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.

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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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