Web Wisdom.

Message to Tech Entrepreneurs: Don 't Believe Your Own Hype

JUST a few months ago I had breakfast with a longtime friend and a young acquaintance of his: one of the new breed of late-20s/early-30s Southern California tech entrepreneurs. He was unpretentious in manner, but in some ways seemed to have unusual notions about business.

My friend mentioned that a relative in St. Louis had started a small Web-based business that could become a $20 million to $30 million proposition. I proposed another similar idea. Yet the young man had little interest in such "small ideas." 1-le was interested only in "million-dollar" investments in companies with the potential for billion-dollar market values.

I came away hot a little intimidated by the incident. After all, a lot of us 40-somethings -- or worse -- were on the sidelines, voluntarily or otherwise, while these bold younger people seized the Web and made it their own. They deserved the accolades and the success, often into the hundreds of millions of dollars, that went with it.

Yet now it may also be true that us older dogs know a few tricks. Many of the companies that were once high-flyers -- some of them with solid business ideas, others with nothing but the zaniest notion -- have seen their capitalization diced and sliced. For some, such as CDNow and DrKoop.com, the best hope may well lie in a fire-sale purchase by a larger company.

Drawing some conclusions

What lessons can be drawn about the turn of events on the Internet? The first seems to be a basic one: Watch your back and don't buy your own P.R.

Firms like CDNow, and even more so its merger partner NDK, are, poster children for what happens to entrepreneurs who lose money on the way to getting filthy rich and almost obscenely famous. Eventually they get caught with their flak down.

Perhaps the next important lesson is to watch costs and secure your niche. Companies backed by venture capitalists thought that if they put a dot-com behind their name -- say, Dogfood.com -- and put funny ads on during the Super Bowl, they couldn't be stopped. They never thought that others could come up with similar notions about what were essentially commodities or that larger firms, pet chains or even Alpo, could do the same with far lower shipping and product costs.

Finally, some of these companies might think about cutting their personal expenses. Being in business does not mean you get to be a millionaire within the first two or three years. You don't put a startup in $40-a-square-foot space when there's perfectly adequate, and sometime more interesting, $15-a-square-foot digs available. Venture funds, ad agencies and big-time lawyers may need to be in Century City or Santa Monica (money likes company and nice digs); struggling startups do not.

Yet despite all this, I am not at all dismissive of our smart young men and women in this burgeoning industry. In its essentials, the hype is right: The Web continues to explode. It's just that getting a slice of that potential is harder now.

Instead, we have to look more at basics, not just for business in general, but to the roots and nature of the Web itself. We forget that the business started as a kind of low-level guerilla marketing system and information warfare. Its founding fathers -- people like Richard Rosenblatt, founder of iMall -- sat on used furniture, while cutting-edge firms like New York's Concrete Media went to the funky spaces before they got hip and fashionable.

Look for those people to get back to their own roots, and rediscover the tough spirit that made them pioneers before. After all, it shouldn't be too hard to reinvent yourself at 30.

Don't believe the experts

And one thing: don't listen to the establishment-media conventional wisdom. Now they say there will be a mass consolidation. The Web will become dominated by "big established players" -- AOL, Yahoo and the like -- which are now dabbed in holy water by Sand Hill Road venture capitalists, Madison Avenue and investment bankers.

I have seen this before -- during the PC revolution of the early 1980s, the precursor to the Internet explosion. The conventional wisdom, once PCs were accepted, was that the business would be dominated by the Japanese and Big Blue. I will never forget the famous Business Week headline: "And the Winner is IBM." And then Dell, Gateway and a bunch of other "no names" cleaned Armonk's clock.

On the Web, the ability to consolidate is even dodgier. It is essentially an open channel; if it weren't, we'd all be on AOL and be forced to see the world according to the over-cross-fertilized view of Gerald Levin. That is not what the Web is about. It is about a series of great business niches that can be exploited fully if the content and concept work. It is not back to the old structured past, no matter how much the Manhattan business mafia, or the Sand Hill Road boys, would like it to be.

Instead, for the young dot-commer it should still be about looking ahead to the future, a little chastened perhaps, but nevertheless with eyes fixed forward.

Business Journal columnist Joel Kotkin is a senior fellow with the Pepperdine institute for Public Policy and a research fellow at the Reason Public Policy Institute.