Surviving DOT-COM BLUES.

Dot-com CEOs and Boards are starting the tough work of company building--and narrowing the gap between old and new economy management styles.

The Year 2000 was the official end of dot-com mania and return to normalcy. It started on April 14 with a freefall in the stock market. Gartner Group predicts that 95 to 98 percent of all dot-com companies might fail over the next 24 months. Dot-com liquidators sprang up to get rid of the inventory of failed companies. Commentators spent the year kicking the dot-com crowd for hubris, for the "underlying sense of entitlement, the belief that the new economy deserves special treatment because it's so unlike anything that's come before," as one Salon.com writer put it. Some dot-coms suffered the indignity of de-listing from the NASDAQ; others closed their doors.

More importantly, venture capital was redirected from e-commerce to Internet infrastructure, online content services, and online software and services. The 300 IPOs of 1999 that raised $22 billion were replaced by IPOs that were deferred from week to week until the market got better.

The climate shift means today's dot-com CEO has a vastly different job. It's the tough, disciplined building of an enterprise in an era of constrained capital, brutal markets, and demanding investors. For some, cash flow has become everything. They calculate the days until investment cash runs out, and race to become profitable--or line up more capital--before the till is empty. Paths to profitability frequently include layoffs as CEOs slash overhead, and those in turn prompt the question of whether CEOs are cutting into bone and muscle in their struggle to survive.

In the middle of this meltdown, dot-com CEOs and boards have had to confront tough decisions over their relationships. Spencer Stuart conducted a combination of in-person, telephone, and e-mail interviews with top executives of 28 leading dot-coms and venture capital firms to ask about corporate governance in the maturing new economy. More than two-thirds of all respondents in the survey also served on the boards of organizations other than their own, ranging from at least two to more than a dozen different Webcentric companies, as well as traditional Fortune 1000 companies.

Survey responses suggest that many Webcentric organizations are tweaking existing corporate governance practices more than engaging in serious reinvention. But in the process of shedding basic corporate governance traditions to satisfy what they see as new economy needs, at least some dot-coms seem to be making potentially risky tradeoffs-- wittingly or unwittingly.

For example, most executives and venture capitalists surveyed acknowledged that Internet-based companies look to current directors to fill gaps in knowledge, expertise, and contacts that many of their typically younger, less experienced management teams lack. Yet, most don't appear to be weighing the consequences of this when it comes to reasonably expecting the same boards to provide legitimate oversight and stewardship for the enterprise. In addition, many Internet executives stated a preference for younger, albeit more inexperienced, directors by claiming that older executives do not understand the Internet and can't keep up with the speed of change.

Most survey participants made a clear distinction between directors in a pre-IPO company and directors in a post-IPO firm. They believed that such directors were not interchangeable. Dot-com CEOs expected pre-IPO directors to form part of the management team as "director-managers," raising capital, helping to develop a viable business model and plan, recruiting key senior talent, building an organization, and getting through the IPO. They are to be key assistants to the dot-com CEO, or as one dot-com executive said, "Directors should be ambassadors for companies internally and externally."

Post-IPO, a director would assume a more traditional role, although CEOs and venture capitalists differ on what exactly that means. One survey participant argued that dot-coms cannot be expected to follow all of the same rigidly prescribed corporate governance practices developed for Fortune 500 corporations over many decades and hope to survive, let alone thrive. Others countered that the fundamentals of good governance are good business and insisted they should apply consistently to all companies. For some this view reflected a change of heart. As one dot-com executive said, "I thought the Internet would drive everything, and we were dealing with a whole new ballgame. I no longer think the fundamentals have really changed that much."

A venture capitalist seconded that assertion, noting, "Two out of three Webcentric companies defy the fundamentals when it comes to realistic values, profitability, etc. The vast majority of dot-coms will never see a dime of profits. An absence of legitimate governance at many of those organizations can't be dismissed as a minor detail."

Another venture capitalist offered a detailed view of just what directors should be doing for dot-com CEOs. "First, they bring strategic oversight. They ask questions like, 'Does the business plan make sense? Are they sticking to it? And when things change, are they modifying the plan?' Second, they contribute to organizational development by asking management if they are developing the infrastructure. The tendency among dot-coms is to save money and cut corners, and this is typically where they do it and to their own detriment....Third, the best directors have expertise in capital management. They must stay on top of the company's track record at not just raising money, but also effectively using that capital. And finally, great board members bring great networks of contacts--not just Rolodexes with lots of names, but the ability to reach out into communities and find expertise and knowledge for management to tap."

CEOs and boards of surviving dot-coms are also evaluating the futures of their companies without sentiment. Hence, the streams of mergers that occurred through 2000. The real question that CEOs and boards in surviving firms have to confront is whether to acquire or be acquired, taking into account cash-on-hand and profitability. As dot-coms expire by the dozen, there are opportunities to gain technologies and customers that would be difficult and expensive to build. However, this calls for a close examination of the technologies of fading companies and wading through the wreckage to find a usable transmission here and a replacement door there.

In sum, dot-com CEOs look much like other hard-driving, non-dot-com entrepreneurs and managers who are building companies a brick at a time, even though their boards might not look or act quite the same.

Chris Nadherny is managing director of Spencer Stuart's North American Internet practice.