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March 9, 2001
One of my favorite movie scenes is near the end of "Apollo 13." An official grumbles that this could be the worst disaster in NASA history. Hearing this, Gene Kranz (played by Ed Harris) tugs at his vest, straightens his tie, sticks out his chin and says, "With all due respect, sir, I believe this is going to be our finest hour."
In that spirit, I am going to make a bullish case for the Internet. No, I am not recommending that you rush out and by Yahoo, Amazon, and DrKoop.com, which closed yesterday at $17.70, $11.70, and $0.25, respectively. My feelings about the Internet high-flyers always have been--er, how shall I put it?--mixed.
The bullish case that I am going to make is for opportunities that are, to use the title of my forthcoming book, Under the Radar. That is, they are not large markets in which companies can hope for billion-dollar valuations. They are for the quaint souls who believe that $10 million or $20 million is still real money.
I will describe a number of categories of Internet businesses that seem promising. Within these categories, there are businesses that are being pursued successfully by entrepreneurs now. However, there are many more opportunities for people who want to take the start-up route.
Many small businesses suffer from IT headaches. Law firms have a hard time retaining network administrators, for example. Mental health practices have difficulty with tracking billing and collections.
For small businesses, it is very difficult to deal with maintaining a computer network, upgrading software, and keeping up with changes imposed by trading partners (such as standards imposed by insurance companies on mental health care providers). For entrepreneurs, the Internet represents an opportunity to solve these problems inexpensively. In effect, you can become the IT shop for many small businesses of a given type.
The vertical IT shop tries to give the small business a targeted, complete outsource solution. Examples include Don Britton's Network Alliance and Bernard Brookes' Actualize, Inc..
However, becoming a vertical Application Service Provider requires more than just writing generic software code. You need to understand the peculiar features of the industry. You need to wrestle with the issue of customization--doing enough to satisfy your customers but not so much that your cost structure blows up. And you need to develop a rapport with the typical owner or manager, so that you develop a successful sales pitch.
The adoption hurdle can be very difficult to overcome. These IT hassles have existed for so long that many small businesses believe that they have adapted to them. As Michael O'Horo has pointed out, once people have learned to live with pain, it becomes harder to convince them to buy a solution.
On the other hand, this inertia works both ways. Once you have customers on board and satisfied, the renewal rate tends to be very high. Once you have your service model operating efficiently, phrases like "free trial period" and "money back guarantee" can be used to grow your market.
A less successful example (so far) is Dan Cunningham's 507media, which built a system to facilitate online booking of bands for music gigs. Another interesting attempt is Therese Haar's Farmerlink, which aggregates local produce farmers who sell to consumers.
To make the Defragger model work, you need more than just a fragmented market. Some other conditions that are important include:
In the case of skyjet.com, the executives and assistants who book charter jets would spend hours trying to work with the fragmented industry, while they now can do this in minutes on the web site. (Although heaven help you if you go to www.skyjet.com and get stuck on its evil splash page.)
You have to be able to rationalize the industry without killing yourself. The charter jet industry has about a thousand service providers, which can be managed. In other industries, there are tens of thousands of suppliers. In many cases, the markets are localized, so that you might want to focus on just one metropolitan area.
In the case of skyjet.com, the users of charter jets are easy to identify for target marketing. On the other hand, if you tried to aggregate the market for babysitters (or in-home child care, if you will), it might be expensive to make this service known to the potential market. (Otherwise, this would be a great market to defrag. If you've ever had a babysitter quit with less than one week's notice, you would realize how painful the fragmentation is for consumers.)
In my opinion, advertising on web sites should not exist. Web sites should drive you either to transactions or to newsletters. Banner ads are the road to ruin.
Niche newsletters are terrific because they provide targeted opportunities for advertising. For example, consider Paul Sherman's Potomac Techwire, a newsletter about high-tech firms in the Washington, DC area. It has a very effective classified advertising section, because advertisers know that the newsletter is eagerly absorbed by its target audience.
In general, newsletters are not as demanding to develop and maintain as web sites. Consumers expect little in the way of graphics. There are no interface design issues. Link structures are simple.
The combination of solid revenue potential and low cost makes the niche newsie business the best model for the journalistically-oriented Internet entrepreneur. The challenge is to build up a loyal base of regular readers before you try to bring in too much advertising.
The Internet makes it possible for a firm with a high-cost headquarters location to reduce the cost of its routine labor. You can have clerical work, software development, or customer service done remotely, with no loss in turnaround time.
Some of the most striking reductions in cost come from moving work overseas, to countries like Ireland and India. Because immigration is restricted, both by cultural and legal factors, wages are much lower overseas for workers with comparable skills. The Internet makes possible "virtual immigration," in which workers effectively join American firms without leaving their home country.
Many opportunities exist to facilitate and profit from virtual immigration. You need to have contacts with companies in the United States that have outsourcing opportunities as well as contacts with people overseas who can organize pools of workers.
Typically, this means that by the time you reach $500,000 in revenues, you should be profitable. If not, then the business model may require funding beyond the "friends, family, and fools" used for bootstrapping. Certainly, do not assume that you will have access to venture capital.
A product or service that needs to be sold to big companies is going to be a challenge in today's environment. A year ago, you could have pitched almost anything to a big firm as a "research project." However, large companies suddenly are focused on trimming expenses and holding onto profits. Even if you offer a product that meets those needs, the middle management with whom you must deal may not view your offering as enhancing job security, which is their top priority at the moment.
Small businesses feel just as pressured relative to the bottom line, but you face fewer political complications. If your offering solves their problem, and you understand their mindset well enough to sell effectively, then they represent a more reasonable target market.
Finally, if you do not target either large or small businesses, then you presumably are selling to ordinary consumers. Unfortunately, they are still fairly stingy on the Internet, and "B2C" remains a challenge. However, there are bootstrapped businesses making money selling products and services online.
No, it's not vision and passion. Take that act to the VC circuit. Good luck.
It's not creativity in software development or web design, either. As far as "content sites" or software products goes, the supply is way ahead of demand. There are a few people whose creativity is appreciated by the market. On the other hand, the vast majority of creative types are legends in their own minds.
The skill set that today's entrepreneur needs is more of an old-fashioned, back-to-basics kind. You need to be able to charm your customers into trying your product or service. And you need to be able to execute effectively, so that they renew with pleasure and create strong referral business.