the late '90s, Exodus Communcations had become one of the greatest success stories of the Internet era. Arguably the first large-scale--and definitely the largest--data center company in the world, at one time it hosted one-quarter of all the Web's traffic.
I sold my first company, Service Metrics, to Exodus at the end of 1999. Over the next year and half, Exodus stock quintupled in Apple-like fashion, with the company's market valuation peaking at $27 billion.
You know what happened next. The stock market contracted in 2001, and then, to the utter disbelief of everyone involved, only six months later Exodus came crashing down, selling in bankruptcy for just $850 million to a company called Cable and Wireless.
After spending years reflecting on what I--along with plenty of others--experienced from the belly of the beast in Silicon Valley, I've come to a few conclusions about what really happened. Entrepreneurs in the dot-com era made all kinds of mistakes, many of which--fortunately--you don't see founders making today.
But there is one in particular that hasn't gone away entirely--and it's just as dangerous now as it was then. Let's call it "the mirror."
Selling Into the Mirror
Exodus's greatest failure was what I call "selling into the mirror." Located right in the heart of Silicon Valley and a product of the first wave of Internet venture capital, Exodus and its core team knew every well-funded start-up along the peninsula. So the company knew exactly where to go when it was time to make some sales. Thus, Exodus became part of a class of companies--along with Cisco, Level 3, and Sun Microsystems--that saw revenue skyrocket as Internet demand soared just as fast.
The reason why once-hot Internet companies such as Exodus collapsed so spectacularly boils down to this: These start-ups demanded so little value because they themselves felt so little pressure to create value. Web companies were growing as fast as they could spend money, not as fast as they could win loyal customers. Internet infrastructure companies were simply swapping equipment and putting it on their books as revenue. They essentially handed pieces of paper back and forth and called it money. Nowhere in the equation did anyone ask, "Are we really making something with deep value to a broad audience?" This was their fundamental mistake.
Still Looking in the Mirror
I still see that same echo chamber in Silicon Valley today. Companies launch and quickly climb to 100 or 200 customers. But if you take a look at who these customers really are, you'll find they look a lot like the company that's selling to them: In fact, I'd bet 85% of their customers are located within about a 5-mile radius from The Creamery, a popular Silicon Valley hangout.
Once companies try to push past these customers, often the painful realization sets in that they don't have the value they thought they had. It takes real effort to deliver true value for a broad set of customers.
The upside is that most of the economy is fueled by areas and industries outside of what's happening on the coasts. So many of the companies that make this economy tick--those that manage logistics, manufacture products, facilitate hiring, and operate transportation--are located not in Silicon Valley but in America's heartland.
That reminds me of the last business I built; we sold tools to companies that ran their businesses on PeopleSoft, SAP, and JD Edwards. I have never spent so much time flying to second-tier cities across the United States. I quickly realized they were home to multibillion-dollar companies I'd never heard of that made one or two things and made them really well. The heart of the American economy really is in the heartland.
So, here's a challenge to put your product or company to the test. Identify 10 prospects not in Silicon Valley or New York City and try to sell to them. If you succeed, you've got a tiger by the tail. If you stumble, you'll have learned early that you were getting a little help from your friends, not building a business based on valuable customers.
Perhaps the old adage is more true than ever: If it'll sell in Peoria, it'll sell anywhere.