10 lessons from the dotcom bust

March marks a decade since the beginning of the end for the dotcom bubble. On March 10, 2000, the technology-heavy NASDAQ sharemarket index peaked at 5048.62 – double its valuation of a year earlier – with a slew of highly speculative public offerings for web-based businesses inflating the index well beyond reason.

When reason returned it did so with a vengeance, wiping out almost 9% of the index in just five days. Worse would follow.

A similar story was told in Australia, where the valuations for companies, both public and private, were slashed, and investors walked away from the carnage in droves.

The tech wreck did not mean the end of the dotcom dream however, and from the rubble emerged successful companies including Wotif.com, Seek, Hitwise, Carsales.com.au, and many businesses recently profiled in SmartCompany’s Digital Dozen.

There were also plenty of lessons learned. SmartCompany spoke to a number of the survivors of the dotcom era to compile this list of the top 10 lessons from the tech wreck.

1. We know the difference between a real business and a fake one now

The newness of the internet as a business platform in the late 1990s allowed enthusiasts to make unrealistic claims that the standard rules of business – particularly relating to cashflow – did not apply online.

That assertion was quickly killed in early 2000. Huy Truong witnessed its demise firsthand; first as the founder of online shopping service Wishlist.com.au and now as co-founder of private equity firm Yarra Capital Partners.

“I don’t think anyone really understood the internet back then, but felt that it was an opportunity that warranted speculative investment,” Truong says.

“Whereas today people are much more sophisticated in their analysis of not just the internet, but broader venture-type investing.”

The former CEO of web measurement company Hitwise, Andrew Walsh (who recently became non-executive chairman of the software maker The Adweb Agency) agrees that fundamentals are playing a much bigger role now.

“In the early stage there were a lot of smoke and mirror businesses, that had a lot of ideas and got a lot of funding but weren’t real businesses,” Walsh says. “A lot of things that are out there now are real businesses with real revenues and real profits, and ought to be assessed like any other business.”

2. Profitability is better than blue sky

Dotcom businesses were valued on wild ideas about future revenues and profitability. Web-based businesses today are valued on actual financials. Truong says investors are generally less patient and want to see a cashflow/break-even business rather than one with enormous potential. So too do the entrepreneurs, lest they be diluted out of their holdings.

“Entrepreneurs who went through the dotcom crash and doubled up to raise more capital were very exposed,” Truong says. “The entrepreneurs know the sooner they can get to a profitable situation, the more control they have.”

3. Good people are more valuable than good ideas

Dotcom veteran Tony Faure, who helped establish Yahoo! in Australia, was CEO of ninemsn and now runs his own consultancy firm, says one of the best bits of advice he has heard was delivered by former McKinsey & Co director, Clem Doherty.

“You’ve got to remember that you’re investing in the business that these guys come up with when they realise that the idea that you backed them for isn’t going to work,” Faure quotes.

What that means is, you are looking for people with good business skills that are adaptable, rather than just a good idea.

“If you have to pick one over the other, you are really more likely to get a return on your money if you pick good executors than if you pick a good idea,” Faure says.

4. Building it does not mean they will come

One of the biggest failings of the dotcom era was the lack of rigour in understanding whether markets truly existed. Truong saw this clearly in e-tailing at Wishlist.com.au, where a concept that had worked well in America was naturally assumed to work in Australia, despite our smaller population and lack of heritage in catalogue buying.

“In contrast, for a company like Seek.com.au the market for classifieds already existed, and it was simply a case of which medium was going to be the most efficient,” Truong says.

“For online shopping, the shopping experience was a fundamentally different value proposition between the physical experience and the online experience.”

5. An existing marketplace is a good place for a new business

Faure says that of the businesses that are thriving today, most came out of existing markets such as travel and classified advertising, such as Seek, Carsales.com, REA, and Wotif.

“They have figured out that there are certain markets where probably both buyers and sellers prefer there to be one marketplace that is clearly better than any other, and that’s what they tend to congregate around,” Faure says.

6. Getting people to change their behaviour is hard

The online revolution bred a new breed of early adopters that would race into new services. The mistake came through believing they were actually the vanguard for the greater masses.

Expectations and valuations were built on the early adopters, who also proved to be a fickle bunch that would quickly tire of their new experience and move on to find another one.

According to co-founder of Seek.com.au and now chairman of the fast-growth Australian software business Nitro PDF, Matt Rockman, much of the problem stemmed from difficulties in changing consumer behaviour to adapt to a new way of receiving services.

“I prefer businesses that don’t require people to change their behaviour, just modify it,” Rockman says.

7. You have to be where your customers are

The internet may have made it easier for companies to collaborate and sell across vast distances, but for many businesses there is still no substitute for being physically in the market.

According to Vivian Stewart, a former executive with the web era investment group Tinshed and now a director of private equity firm Hall Capital, if you can’t get your CEO over to the markets that you want to sell in, you need to find someone good, fast.

“You’re not going to sell to US law enforcement being based out of Sydney,” says Stewart.

According to Faure, building a global business almost certainly means relocating the business out of Australia in the first two or three years.

“The kind of funding that you need, and the partners that you need to make it happen are just not based here,” Faure says.

“The geographic separation of Australia – particularly from the American market and venture community – makes it very difficult for people to be based here and make it work. It’s not impossible, but it’s hard.”

8. But you can build a decent business in Australia

Curiously, most of Australia’s dotcom success stories have succeeded by building up a profitable business in Australia only, at least initially, rather than extending their reach too far.

Stewart uses the rural automotive classifieds service CountryCars.com.au as an example, where the $1 million that was raised delivered a strong return to investors when the company was sold to Fairfax.

“The investors made a good return on their money,” Stewart says. “That happened in a fairly short period of time, and they were focused on regional Australia.”

9. A psychology degree can be useful

According to Ramin Marzbani, founder of www.consult.com.au and now an angel investor, the entrepreneur is their own worst enemy when it comes to attracting funding for a business. But unfortunately maverick founders also tend to provide the magic ingredient required for rapid growth.

“Half the time, if is a fantastic business opportunity, then the entrepreneur is probably a complete nutter, and you have to expend so much energy stopping him from torching the place,” Marzbani says. “Whereas if you have corporate dudes, who do everything by the book and perfectly rationally, you end up not having the same kind of explosive growth.”

10. Hard work just isn’t enough

Marzbani says there weren’t a lot of people who were building dotcoms that didn’t work hard, so hard work alone is definitely not a guarantor of success. Luck also plays a critical a factor.

“There is still a whole bunch of people that don’t understand that they were lucky, and a whole bunch of people that think they were extremely unlucky and they were poorly done by,” Marzbani says.

Good old-fashioned business skills also played their part, says Faure.

“There weren’t very many companies where they had an awesome business and had it not been for the dotcom meltdown would still be here today,” Faure says.

“Generally speaking the people who did well and ran good businesses did well and continue to do well.”