The dot.com crash around the turn of the century should not really have been a surprise. The major stumbling block was lack of experience. E-commerce was in its infancy and the ease and speed at which a dot.com business could grow and become viable was totally over-estimated. Certainly there were other influencing factors such as the fear of giving credit card details online - an issue fanned by the media. This has now become less relevant.
The failure rate of dot.com businesses was far higher than the failure rate of traditional enterprises. But the fact is that scrutiny of the respective business plans or balance sheets would doubtless reveal that the chances of the majority surviving were very remote from the start. One pointer is that the very high success rate of an existing business introducing e-commerce – which basically means that if you have experience in your business you’ll probably succeed. If not you’ll most likely fail. But there were successes. As an example, Internet holiday sales rocketed during this time. However, for the media, bad news tends to be better than good news so these examples were not given a great deal of coverage.
Stories such as boo.com were far more interesting. The story goes that Swedish founders Kajsa Leander, Ernst Malmsten and Patrik Hedelin, with the support of the virtual Miss Boo, sold classy clothing items in many countries across the globe. But just a year and a half after their start-up, the $120 million or so venture capital had been used up. The legendary champagne & caviar lifestyle of the founders, who had moved to London, was partly blamed. But other factors played a greater role in the downfall. It’s costly enough to achieve a large volume of sales - marketing is even more expensive and distribution at an international level is much more complicated and costly. There are different currencies, languages, distribution systems etc. involved and without a clear project plan, failure was pre-programmed.
But surely this is just one more case to put down to inexperience, unrealistic expectations of the New Economy and being blinded by stock exchange fantasies. Huge marketing campaigns were launched and expansion at all costs was the buzzword. The collective euphoric delusions of the up-up-and-away start-up businesses ended in a collective nosedive. And there were enough Kamikaze pilots around with huge egos, rose-tinted spectacles and a total overestimation of their own abilities to steer a course ending in a crash landing. Most businesses didn’t fail because they were involved in the New Economy, they failed through lack of basic business acumen.
Now this all seems to be straightforward common sense. So why did so many experienced venture capital companies back so many losers? Was it just a gamble on their part? A gamble with a lot of experience behind it? Did they gain as shares soared in the hype of dot-com stock exchange launches, leaving the millions of small, inexperienced investors to bear the brunt? Not to mention the many employees who lost their dot-com jobs. The burst of the dot-com bubble blew even viable dot-com companies into thin air as confidence crashed.
In the meantime most start-up companies have changed their strategies. Learning to walk before you can run is back in fashion, as is profitability. And partnerships with companies in the Old Economy are sought after. The outlook is brighter and dot-com failures en masse should be a thing of the past.
The circle appears to have closed with the realisation that chances are coupled with risks and the greater the chance the greater the risk.