With that a stream of new, previously inconceivable, business ideas has emerged and some entrepreneurs have made millions, if not billions, by harnessing the power of the Internet. But for every successful Internet entrepreneur there are hundreds of people who have pursued the allure of dot.com wealth and fame only to burn through all their start-up capital, run out of cash and have to close shop without ever getting their idea off the ground. Here’s how to get it right.
What is it that successful Internet entrepreneurs do to build a valuable business?
To answer this question I did in-depth research into seven online businesses (see the table on page 85) that survived the lean and challenging period after the dot.com boom and bust (2000 – 2004). All seven businesses were considered to be successful because they created significant wealth for the founding team. In examining these businesses, I focused specifically on the strategies, behaviours and perspectives that enabled this group of
Internet entrepreneurs to uncover innovative business ideas, build valuable enterprises and make the right strategic choices to realise that value. This article will outline some of the insights that emerged from this research.
I will first outline why the Web creates a new and different context for launching a business and to contrast this I will highlight what traditional business principles still apply.
I will identify three mechanisms for creating economic value in Web-based businesses and I will describe the practices employed by successful Web entrepreneurs to uncover ideas, launch new products and services, build the business and realise value from their investments.
Why the Internet is different
The Internet is an emerging technology that is still rapidly evolving and growing. It has only been accessible to a regular person (i.e. you and me) since the early 1990s, making it between 15 and 20 years old. This may seem like a long period of time but most comparable technologies (telephones, the fax machine and television) had not even reached critical mass after being available for 20 years, while the Internet has moved well beyond that in its short lifespan.
Because of the nature of the Internet as a tool that enables people to communicate, interact and transact and because of its rapid uptake by users, it creates a platform where business people suddenly have easy access to a very wide audience. This means entrepreneurs with niche product or service offerings can more easily find and transact with large numbers of people in a specialised audience.
For example, if you have a deep interest in Calvin and Hobbs comics, prior to the Internet your chance of finding a market to trade such comics would have been slim but with the Internet you can find, interact with and sell to other people who love Calvin and Hobbs. Chris Andersen called this concept of reaching a niche audience via the Internet Long Tail (see his book The Long Tail for more on this idea).
The Web is a flexible open technology. Anyone can learn to use and manipulate it for their purpose. The never-ending supply of HTML coders in India is testament to this. This means that the Internet can easily be used as a platform for business purposes; it does not require an unattainable skill or a huge sum of money to be able to use it. This makes the barriers to entry into a new business much lower than they may have been in the past.
Because the Web is inexpensive and easy to use and because it provides access to a wide range of potential customers and users, it creates a platform from which new creative business ideas and business models can be launched. It is a hot-bed for entrepreneurial activity. Initially this created irrational excitement among investors and business people, giving rise to the dot.com boom and bust. But since then a number of entrepreneurs have taken a more pragmatic and profitable view of the potential of the Web for creating new business opportunities.
Related: Online Business Idea Guide
What remains the same?
The dot.com bust in the early 2000s introduced an element of reality to the way people viewed the potential of the Web. It demonstrated that in spite of all the promise and hype around the Web, certain traditional business principles still apply. Whether you are operating the most innovative, cutting edge Web company or a mundane tyre manufacturer with no Web presence you still need to:
- Create something that appeals to a particular customer base
- Generate more revenue than cost over time
The businesses that survived the dot.com bust were the ones that had established a paying customer base and were at least breaking even or close to breaking even. Avoid falling into the trap of seeing the Web as a magical land in which all traditional business principles fall by the wayside.
The Web often puts increased pressure on entrepreneurs and business owners because people who use the Web want more, for less (and they often expect to get stuff for free). This creates new and often challenging economic relationships between revenue, cost, volume and profit for Web-based entrepreneurs. Those that succeed understand that in the medium-term they need to make a profit to survive.
What Constitutes Value On The Web?
When the Web was first proposed as a business platform, there were many discussions and debates about how one creates value by doing business on the Web. Because so much is made available for free on the Internet people often grapple with the idea that if you give away everything on your website, where does the value come from. Over time it has emerged that value on the Internet is created in one of three ways:
- Sell stuff. Firstly you can sell something via the Web. It could be a product (e.g. digitised music, rare books, specialised software) or a service (e.g. storing and printing photographs, copy editing or accounting services). In addition, the Web creates a useful platform for selling information (e.g. Hoovers, Gartner and Trendwatching.com) or selling marketing opportunities. Marketing opportunities come in the form of advertising space (e.g. a banner advert on Yahoo.com) or sales leads (e.g. TripAdvisor.com providing information to travel agents about people who are interested in buying a holiday package to a particular destination). Selling via the Web, whether it is products, services, information or advertising opportunities, is the best way to create a sustainable independent business over time. It is the application of traditional business practices using a new platform.
- Create innovative technology. The second way to create money on the Web is to create a piece of technology that can do something that very few others can. Because the technology underlying the Web is rapidly evolving and changing, there are always new opportunities to do things that others have not done in the past (e.g. create the technology to upload and watch video via the Internet with relatively low bandwidth as the YouTube founders did. YouTube was sold 18 months later to Google for $1,6 billion.). This is a more risky approach and the entrepreneur is too often dependent on selling the company or the technology to a third party to realise value from the investment.
