By Nigel Thorpe
Senior English Editor
Albawaba.com - Amman
As the dust settles on the dramatic mass failures of American and European dot.com businesses, Middle East business men are thinking twice before “hitching their wagons to a cyber-star” and moving online.
DITnet reports that more than 200 dot com ventures, over two billion dollars of venture capital, and up to 15 thousand Internet jobs disappeared into the black hole of cyberspace last year.
Details of the year 2000 dot.com meltdown are given in a report by Webmergers.com which provides a research-based market place for buyers and sellers of Internet “clicks and mortar”. Webmergers’ data reveals that 75 percent of the failed companies were in the business-to-consumer (B2C) sector, while 21 percent involved business to business (B2B) firms. A geographical breakdown shows that approximately one third of the shutdowns were in the computer heart-lands of California, with one tenth of the total failures in New York, and another one tenth in Massachusetts. Across the Atlantic divide, western European companies accounted for over 11 percent of the global Internet shutdowns. The report’s analysis of the shutdown time line showed that 60 percent of the failures occurred in the fourth quarter of the year when December’s causalities alone accounted for US$1.5 billion in lost investments. Also in December, several companies closed down in a preemptory move to preserve what little remained for their venture capital. The latest reports available suggest that January, 2001, was another record month for internet layoffs.
Rather surprisingly, the majority of analysts believe that the bursting of so many dot.com bubbles will not stop the digital economy from becoming the global norm in the future. The dot-com shutdowns, the faltering of the Internet-based ‘New World Economy, and the slowing of the US economy have, however, certainly cast a shadow over online projects in the rest of the world. The DIT net report suggests that the nascent Internet industry in the Middle East must learn the lesson of the early dot.com failures and chart a safer course through cyberspace. The report, which echoes similar advice offered in both CNN and BBC dot.com documentaries gives ten rules for Dot.com success.
Ten Golden Rules for Dot.com Success
1. Formulate a Sound Business Plan
In the heady pre-NASDAQ crash days of seemingly unlimited
venture capital, many dot.com companies were launched without a sound business plan. Back then, the Internet looked like a golden opportunity of a new generation of entrepreneurs who did not believe in “outmoded“ traditional business methods. Scott Sobhani, vice president and general manager of Astrolink ME, comments “It is probable that a number of dot-com businesses have been founded on their Internet credentials without having a clear and realistic view of their business offering, without a business model, and without having a firm grip of the industry they plan to venture into. Astrolink is building the first global satellite network which will provide worldwide broadband connections.
“It was always inevitable,” continues Sobhani, “that VC (venture capitalists) would start to become more selective and more realistic in their expectations of return and fundamental business strength, and this means that weaker players in search of second round funding have a much harder time in getting that additional money. It is (however) worth bearing in mind that 210 failures, compared to the huge number of successes, is pretty small.” Sobhani summarizes the first lesson Middle East business men should learn from western experience by saying “you cannot go to the Internet without a thoroughly thought through business plan. The rules of conventional business still apply even on the Internet. Internet businesses still need to be solid in terms of market status, competition, demand, logistics, and target markets. What is more important is that you are likely to be successful if you go with a new business to the net with a clear view and experience of your business beforehand; the Internet then becomes
another distribution channel or another front to reach your markets.”
2. Seek Limited Venture Capital
In the present dot.com investment climate this piece of advice is, perhaps, the easiest to follow. When venture capital seemed to be both unlimited and easier to come by, the dot.com entrepreneur’s emphasis was often on spending, rather than earning money.
In the lean days of the present Internet famine, the new emphasis must be on turning a profit as soon as possible. Early dot.coms using new technology to navigate largely uncharted business waters also suffered from the unrealistic expectations of venture capitalists and share holders. Internet failed to make the grade because “they could not make their revenue model work in time to meet the expectations of financiers,” comments Steve Lockie, managing director of Tech Data ME.
3. Develop a Website as an Extension of an Existing Successful Business.
Many IT experts now feel that online extensions of existing businesses with proven profitability have a much better chance of success than pure online companies. The internet gives traditional successful businesses an additional platform to improve efficiency and reach new customers. Sobhani, for example, “believes that the extension of conventional businesses to the Internet will remain the solid bedrock that the web will build on in the future.”
4. Ensure a Multiple Income Stream
As an increasing number of dot coms are chasing a decreasing number of advertisers willing to fly their banners in cyberspace, generating income from a webpage is becoming increasingly difficult. The plethora of sites giving free information and services further exacerbates the problem. “Web finance,” commented a BBC dot.com documentary, “itself needs to be a web woven from a number of independent cash threads; advertising revenues need to be augmented by customer sales and registration fees.”
