Dot Coms-Take A Lesson From Small Business
New economy this, new economy that. You'd think everything in the marketplace was new. And you get the impression that anything that isn't new, isn't cool. If you are part of the "old economy", you're probably tired of hearing about all the new economy hype.Okay. I admit it. I've been guilty of being a little giddy about the new stuff going on in the marketplace. But you have to admit, it is exciting - what with the new technology creating all of the new opportunities, new ways of doing business, even new markets structured around new ways to manage information.
Some Things Never Change
But here's a flash: No matter how much the old economy morphs into the new, there are still some things that seem to never change: Location is still the three most important things in real estate; customers are still the most important part of your business; and all companies, whether the old economy kind, the new economy models, or the ones who dwell in both dimensions, have to deal with challenges of cash management.
Recently we've seen this last economic perennial come home to roost for so many of the companies that most typify the new economy, the dot coms. Flush with literally tens, if not hundreds of millions of dollars raised through initial public offerings (IPO), for most of us with ties to the traditional marketplace it seemed these new economy entrepreneurs would have enough cash to last forever. Perhaps even to out-cash their no-profit projections.
Alas, just as I initially underestimated the impact of new economy innovations on the marketplace, I underestimated the cash burn rate - check that - wildfire, of some of the dot coms. But MY surprise wasn't the problem. The virtual landscape is now strewn with dot coms turned dot bombs, with their uninitiated operators asking passersby if anybody got the license number.
How Could Anyone Spend That Much Money?
Mind you, I wasn't surprised that a company could run out of cash. I'm a grizzled veteran of that natural law with the scars to prove it. What I was surprised about was that these guys could spend that much mulla so fast: Twenty-something CEOs were burning through 20-something million dollars in a single quarter. It boggled the mind.
I know what you're thinking. I had the same thought. Easy come, easy go, right? And after enduring all of the stories about fresh faced, instant multi-millionaires, while you and I toil away sans IPO, who could blame us for wanting to say, "Welcome to the real world, my young friends".
Small Business To The Rescue?
If only they had asked, you and I could have taught these young whippersnappers a thing or two about cash in the real world, couldn't we?!
We know that cash from investors or lenders shows up on the liability side of the balance sheet, which is not cash from economic production, like sales revenue, but rather an obligation. Only if you can leverage invested or borrowed cash into sales is it a good plan to take the money. In the marketplace, only cash from a sale creates economic benefit and a sustainable business model.
Don't You Have To Sell Something?
Many of the failed dot coms weren't creating anything you could buy. Their business models were structured around attracting eyeballs to view advertising impressions on banners. Not that this is a bad plan. In fact, many companies still operate this model with relative success. But you and I have learned that the high percentage play is to have paying, loyal customers, not empty handed visitors. Paying customers create the kind of economics that last.
Don't You Have To Sell Something People Want?
Many of the dot coms that were selling products and services were such early adopters that they had to literally make their market, like trying to sell furniture online. I'll bet you're like me, you sit on a chair before taking delivery. You and I would have told these guys that you can burn through a lot of cash trying to change that kind of consumer behavior.
Take A Lesson From Small Businesses - And Their Bankers
But we have the benefit of hindsight. With all of the general acceptance of the Internet, and the frenzy about the virtual marketplace, who knew which applications and adaptations would stick and which would fail?
One thing you and I do know, and would have told IPO and after-market investors if they had asked, is that gobs of other people's money, the invested kind, not the borrowed kind, creates a dearth of due diligence and a cavalier attitude toward risk.
We small business owners may complain about how tough it is having to jump through bankers' hoops to borrow our working capital, but those hoops make us tougher operators, and our plans more viable. You and I know this, and if asked, would have imparted this wisdom on our dot com compadres.
The Bursting Of The Bubble
Fed Chairman Greenspan contemplated the potential for a stock market bubble, and worried out loud about how a burst bubble would impact our economy. When asked how such a bubble could happen, he pointed to the "greater fool" theory of investing, where investors say, "Yes, I know this stock is overvalued, but I'm going to get in now and sell to the 'next fool' as he bids the price up to sell to the 'greatest fool'."
When the value of banner clicks diminished, and furniture and grocery shoppers continued to take their business out on the boulevard where they could squeeze the melon and sit on the chair, that's when the pin prick of prudence penetrated the NASDAQ bubble. That's when the "greatest fools" parted with their money, and many nouveau millionaire CEOs parted with their companies.
Our Feelings Were Hurt - A Little
There was a period of time, perhaps a year or two, when I felt many small business owners believed they had missed the boat. That we were being left, almost as if dead-in-the-water in our small business runabouts, as the new economy's IPO yachts sailed toward new horizons awash with easy money.
But our background, instincts, and due diligence told us that while customers are drawn to the high tech stuff, they also still yearn for the high touch experience of our local TLC. So we stuck to our knitting and, surely but sometimes slowly, we began making sound and substantive progress on incorporating new economy components to leverage our traditional business models. And it didn't hurt that our bankers like this kind of sound, fundamental approach to investing in new capability.
Back To The Cash
So here we are, cruising our small business runabout toward that new opportunity horizon. With some of our cash from profits, and some help from our bankers, we've installed a new "motor" that incorporates high tech capability into our traditional business model. And since it's our money, and/or money we have to pay back, we've made a prudent investment, not a Monopoly money investment.
It doesn't make us happy that some of the dot com IPO yachts have sunk or been repossessed. But their story does lend validation to the small business approach to growth:
• Walk before you run.
• Look before you leap.
• Research what you don't know.
• Test new ideas.
• Show how you will recover in a worse case scenario.
• Cash may be King, but the good kind comes from paying customers.
• A bankers just may be a better friend than an investor.
Write this on a rock...Remember what Adam Smith said about money: It only has value in exchange, and no value in use. Cash seeking use instead of exchange is a shipwreck waiting to happen.