- Establish a massive user base. The third way to create value on the Web is to establish a large user base on your website. The logic goes that if you get many users, over time you can generate value by selling premium products or services to them (e.g. Craigslist, the mostly free classifieds site, charging for property listings in certain premium areas) or by selling advertising space on the site. Even if your company is struggling to generate revenue from your large user base, there is a strong chance that an established company will want to buy the business to access your user base (e.g. Yahoo buying Flickr, the online photo sharing site or Microsoft offering to buy Facebook to get access to all Facebook users). Adopting this as a strategy is highly risky. The number of websites that create a user base the size of Craigslist, Facebook or Flikr is very small yet if you get it right the payoffs can be big.
Many successful Web-based businesses employ a combination of two or even all three of these value creation mechanisms to establish a strong competitive advantage. For example, Google uses its proprietary search algorithm (#2) to generate a large user base that they monetise through advertising (#3). They also sell goods and services to their large user base via their Google Apps website (#1).
The value that arises from each of these three mechanisms can be recognised in one of two ways. Either the business is sold to a larger organisation for a premium (at which point the entrepreneur usually becomes very wealthy) or the business operates in the medium term as an independent profit generating operation. The table opposite describes the outcomes for the seven Internet ventures that were examined as part of this study.
Strategies, Behaviours & Perspectives Employed By Successful Web Entrepreneurs
To get an understanding of the specific practices that underlie success for entrepreneurs building Web-based ventures I created rich and detailed case studies from multiple data sources for each business. The following four themes emerged. These ideas are not necessarily easy to implement but they appeared to be strongly related to the entrepreneurs’ successes.
Related: Ways to Come Up With a Business Idea
Uncovering ideas: Start as a User
In all seven cases the entrepreneurs founding the business could be described as users first and entrepreneurs second. They had a specific need for a product or service that they thought could be effectively delivered via the Web so they created a solution to meet that need and in so doing realised they had uncovered an opportunity for a new business. For example, Joshua Schachter, describes how he uncovered the idea for del.icio.us as follows:
“There was no point at which I said, ‘I’m inventing this wonderful new thing.’ I just sort of realised that I had evolved my own filing system, and it worked for me. I’d used it for a long time before del.icio.us even showed up. This was the codification of that practice. I eventually put del.icio.us on a server and opened it up to other people, and it began to spread by word of mouth.” Building a business on the Web is riddled with uncertainty and ambiguity.
Because of the rapid changes in technology and business models new opportunities are emerging all the time. But it is difficult to tell the real opportunities from the distracting sideshows when there is so much uncertainty and ambiguity in the market.
Being a user brings entrepreneurs much closer to the problem. It enables them to develop solutions that fit with what they want and need and therefore with what the market wants and needs. In a confusing market this is critical and in this context, it appears that there is significant value in developing a business around something that you know well and need for yourself. You may develop it for yourself as a side project and launch it as a business later.
Getting traction – Forge a following
In six of the seven cases examined, the entrepreneurs established an online community of followers attached to the business. These were not just communities of customers. They were communities of passionate disciples who monitored and followed intricate details about the business on a blog published (in most cases) by the founder. In some cases the founder had been publishing a blog before they started a business and they reported on the business as they moved through the entrepreneurial process. In other cases they began publishing a blog as an inexpensive marketing strategy for their new venture.
But in all cases they put effort into their blog, created a reader base and that reader base later served as resources for the venture with respect to (1) getting new ideas – the reader base would share ideas for new products, services or features; (2) testing concepts – the entrepreneur could test a new concept and/or tool with the reader base before developing it further or launching it to the public at large and (3) viral marketing – certain members of the reader base would forward links to blog posts or to the company’s website to everyone in their email address book and thereby create a flurry of word of mouth advertising. The entrepreneurs had to play their part in this deal, they were diligent in publishing their blog and they often gave stuff away to their reader base. A small price to pay for a substantial return.
Staying relevant – Tinker, experiment and adapt
Online businesses are invariably being built in a fluid and changing environment. From the case studies it emerged that in such an environment, flexibility is a virtue and goals may actually work against you. None of the entrepreneurs examined got locked into specific time orientated goals. In many contexts goals are very powerful for driving success but in the online entrepreneurial environment, goals may actually hurt you. Research has shown that one of the primary reasons that goals are valuable is because they narrow your focus and cause you to lock in on a specific outcome.
This works well where it is clear what the outcome should be, but in an uncertain, ambiguous environment, the outcome may not be clear and in such circumstances it seems that being flexible and adaptable about where you are going and how you will get there may actually help you to make the most of the situation. Therefore, instead of goal-oriented behaviour, the entrepreneurs in these case studies showed signs of tinkering, experimentation and adaptation and they allowed their goals to emerge and change as they went through this experimental learning process.
Recognising value – Time the exit
The final item that is key in this context is “when to get out?” Five of the seven entrepreneurs examined in this study realised significant monetary value from their efforts when they sold the business. This highlights that timing was critical to their success. Being scientific about when to sell a business is very difficult but being aware that it may be beneficial to sell the business at the right time is important.
Most sales of successful online businesses are to larger corporations with related business interests. They buy the venture to access and use the technology developed in the company or to access the user base of the website.
As an entrepreneur it is important to be conscious of the fact that there may come a time in your business’s life cycle where a viable option would be to sell the business.
This will be prompted (1) from the outside in – you will start getting enquiries about whether you might be interested in a deal or (2) from the inside out – you will start to feel like your return on effort is diminishing and running the company has begun to feel more like work than play. Either of these is a sign that it might be worth selling.
That said, two of the seven entrepreneurs in my study were still running the business at the time I interviewed them and they were having a blast doing it so your ideal outcome may be sustainable, profitable, ongoing business. Whatever you desire in your entrepreneurial endeavours, the Internet is an exciting and challenging, high opportunity, high risk, high return place to do it.