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Is Self-Employment For You?

Chapter Sample

The following is a sample chapter from the book, Is Self-Employment For You?, by Paul E. Casey, President of Casey Communications, Inc., a Seattle-based company that specializes in radio advertising. From July to December, 2003, I served as ghost-writer/collaborator for this book, re-writing and editing text from Paul Casey's original manuscript. The book was published by Hara Publishing in January, 2004.

The book focuses on how to start your own self-employed business wisely and efficiently, how to maximize your chances for success, and how to avoid the pitfalls that can result in the failure of your business. The following chapter looks at lessons that the self-employed business owner can learn from the failures of the dot-com startups of the late 1990's. The chapter includes a case study on Webvan.com and HomeGrocer.com, two now-defunct companies that offered online grocery-delivery service.

Other chapters in the book, Is Self-Employment For You?, included:

• A chapter asking the reader to name five different reasons why they wanted to start their own business.

• A chapter focusing on the self-employed business mindset and the mentality of the free agent.

• A chapter focusing on choices concerning their personal lifestyle that the self-employed business owner must make when they start their own business.

• A chapter on the role that experience plays in starting your own business.

• Chapters on using good judgement and "option thinking" in making business decisions and solving problems.

• A chapter on organizing your business and running it efficiently.

• A chapter on keeping low overhead and avoiding unnecessary business expenses.

• A chapter on the dangers of partnerships, and on the dangers of overusing technology in business.

 

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Chapter Six

LESSONS FROM THE DOT-COM CRASH

When I speak of learning from experience, I am not just talking about learning from your own mistakes. And when I talk about learning from the experiences of others, I don't mean just learning from those who have been successful in business. You can learn just as much, if not more, by studying the failures. Often, an analysis of businesses that have failed can tell you what not to do in your own business, and can clue you in to the pitfalls and traps that entrepreneurs should avoid.

In the late 1990's, as Internet access became available to almost everyone, a new type of entrepreneurial business, the "dot-com startup," started to emerge. If something could be sold, traded, or transacted over the Internet, an entrepreneur would find a way to do it. Investors and venture capitalists lined up in droves, pouring billions of dollars into dot-com startups in the hopes of cashing in on the Internet craze and the so-called "New Economy."

Unfortunately, many of the dot-coms are now jokingly (and sadly) referred to as "dot-gones." As long as the economy was good, investors were more than willing to pour money into dot-coms. The Internet was seen as "the next big thing," a better and faster way to do business, trade goods and services, and move information. But when the national economy started to cool down, many investors stopped putting their money into dot-coms that were spending millions of dollars a day and still not turning a profit. It became known as the "burst of the dot-com bubble." Since then, dozens of dot-com startups have gone out of business.

If the burst of the dot-com bubble teaches us anything, it's that even "New Economy" businesses must still obey "Old Economy" rules. Again, Rule #1 is, "A business must take in more money than it spends." When all is said and done, the Internet is nothing more than an extremely-useful communications tool. An Internet-based business must still offer a tangible product or service, and must still make an actual profit if the business is to survive.

Even if you don't plan to start an Internet-based business, you can still learn a lot about what not to do as a self-employed business owner by studying the mistakes of the dot-com era. What are some of the reasons the dot-coms failed? Let me count the ways:

1. They used other people’s money (that is, the money given to them by investors) and lots of it. When you use other people’s money to build your business, it becomes frighteningly-easy to spend. You develop bad habits, such as not accounting for each dollar. Also, when someone else is financing you, you don’t have that sense of urgency to make your business successful and profitable as soon as possible. There is such a thing as having too much money when you start your business.
2. The idea behind many dot-coms was to build their business based on the novelty of Internet technology, not on the product or service being offered. Many dot-com entrepreneurs were not interested in offering a quality product or service, but in how they could leverage that product or service into quick money or an IPO.
3. Many dot-coms tried to "conquer the world" with their product or service before they really understood it, or before they had fully tested their concept. They spent millions of advertising dollars trying to capture "market share"—that is, trying to outdo their competitors to be the top search engine, or ISP, or online toy seller on the Internet, when they hadn't yet perfected their concept or their service, or figured out how to turn it into a profitable enterprise.
4. In many cases, dot-coms invested money in unnecessary expenditures, such as high salaries, lavish office furniture, and elaborate corporate events.
5. Many dot-com CEO’s were overnight wonder kids in their 20’s who lacked the perspective and experience that it takes to start a successful business. A few more people with gray hairs around the water cooler would have helped enormously.

