Remember — cash flow is your lifeblood.
Some attribute it to exuberance, others to greed. But it is true to say that the arrival of the internet and dot-com era was shaped by a unique set of circumstances: ever-increasing stock prices, nearly unshakable market confidence that companies would (eventually)deliver profits, the use of equity as a cash substitute and easy access to funding, particularly venture capital.
The technology was new and the excitement was contagious. Yet in their eagerness to participate, many investors overlooked traditional financial metrics — and later paid a high price for this folly.
New economy thought it had new principles
The typical dot-com business model was built on first-mover advantage, where value was based on innovation and the size of the potential customer base. The idea was to get big fast and build brand awareness; profits were expected to follow. Though it is easy to mock now, there was a genuine sense that a fundamentally “new economy” had emerged, based on different principles.
During the height of the boom, IPOs raised huge amounts of money — the technology industry had more than 1,489 IPOs with an aggregated value exceeding US$116 billion over the 1998–2000 timeframe1>, even though many companies had never made a profit and often hadn’t even earned revenue.
From the gloom of the bust, leaders emerged
A handful of leading companies from this time did have carefully constructed business plans that delivered real consumer benefits, enabling them to sustain their success: Amazon, eBay and Google, to name a few. But many more were me-too followers without solid business plans that eventually ran out of money.
In the end, the surviving stars proved the value of the internet and of “network effects,” but only when combined with sound business models and rational economics. Network effects are evidenced by the ways in which technology’s successes — search engines, social networks and application stores, for example — tend to generate information value that attracts more customers, who then generate more information value that leads to greater success. Broadband networks and network effects have demonstrated potential to restructure information in many industries.
Lesson learned
The most important lesson from all of this is that a sound business model is critical to success and will result in good cash flow management, which is your lifeblood.
Typical dot-com companies focused on generating traffic to their sites rather than profits. Some companies at the time spoke openly about their “burn rates” — how fast they used up capital — to demonstrate to potential investors their intent to gain first-mover advantage.
But no business is given an open check book forever — at some point the investment stops and you have to earn a profit.
1 Ernst & Young IPO tool, accessed March 2010.
