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This thinking, though, merges two different arguments. Without pulling them apart, it's hard to learn anything from the last couple of years' craziness. So let's look at the these two debates separately: First issue: The rise of public venture capital. Many Wall Street investors were burned because they put money into really young companies. Spurred by out-of-control demand from individual investors for stakes in Net companies in 1998 and 1999, venture capitalists and investment bankers pushed businesses, ready or not, out to the public markets. Instead of building companies, VCs flipped them, floating them in two years on average vs. four to five years previously. The debate here is whether VCs were doing what they really do -- make money. Or whether they should have been doing what they claim they do -- build companies for the long haul. Second issue: Wacky dot-com business models. Right now, the debate is focused on how we could have ever let ourselves be taken in by all these crazy ideas. The general lament is that we should have known better. In hindsight, it's simple to know what doesn't work. The reality, though, is that we're not omniscient. Finding a plan that works in an era of great change is inevitably about trial and error. Wildly stupid ideas were funded. But that's what happens when something as socially transformative as the Internet comes along. The added problem, though, was that dumb overfunding happened as venture funds grew tremendously, and VCs invested in packs. For the most part, not much is wrong with the basic idea of trying out different business models. That's what entrepreneurs should be doing. All you have to do is look to the past to understand that in times of change, money-making plans just don't pop up perfectly formed. HISTORICAL PRECEDENT. Part of the problem is that the recent debate has been pretty myopic. We're not looking at the Internet in any real historical context. We're acting as if this recent cycle of adventurous businesses crashing and burning has never happened before. That's just not true. Take the railroads. The 1880s saw more miles of track built than in any of period. By the 1890s, more miles were bankrupt than at any other time. From 1904 to 1908, more than 240 companies entered the automotive business. In 1910, a big shakeout occurred because too many companies were operating at inefficiently low scale. Henry Ford, with his super-efficient setup of building one-size-fits-all Model Ts, emerged as the temporary winner. One of my favorite historical examples is the struggle at the turn of the century to figure out the model for the phonograph. Thomas Edison, who invented the device, thought it should be used primarily for dictation. Think that's weird now? Well, at around the same time, a Delaware company thought it had hit on the perfect business model for combining the phonograph and the nascent telephone: Distributing music over phone lines. It seems funny now. But that's because we're looking at that history in hindsight. Because the phonograph was brand new, it was impossible, without trying a lot of different things, to figure out what its successful commercial use would be. BACKLASH. Of course, much of the negative sentiment about dot-com business models is a reaction to the hype. Yet, the pessimism is just as misplaced as the excessive optimism was. Again, we're ignoring historical context and becoming incredibly complacent. The Net is such a part of our lives that it's easy to dis it. But remember that just six years ago, when the Web jump-started the Net's commercialization, only about 600 Web sites and 71,000 domain names existed. Now, 26 million domain names and millions of sites compete for attention. Services like CNET, ESPN, and Yahoo didn't even exist until 1995. Now, they seem old hat. What's disturbing about the scorn for the recent failed business models is that it doesn't seem to get us anywhere. We don't appear to have learned that trying these ideas wasn't wrong. Where the innovative process went awry was in bringing in public investment before the models had proven themselves. WRONG FOCUS. The debate is centered incorrectly around how stupid these ideas were instead of understanding that all new business models are risky. The very real danger, of course, is that emerging trends, such as wireless and peer-to-peer computing, will end up being financed far too early by the public as well. The biggest lesson to learn is that business models take time to develop. And that growth should happen in private and be funded by VCs, not Wall Street. Green covers the Internet for Business Week in New York. Have a question or a comment? Let her know at heather_green@ebiz.businessweek.com. |
