Looking for ‘Plan B’

One of the striking things to me about Internet entrepreneurs and VCs is that almost no one is seeking to create long-term value or build businesses that will be sustainable and be around in a decade. Many will deny this but if you look around, the Craigslists of the Internet are anomalous.

Most Internet entrepreneurs and their funders are identical to real-estate speculators — I don’t entirely blame them given how many people have made money in this way. They make something look impressive in the shortest amount of time in the hope that there will be a bidding war and they’ll get 5X to 10X (or more) the original money invested. In other words they’re flipping the business in the same way that people (used to) flip houses during the real estate bubble.

A few companies go public, but most do not or cannot. A few companies run out of money and are forced to sell. And, increasingly, a few just run out of money.

Whenever I encounter an entrepreneur who is seeking to build a business or is passionate about an idea and trying to bring it to life — without regard for whether it will be bought — I’m impressed because a long-term view of the market is both rare and exactly what’s needed to make many of these ideas succeed.

Such “sober” talk surfaced after the first dot-com bubble burst in 2001 but vanished a few years ago as VC money flooded back into startups and M&A activity started to pick up. This time it was often fueled by competition among a handful of big Internet companies — Microsoft, Yahoo, Google, AOL, News Corp. and a few other traditional media entities — seeking to out-do one another with new features/tools or fearful that an arch-rival would get the prize and not them.

But what happens when you try and sell but can’t? Like a house you have to lower the price. But many VCs/entrepreneurs resist this idea.

Digg may be an interesting case-in-point. Google was reportedly in the hunt to buy Digg for around $200 million and was very close, according to rumors. However, TechCrunch now says that Google has walked away from the deal. TechCrunch speculates that the company will just raise another round and keep going.

But my guess is that the founders were hoping for a big, near-term payday and are tired of running the company. I don’t personally know any of them. But I can imagine the expectations of selling had been growing and, psychologically, it’s very hard to return to business as usual once you think you’re done.

Digg probably never saw itself as a sustainable long-term business. It probably saw itself as a “cool” opportunity filling something of a hole online. Ultimately (say 3 to 5 years) everyone probably expected the company to be picked up by either an Internet heavyweight or a traditional media company. That may still happen.

But what if they now need to think about being there 10 more years and calibrating the cost structure to a sustainable revenue model? It requires a big psychological shift that may even require new leadership because it’s just too hard for the current management to make. I’m just guessing about all this of course.

Stepping back, it strikes me that there’s something quite “dysfunctional” going on in the way that many entrepreneurs and funders think about building online businesses. Historically people in the real world who start businesses have not gone in with the attitude: in three years someone will buy me and I’ll never work again or maybe I’ll go start another business that will be acquired in another three years.

Maybe this recession and another “correction” in the Internet market will reshape attitudes. But as long as there is money to fund half-baked ideas and companies built around needs that don’t yet exist, I’m not so sure.

___

Related: Silicon Alley Insider dismisses Digg as a business. I actually think there’s an interesting business as a “recommendations engine,” for products and services, which the company launched but hasn’t yet developed.

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24 Responses to “Looking for ‘Plan B’”

  1. How To Reorganize Management For Social Media, Search Marketing and Internet Advertising Says:

    [...] center volumes? Highly questionable at best form cost savings perspective, certainly missing the revenue opportunities [...]

  2. fred wilson Says:

    the recent management transition at Etsy is but one example of companies in our portfolio that are making the investments and moves required to build sustainable businesses. it’s going on all over the place. you just need to look a bit harder.

  3. Greg Sterling Says:

    Glad to hear it. I maintain it’s still the exception.

  4. Sustainabilty vs. speculation Says:

    [...] Sterling’s got a good post today on how he appreciated entrepreneurs who want to build viable businesses, not just built to [...]

  5. John Says:

    The web as we know it did not exist ten years ago. We shouldn’t be surprised that business models take rapid change into account.

    Shrouding Digg in supposition while singling them out as an example of excess is stupid. You’re crying wolf on guesswork.

    There are huge holes in advertising-based web business models – you’d have more luck focusing on larger market trends than the entrepreneurs themselves. Don’t hate the player, hate the game.

  6. Greg Sterling Says:

    I don’t hate Digg and I’m not focused on Digg. I don’t mention anyone by name here; it’s an occasion to discuss a larger phenomenon as is abundantly clear. I acknowledge the speculation and don’t “shroud Digg in supposition.”

    I guess you didn’t read to the bottom. Note this:

    Silicon Alley Insider dismisses Digg as a business. I actually think there’s an interesting business as a “recommendations engine,” for products and services, which the company launched but hasn’t yet developed.

