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Introduction > Breaking the rules

Breaking the rules

1 Do not be afraid to lose money

What's $4 billion when market analysts forecast that the internet economy will be worth $3.3 trillion in 2003? It's a question well worth asking: if your company is first to market in a business revolution, what price success?

Building market share, establishing a brand and buying customers are all common parlance to internet companies. How much one pays to get there and how long it takes to achieve some sort of critical mass are the $4 billion questions.

Which is where holding one's nerve in the face of mounting losses, with the knowledge that the future is uncertain, that pay-day may never come, and if it does then not in the way your business plan forecast, comes in.

And at the same time, the cynics and critics, of which there are many, carp about the internet bubble about to burst, about overvalued stock prices, about unsustainable business models and the overhyped individuals at the industry's heart.

Losing money hurts. It goes against every capitalist's grain. Yet for the foresighted and far-sighted it is a risk worth taking to seize the high ground and to gain control.

It is not that we have not been here before either. Take the example of other so-called blue sky investments - mobile phone and television cable companies.

Why was it that loss-making cellular phone groups were priced at a premium when going public? Because it was not just the management that was confident of a mobile future; it has come to pass - these communications companies have fulfilled their early promise and most now deliver great returns for shareholders.

Likewise, UK cable companies provide another good example of premium pricing for a loss-making industry when some went public in the early 1990s.

However, there is one distinct difference. The cable industry has been a disaster for investors. After pouring more than £20 billion into a fibre optic network, the 30 cable companies have shrunk to two, while profits remain a still distant prospect.

How does this relate to the internet? On the one hand, spending and losing money in the mobile phone industry was evidently a good thing. Customers have benefited from falling prices, companies have gained from healthy valuations, while investors have been rewarded with good returns.

The UK cable industry, however, suffered from competing against a market leader in terrestial television that was both popular and free. At the same time, subscription-based satellite television had savvier marketing and lower prices.

For their part, the cable companies had poor customer service and high cost bases.

Internet companies are spending money because, like both of these industries, they believe they will eventually make money. The questions for both entrepreneurs and investors revolve around issues such as the sustainability of the business model, the competition in both old and new worlds, the potential margins the company can achieve, and the repeatability of the business.

But perhaps the most crucial question is this: is the world a better place because this business exists, or not?

Would we, for example, miss the cable companies if they did not exist? Probably not. But we would surely miss the mobile phone companies who have grown to become such an important force in society.

Likewise, would we miss Amazon if it did not exist? Almost certainly. No one does book selling over the internet better. Ebay? For sure. On-line auctions have redefined the internet for many people and the San Franciscan company remains the best purveyor.

But would we yearn for yet another portal selling CDs? Probably not. Or another MP3 music site?

The lesson for internet entrepreneurs is clear. If you believe in your business, if you believe your business will make a difference, then spend and spend now to achieve pole position. The expenditure graph rises sharply the longer you wait.

It was a strategy pursued early on by Jay Walker of Priceline. He took his concept of name-your-own-price website to the airline industry. The theory was simple: the airlines had spare seats and extra passengers would be attracted to fill them at the right price. However, in practice, persuading the airlines to join the scheme proved more difficult.

No matter. Walker hires the actor William Shatner, launches an expensive marketing blitz - and then subsidizes customers to fly at the price they want. It's an audacious plan, but eventually it pays off. Priceline continues to lose money, but the business plan becomes effective at the cost of short-term additional expenditure.

2 It's your idea - take it and believe in it

Pursuing a notion to the nth degree is a constant factor in the success stories in this book. Being dogmatic in one's belief of a venture is as important as having the idea in the first place.

But there are ways to underpin one's faith. Getting sympathetic investors on board is one. In today's dotcom environment, this is a much easier proposition than say five years ago. Today's VCs see giving advice and nurturing their investments as a primary requirement.

However, it was not always the case, and still is not in less developed capital markets outside of Silicon Valley. Supportive investors will count when it matters most - when the 'burn rate' in one's venture has to be ramped up, when new partnerships are being sought and when targets are proving hard to achieve.

Take Joe Kraus, and the other founders of Excite, one of the internet's biggest search engine groups, and bigger still since its acquisition by @Home.

It's 1994, and with the internet in its infancy, these six Stanford college kids develop an innovative piece of software that searches and sorts through the world wide web. They admit to potential backers that they have no idea how to make money from this, but if someone is willing to help them develop that side of the business too, then all well and good.

The response is underwhelming. Nothing. A big zero. The notion of incubating some smart kids with management expertise is unheard of, even in Silicon Valley.