Now I have a confession to make. I was not immune to the "gold rush mentality" of the dot-com era. In the late 1990's, I had more "disposable" income to invest with than at any other time in my life. I invested some of my money in dot-coms, but my investments were very limited because I was always very skeptical about the long-term success of many of these ventures. As a result, when these dot-coms went out of business, I lost some money, but not much.

The first time I heard the term "Burn Rate" was at a stockholder's meeting in the year 2000, from the CEO of an Internet start-up that I had invested in. I had to ask a fellow investor what the term meant. He said that it was "the money that feeds the monthly cash flow to the negative, but which the company needs in order to brand its product in the marketplace, with the goal of bringing in new investors."

In other words, the company was furiously spending more money than it was making, in an effort to attract investors with more money to spend. By bringing in new investors as quickly as possible, the company hoped to offset its massive business costs until it could establish itself enough to turn a profit. In doing this, the company had created a corporate culture of losing money.

Unfortunately, this company's investors, myself included, soon grew very tired of hearing about the "Burn Rate." In essence, the company was asking us to believe the concept, "We're not losing money! We're just spending more than we earn as we move towards making a profit." (This is like an airline pilot telling the passengers, "Don't worry, folks! The plane is not crashing! It’s just that the rate of descent is faster than we'd like!") As investors like myself stopped believing in the "Burn Rate" mentality, they stopped investing, and the company went out of business.

The problem with building a culture of losing other people’s money on a monthly basis is that you don’t stay focused on the core of the business. The dot-com crusade failed because the people in charge believed that the red-hot economy and the lust of investors for anything Internet-related would last forever. There is always a day of reckoning in any start-up venture, where the company has to prove that it is making a profit. If investors see that a company is losing money over an extended period of time, they will stop investing in it. Many dot-commers were caught completely off guard when their investors suddenly cut off their cash flow. By that time, most of the dot-coms were so far in debt that they had no choice but to file for bankruptcy.

In retrospect, it's easy to see that many of the dot-coms were actually set up to fail. Many of these companies violated almost every principal about starting a successful long-term business that is outlined in this book. The sad part is, many of these dot-com companies could have made it if they had kept their overhead low and had tested and perfected their concept over time. When owners and investors get greedy, or try to do too much too soon with their business, it usually leads to disaster.

 

A CASE STUDY: THE WEBVAN/HOMEGROCER PHENOMENON

Webvan.com and HomeGrocer.com both started out in the late 1990's with the concept of an Internet-based home-delivery grocery service. Both companies hoped to revolutionize the American grocery industry by doing away with the traditional "brick-and-mortar" supermarket. There was no longer any need, they argued, to waste time going to the supermarket to shop for food. Online shoppers could now order groceries on the Internet and have them delivered right to their homes the very same day.

HomeGrocer was founded in Seattle in 1998 by Terry Drayton, a software entrepreneur from Toronto. Webvan was founded that same year in San Francisco by Louis Borders, founder of Borders Books. Both companies attracted a number of high-profile investors. Webvan's investors included CBS and Knight-Ridder Newspapers; HomeGrocer's investors included Amazon.com and Martha Stewart Inc. Both companies promised that they could achieve profitability within a few years by eliminating the need for an actual supermarket store, and by automating the "outdated" infrastructure of the grocery industry with high-tech distribution centers.

Within a year of going online, both companies started to aggressively expand their operations. HomeGrocer began offering grocery service in Portland, Oregon and Orange County, California; Webvan began offering its grocery service in Los Angeles and San Diego, and later in Atlanta, Chicago, and Dallas. Both companies competed heavily with each other for market share, and also competed with established supermarket chains like Safeway and Albertson's.