  7. Malcolm Lewis Says:

    Generally I think the post-bubble (1999-2000) system is sound and self-correcting. Businesses that do not provide significant business value typically do not find an exit. So it might be easy to a dumb idea funded, but you’re unlikely to cash out unless you build a business that delivers value and thus drives interesting revenues and profits.

  8. Greg Sterling Says:

    Many acquisitions are about “technology” (e.g., Farecast) or “audience” (e.g., Bebo) rather than revenues.

  9. Greg Sterling Says:

    Add Jellyfish to that former category.

  10. links for 2008-07-28 « that dismal science Says:

    [...] Looking for ‘Plan B’ « Screenwerk “…there’s something quite “dysfunctional” going on in the way that many entrepreneurs and funders think about building online businesses.” (tags: business startup startups web2.0 digg google) [...]

  11. TJIC Says:

    I’ve created a company two two brands (SmartFlix.com and HeavyInk.com) with revenues north of $1.0 mill/year. The profits are all plowed back into growth. We’ve got four engineers, two customer support people, etc. The base idea (ecommerce) isn’t sexy, but there’s a lot of good solid fun work to do. Because we’re moving atoms, we’ll never grow as fast as the latest purely virtual all-outsourced to the compute cloud service, but we’ve got tens of thousands of paying, satisfied customers. Keep growing something like this 10-30% per year, for a decade, and you’ve got a real firm.

    Sometimes starting small, self-funding, and doing less-than-sexy work beats out taking a lot of VC money, exploding, and then collapsing.

  12. Greg Sterling Says:

    Agree.

  13. Hillel Says:

    I agree with these observations. To me, the insidious part of the problem is this. Digg may be a fine smaller business. In fact, I bet many smaller VC funded businesses could make quite a nice living for a small group of dedicated folks looking at sustainability and recurring revenue. The problem is that these businesses have taken so much money from investors that this is simply not an option for them.

    If I take 5 million dollars in investment and end up creating a profitable 5 million dollar a year web business with it, I could eventually pay back my investors with interest. But these types of investors are looking for home runs, not singles. So, even if the founders have created a nice smaller business that could feed a handful of mouths quite well, the VC will push them to distort their nice small business in the hopes of getting the big pay day.

    This is key to understand as for the VC the difference between a loser and a single I negligible. For the founders and employees the differences are much much bigger.

    Yes, one could argue that creating a 5 million dollar a year business with that much in investment is not a brilliant feat. But I suspect that in today’s tech economic reality, many of these potentially successful smaller web businesses could have been started for much less money.

    And if you don’t think 5 million a year is decent money, think about this. For a web business, most without inventory, and with a 30% profit margin that could mean 1.5 million a year in profit. Distributed to 10 full-time employees that averages to 150k per year on top of salary. would a 200-250k salary per year be something attractive to most people? I think so.

    I’ll write a post on this soon.

  14. Jackson Fish Market » Internet Speculators Says:

    [...] “Most Internet entrepreneurs and their funders are identical to real-estate speculators…… Posted on July 28th, 2008 in Interesting [...]

  15. jeremy Says:

    Some sobering thoughts. I hope there are more people who view this in the same way. Sustainability is the word of the century.

  16. Greg Sterling Says:

    Indeed.

  17. squashedbills Says:

    Sustainability what a word hard to spell if you have had a beer

    Fraser

  18. Greg Sterling Says:

    Even if you don’t.

  19. katrinagarcia5 Says:

    Greg,

    I agree on some of these views. In business, relationship is very high on my priority list becuase I want something longlasting. And who I am in business with is vital because there must be value and empowerment that we are giving to others.

    This was an insightful article.

    Katrina Garcia 5

  20. NeedVentureCapital Says:

    Hi Greg,
    I agree it’s mostly short term runs attitude with young entrepreneurs founding internet businesses and seeking venture capital investors for the “next big thing”.
    However, VCs also look for this, so they can cash in fast and big…
    I admire founders with vision like Digg but moreso youtube- hey, they kept burning money without any profit, yet sold for more than what digg was offered. Vision here is more long term, or? Video in advertising vs. yet one more bookmarking/news site that’s harder to monetize with limited space and kinda geek crowd that doesn’t like clicking ads…
    I wouldn’t buy digg if I were google. But maybe I lack the vision for long term digg…

  21. Built to Last: do you have a ‘Plan B’? : Texas Startup Blog Says:

    [...] Sterling is ‘looking for plan b‘, an option for internet entrepreneurs who are building businesses without regard for their [...]

  22. AhmedF Says:

    Really – shouldn’t Plan ‘B’ be the correct Plan ‘A’

  23. Greg Sterling Says:

    INDEED

  24. Top Posts of 2008 « Screenwerk Says:

    [...] Looking for ‘Plan B’            [...]

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