5 Be Realistic About Hardware and Software Costs.
The cost of building and maintaining a commercial dot.com operation has always been pretty high according to Sobhani. “A point worth making,” he continues, “is that Boo.com, the first widely publicized Internet business failure, was reported to have fallen because of the difficulty in sustaining the huge cost of technology.” The important question to ask is - can the projected business in a realistic business model recoup high equipment start up costs? The meteoric rates of technical advance and concomitant high rates of depreciation for newly new computer equipment can make significant inroads into venture cash.
6. Check Out Your Logistics.
It is not quite true to say that the world is your market on the Internet since the virtual orders of your customers must be converted into practical deliveries in the real world. If you have operations to sustain that on a global scale, you also need global infrastructure, global linguistic capabilities and global logistics. "I can see a future where the costs of those communications and operations are manageable, and where the infrastructure in New York is the same as that enjoyed by in a business in Cairo or Amman,” says Sobhani. Perhaps, he might have added, that day has yet to come.
Lockie takes up the logistics theme when he says “it's sadly true that many of the businesses flocking to the Internet today fail to appreciate that the website is a storefront, but that behind the storefront, there still needs to be a sound logistical proposition. Customers still need to get the goods, and in the rush to embrace “clicks and mortar”, many players have neglected good old fashioned common sense, and have failed to allow for the effective fulfillment and delivery mechanisms. This is something I have witnessed here in the Middle East: it’s not just a problem faced by highly developed Internet markets,” Lockie concluded.
Large volume orders as well as long distances can also stretch the “not-so-high-tech” to breaking point. The technical capability and reliability of computer-based systems are also highly important as many of the first E.coms learnt when they attempted to deal with the last minute rush of Christmas orders in 1999. Once bitten, the mouse finger becomes twice shy of making E-commerce clicks. A survey by the Washington-based research organization the “Pew Internet and American Life Project” quoted in a previous Albawaba article showed that 22 percent of Internet users said they had shopped online in 1999 during the Christmas holidays but did not do so this year because of their disastrous experiences last year.
7. Select an Internet-Compatible Business.
In the euphoric days of champagne launches, venture capitalist behaved as if the Midas touch of the Internet could turn any base business into a golden cash cow. Lockie has strong views on this point and commented “There are certain commodities and business processes that are well suited to the Web and there are many that are not – this is becoming increasingly clear."
8. Start Small
As the BBC.com TV series highlighted, a common factor in the failure of American online business was to “start big” before proving the commercial viability of a dot.com venture. The apocryphal hardware stories of the Hewlett Packard's startup garden shed and Apple's garage debut are still pertinent to fledgling Internet companies.
Analysts believe that ambitious local projects like the Dubai Internet City, e-governments in the Gulf and major Arab telecommunication companies will continue to inspire online ventures in the huge Middle East market albeit on a smaller scale. “Small is beautiful” might well be an appropriate mantra for Internet business in the year 2001.
9. Start Early
Most experts are agreed that, having found and carefully researched a potential Internet gold mine, do not take too long to stake your claim. The early bird catches the cyber niche.
The early Internet pioneers Yahoo and Amazon.com, found and filled cyber territory upon which later competitors have found it increasingly difficult to encroach. Analysts also agree that there are certainly unfilled niches for astute Middle East entrepreneurs in the expanding markets of the Gulf.
10. Learn the Lessons of the NASDAQ Bubble
“Case studies of past dot.com failures can provide salient lessons for future Internet entrepreneurs,” commented an expert on a BBC dot.com documentary.
Sobhani agrees that "there are many obvious lessons that all future businesses on the Net in the Middle East can learn from the Western experience” and the bursting of the Internet bubble.
DIT.net believes that the fact the Middle East market has not yet matured to have local IPO’s or publicly listed dot-coms has protected the region from the over-valuation of stocks and the ‘burst bubble’ effect. Without taking high risks, Middle East online ventures have the advantage of learning from the mistakes of the Internet pioneers. They are also less at the mercy of the whim of investor’s looking for ultra-fast and unrealistic profits.
A international survey by the TNS-Teleseker company quoted by Haaretz newspaper showed that the use of Internet in the Gulf at two percent of the population trailed far behind that of Israel (19.8 percent), the United States (50.3 percent), and Internet toppers Norway at 60 percent. Internet use in the Gulf is clearly in its infancy and ripe for commercial development.
The internet gold rush and harvest of IPO nuggets is clearly over but careful panning of local opportunities by Middle East entrepreneurs are likely to yield economic gold dust in the region’s digital future.
© 2001 Al Bawaba (www.albawaba.com)
