Avoiding the Mistakes of the Past: Lessons from the Startup World

by James E. Schrager

Executive Summary
Congratulations if you didnt personally feel the hardship of the dot-com implosion. Many millions went to their demise but at least left behind a legacy of what not to do. Fear not if you wont be using the internet in your next venture. Many of these lessons generalize well beyond their former faulty incarnations. For those of you with a new product, technology, or division to launch, most translate into corporate organizations.

Introduction
Failure is a wonderful teacher. The new-economy revolution had many of the trappings of a genuine economic revolt: vast fortunes forged in a fortnight, dashing young heroes and heroines, rotten institutions brought to their knees. It held such great promise, yet today even the dreams feel thoroughly eviscerated. What to learn from the revolution that never was? What lessons can be applied to new ventures? There is no better place to look for historical clues than the business plans presented by aspiring business managers. These serve as the revolutionary documents of record, holding within their propositions the seeds of ultimate success or failure. We will reassess these pillars of revolutionary wisdom.

The Lessons to Learn

We Will Establish First-Mover Advantage
The problem with this mantra is that first mover by itself means little; what matters instead is the power of your strategy. The first team to execute a dumb idea has accomplished nothing. In some cases, when you have an exceptional new technology, being first brings power. In other casessay, when your strategy is nothing more than another way to sell booksbeing first has little effect. Post-revolution, you can safely ignore the first-mover boasts. Instead, worry about the inherent strength or weakness of the business strategy. Amazon was concerned with being the first big player selling books on the Web. However, Amazons profit struggle has shown that being first made little difference. If you have an invention, for example, the xerographic copy process, being first is wonderful. But note the difference: Xerox got a patent for its process, thereby making it not only the first, but also the only company to offer a plain-paper copier. Since no one could duplicate its service, it was able to charge a premium. Amazon will never be the only seller of books, so its margins will always be subject to pressure. First mover is fine when defensible, but meaningless without a way to stop competitors entering the market.

We Will Be the Technology Leader

Venture capitalists (VCs) are at their best when making carefully calibrated bets on technology companies. They have mostly ignored the rough-and-tumble world of retail business on their way to investments in computer memory chips, software codes, medical devices, pharmaceuticals, genomics, magnetic storage media, telecom satellites, optical bandwidth, and truly new technologies. In each case, tech-company founders had to produce something new and wonderful that worked as promised, would be in great demand, and could be protected via patents, trade secrets, or switching costs. Internet retailers may claim to have some bits of technology in a one-click purchase screen or real-time chat lists, but these are hardly protectable. As such, e-retailing cannot be the basis of a technology strategy.

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Claims of new technologies that cannot be protected are not worth much. Instead, strategies may center on building a brand; however, this is expensive to construct and requires constant maintenance to remain viable.

We Will Create a Powerful Image

Instead of worrying about technology that can be protected, retailers concentrate on the precise construction of a tailored image to appeal to a consistently fickle public. Priceline discovered how expensive it is to spend for a national audience and capture just a tiny slice. The overreach inherent in most mass-media advertising makes it a very dull tool for carving a startups image. So how will the image be created? Postrevolution business plans need to find a more efficient way than simply throwing money at the problem! Your marketing plan must also develop a carefully conceived media approach to allow for your image to be built in an economically efficient manner.

We Will Attract the Best VCsWith Their Reputations We Cant Fail

As long as VCs can sell the idea to Wall Street, theyll build the company. When they cannot, theyll do their best to be long gone. Post-revolution, VCs who dabbled in e-commerce look just like other Wall Street pawns, appearing to be infallibly brilliant when the market goes up and hapless fools when the market collapses. The final customer for your product rarely cares who was behind the financing. Its clearly better to have a brilliant idea funded by people no one has ever heard of than a specious idea promoted by a well-known VC shop.

We Plan a Full-Scale National Rollout to Leverage Our First-Mover Advantage and Ensure Our Ability to Grow
An accurate market test is your very best insurance against a giant belly flop. But dont think youll impress anyone by faking it. For example, a pacemaker distributor in Japan gauged demand for a new product by displaying it to its current customers. Even though the doctors involved in the test showed overwhelming approval of the new device, it didnt meet sales projections once launched. In looking at why the test failed, the distributor noticed that the new device sold almost exclusively to existing customers. The distributor failed to realize the extent to which doctors are brand-sensitive. Make it a real test or dont bother.

We Will Form Alliances with Key Players

This is a fine idea, except that in the early days no one knows who will win. In times of rapid change, even an alliance with a leading company may not deliver the promised advantages. The underlying business strategy, not just its alliances, must be more carefully understood. Very few partnerships in which the giving and taking arent balanced will survive.

The internet Changes Everything

Well, not really. The information superhighway is certainly here to stay, and well use it more and more, but gone are the stories of TheStreet.com buying Dow Jones, e-STEEL buying Bethlehem, and Amazon buying Wal-Mart. Other than Wall Street bonuses, the immediate changes wrought by the internet were fairly modest and will play out over a much longer period than the matter of weeks we were promised at the outset. In fact, its comforting to know that the internet wont change everything overnight. The pace of change continues, even though not all change is progress. The internet does enable very rapid access to information and the rather carefree exchange of e-mail messages. If either of these two attributes can drive your business plan further or faster, by all means use the internet to get there. But what the internet will not do is take people out of the center of the business process.

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Making It Happen
Protect any new technology with patents or trademarkscreate barriers to market entry. Determine your strategy, then your goals (growth isnt a strategy; its a goal). Aim to reach your target market in an economical way. Promote your marketable idea, not your financial backers. Stage an accurate market test. Use the internet if it can drive your business plan further or faster. Be realistic: by all means consider different scenarios, but do not lose sight of reality.

Conclusion
The basic rules of business strategy remain intact and do indeed apply to the internet. Like selling things in a store, selling products on a computer screen isnt about technology. A technology business develops something new that cannot be easily imitated. This is the great lesson of the internet failures. New businesses can be understood by looking at success and failure patterns of the past. A careful review of the strategy you propose can help.

More Info
Books:
Gupta, Udayan (ed). Done Deals: Venture Capitalists Tell Their Stories. Cambridge, MA: Harvard Business School Press, 2000. Slywotzky, Adrian, et al. Profit Patterns: 30 Ways to Anticipate and Profit from Strategic Forces Reshaping Your Business. New York: Random House, 1999.

See Also
Best Practice Sources of Venture Capital Valuing Start-Ups Checklists Basic Steps for Starting a Business Dealing with Venture Capital Companies Investors and the Capital Structure Thinkers Nicholas Negroponte Finance Library Being Digital Business @ the Speed of Thought: Succeeding in the Digital Economy Industry Profile E-Commerce Information Technology

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