But the Excite founders stick with it. They continue to turn up for meetings with venture capitalists in shorts and T-shirts. They carry on harassing bankers and potential backers.

In short, they continue to believe not only in the power of their product and the potential of the business, but also the value of their team. That is and was brave. Discovering just how they managed to convince an investor to take a chance and jump in makes even more fascinating reading.

Then there is David Hayden. Down on his luck after getting divorced and having to sell his first internet business too cheaply, he casts around for a new venture. And it's this: managing the e-mail for big businesses.

This is just the sort of notion that we might take for granted today - after all outsourcing has been the bedrock of much of the technology industry's explosive growth at the end of the 1990s. But in 1997 the idea of handing over your most sensitive communications to a third party was seen as plain ridiculous.

Yet Hayden too was blessed with a tenacity common to our 13 entrepreneurs. His tale ends with him heading a multi-billion dollar business and arguing the tribulations of technology with President Bill Clinton. The journey in between is engrossing.

3 The best ideas are original - and scalable

Don't think niche. Niche is for wimps. An original idea should be just that: fresh, innovative and inventive. Most of all, it should be scalable. It should be able to grow to its ultimate potential. It comes back to marketing, to development expenditure, to managerial resources. They should all be in place - and ready to be increased if the situation requires it. Being first, building a brand, are crucial for web success.

Nothing demonstrates this better than the case of Netscape. Jim Barksdale tells how he tore up the accountancy rule book in order for the fast-growing company to expand at an even greater rate.

So too Jeff Bezos at Amazon. Building a bookstore on the web was an original thought. But throwing the huge amount of resources at the venture that Bezos did was deemed crazy by many analysts. Four years later, and the US part of the book business turned profitable in the fourth quarter of 1999.

Not that that has made Bezos smug. Far from it. He has taken the Amazon concept of great customer service and low prices to other areas of commerce. The scale of his enterprise appears limitless.

Finally, consider how eBay broke the mould. The first mass market auction site was not only a first rate idea, but also limitless in its potential. Yet Pierre Omidyar, eBay's founder, could have positioned the company as simply a regional player. That he chose not to is testament to his ambition and self-belief in the concept of the company.

4 Put the customer at the centre of the business

Behind every successful dotcom is a happy customer base. Research has shown that net users are far more likely to shun a website after a bad experience than in the bricks and mortar world. Poor customer service, it seems, is a big click-off.

At the same time, the traffic rates for sites with great service multiply dramatically due to the internet's viral nature.

Jerry Yang recalls how Yahoo was faced with the dilemma of which direction to take the company - either to a paid-for service, or an advertising- driven free service.

They chose the latter and the decision could have been suicidal: why would net users visit a free website? Surely, like newspapers and magazines, such a concept would be equated with low-brow, downmarket, inferior goods?

Not so. Yahoo served up a free service second to none in which they put the Yahoo customer at the centre. All the new services that were to be added would be user-driven - most powerfully with the introduction of the 'MyYahoo' concept, enabling users to personalize the service.

5 Play to your strengths - spread control

Control is a natural emotion that needs to be kept under control. No manager can hope to oversee every aspect of a business, particularly one that is destined to grow rapidly.

A recurring theme from the 13 entrepreneurs is how good they have been, and remain, about delegating responsibilities. They play to their strengths - as team leaders, as motivators, as innovators, whatever. But they do not pretend to be the best operational executives, or the smartest technologists.

This aspect has become a dominant theme at iVillage, where managers stick to what they are good at, a move that Candice Carpenter reckons has increased the company's efficiency significantly.

Another good example is Excite. Joe Kraus says that he and the other founders were adamant that for the company to expand in the way they envisaged, they would need 'adult supervision''. In short, they wanted an experienced manager to take the reins.

Likewise, who could fault Pierre Omidyar's decision to bring in Meg Whitman to run the operations at eBay? Omidyar admits to being an ideas man, and strategy continues to be his strength.

Jerry Yang describes himself as 'Chief Yahoo', a title that gives him a roving brief, enabling the co-founder to touch upon every part of the company's operations. It is, he says, his way of keeping the Yahoo spirit burning brightly throughout the organization.

Five ways our internet entrepreneurs differentiated themselves from the myriad other dotcom ventures. But over the next 12 chapters, you will also discover where they got their early business influences from, what drove them to their destiny and what motivates them to continue.

Detailed analysis of how each executive did things differently - and what challenges remain - are laid out. It combines into a story that peels away the mystique of the internet market, and reveals the type of business psyche behind some of the world's most successful internet entrepreneurs.

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