In June, 2000, Webvan bought out and merged with HomeGrocer, in the hopes that a larger company could achieve profitability more quickly and would attract more potential investors. But the national economy was cooling, and investors had already started to pull their money out of dot-coms that were still posting massive losses. In an effort to stay in business, Webvan consolidated or shut down several of its distribution centers and laid off almost 900 employees. But this last-ditch effort failed. On July 10, 2001, with no further investors offering money to help them continue their operations, Webvan filed for bankruptcy. At the time, they were over $800 million in debt!

What happened? Again there were so many fatal flaws that a whole series of books could be written about the Webvan/HomeGrocer debacle. The potential business owner can learn a number of lessons from studying this business fiasco:

1. Know your business. Don’t go into a business that you know nothing about.

The founders of Webvan and HomeGrocer knew nothing about the infrastructure of the grocery business, or about the needs of its customers. Like many dot-commers, they assumed that the technology would be the star of their business—not the groceries or the home delivery. They used the novelty of ordering groceries over the Internet to attract investors, and hoped that this same novelty would attract customers to shop at their web sites. As it turned out, this novelty wore off very quickly, for both investors and customers.

2. Know your market—and its limits.

As far as I know, neither Webvan nor HomeGrocer ever did any research to identify their core market. They simply assumed that, with the current Internet craze, everyone would abandon the hassle of supermarket shopping for the more convenient online grocery service. If they had done a bit of market research, both companies might have been surprised at peoples' attitudes about grocery shopping—and about the Internet in general.

In the late 1990’s, people were just starting to understand the Internet itself! The World Wide Web was a fascinating medium, but it was also a bit scary. Was it really safe, we wondered, to order books, or CD's, or groceries online? Or would there be hackers waiting inside these web sites, ready to steal our ID's and credit card numbers? It was unrealistic for Webvan and HomeGrocer to rely exclusively on the Internet as a means for recruiting and establishing their customer base. They expected grocery shoppers to use a tool that they didn't quite trust yet for everyday shopping.

When it comes to shopping for groceries, most of us simply prefer to go to the supermarket! We want to see, smell, and touch the food before we buy it. We need to see for ourselves that the fruit is fresh, that the bread is not stale, that none of the dozen eggs inside the carton are broken, and that the plastic-wrapped ground beef is pink and not past its expiration date. (It's food, after all! We need to make sure it's okay before we put it in our mouths.) Shopping online does not give us this same experience. As Seattle Times columnist Nicole Brodeur put it, "You can’t squeeze tomatoes when you shop online."

I think the best target market for an online grocery delivery service would be people living in major metropolitan areas who don't have time to shop for themselves. This would include young single professionals, young professional married couples, and people who are unable to get out of the house due to injury or sickness. There is a market for online grocery delivery. (At its height, HomeGrocer had 30,000 customers in the Seattle area.) But it is a niche market.

As for other potential customers, in time people will become more comfortable with online shopping. Some of them may eventually become regular customers for online grocery services. But it takes a long time, not to mention a huge cash outlay, to change people’s attitudes and hook them onto the convenience of a new type of service. We have been shopping at grocery stores for over one hundred years. It is unrealistic to think that we will give up this habit any time soon.

3. Don’t try to re-invent the wheel.

When I first heard of HomeGrocer.com, I assumed that its founders were approaching supermarket chains like Safeway and Albertson’s, and offering to fill a niche market by providing these companies with an online grocery service for their established customer base. I thought the concept had real possibilities.

My assumptions were wrong. Instead of trying to fill a small niche market, HomeGrocer and Webvan both decided to build their own grocery companies from scratch. They spent millions of dollars building huge food warehouses known as "distribution centers." They bought fleets of delivery trucks and hired thousands of employees to process and deliver orders. They hired software experts to create their online web pages, and to create exclusive software to run their distribution centers faster and more efficiently that regular grocery stores.

With such high overhead, it's no wonder that both companies incurred the high levels of debt that eventually forced them into bankruptcy! In addition to building their own grocery businesses, Webvan and HomeGrocer also had to build their customer base from scratch. Being so new to the market, they could not rely on an existing customer base to support their business. They had to go out and try to recruit new customers away from established grocery chains. As we've already seen, this turned out to be a losing battle.

Why did Webvan and HomeGrocer feel obliged to spend millions of dollars to try to create new grocery empires from scratch? Quite simply, the founders of both companies thought that they could do it better. They believed that the national network of food warehouses that supplies supermarket chains like Albertson's and Safeway was outdated. They thought that by creating high-tech distribution centers with facilities powered by state-of-the-art software, they could provide customers with faster grocery delivery service than the supermarkets.

As it turned out, the network of food warehouses that supplies brick-and-mortar grocery chains, while it may be several decades old, is still very efficient. Again, it goes back to the founders of HomeGrocer and Webvan not knowing much about the grocery business. Their high-tech distribution centers may have worked well, but their state-of-the-art infrastructure meant little when they didn't have enough of a customer base to sustain their business.

4. Start slow, build slow. Don’t try to "conquer the world" all at once.

As mentioned, Webvan and HomeGrocer started to expand their business into new markets while they were still competing with each other. By offering services in metropolitan areas across the country, they hoped to grab as much market share as possible. They also hoped to attract new investors by proving that online grocery companies could compete with the established "brick-and-mortar" grocery chains on a national level.

In the end, however, ambition was their downfall. In the year 2000, after merging with HomeGrocer, executives at Webvan decided to offer their online grocery service in Atlanta, Dallas, and Chicago. In 2001, they built huge distribution centers, each costing tens of millions of dollars, in Dallas and Atlanta—only to close them down a few months after they had opened, when the company started to run out of money.

This is evidence of the "Burn Rate" in action. It cost Webvan so much money to move into a new market like Atlanta or Dallas that, by the time they had established a headquarters in that area, they had no money left to start the business. In the end, Webvan cared more about acquiring market share from its competitors than about offsetting its overwhelming profit-loss ratio.

A better scenario for establishing an online grocery service would have been to prove that it could work and survive in one city, before moving it into other markets. Again, it would be easier to do this by offering an online service from a well-established supermarket chain with an existing customer base. Perhaps in the first year, 2% of the supermarket chain's customers would use the online option to order groceries on the Internet. The following year, it might be 3%. Perhaps in five years, 15% of the chain's customer base would be using the online option. In the meantime, the supermarket chain would continue to function as it always has, with customers shopping at local stores in the traditional way.

5. Test your concept and perfect it as much as possible before you offer it.

Webvan and HomeGrocer encountered numerous software problems in putting their grocery services online. Many customers became impatient with slow Internet service, and discovered that it was, in fact, faster to go to the supermarket and buy groceries, rather than to sit at their computer for hours and place an order online. Some customers also found that, due to web site compatibility issues, they couldn't access Webvan's pages using major web browsers like America Online.

Webvan and HomeGrocer also had problems with their delivery services. One problem unique to grocery deliveries is that someone has to be at home to receive the order when it is delivered. Unlike packages that contain books or software, groceries can't be left in a mailbox, or deposited on a doorstep where a dog or a squirrel might get them. At the time of their closing, Webvan still had not figured out a solution to this problem.

Also, Webvan and HomeGrocer both had delivery problems in their chosen startup cities. San Francisco and Seattle are both built on very narrow peninsulas that are crowded with hills and surrounded by large bodies of water. This makes the layout of streets somewhat haphazard, and traffic problems in both cities are especially bad. In both cases, delivery drivers had trouble making their same-day deliveries on time—especially when all delivery orders were filled out of one single distribution center located on the outskirts of the city.

Incidentally, since the closing of Webvan/HomeGrocer, Safeway and Albertson's have had better luck with their web-based home delivery service. All orders that are made online are delivered to the customer from supermarkets located within that customer’s immediate neighborhood. The delivery driver is usually a local resident who knows the streets and can navigate them easily, and thus find the customer's delivery address without any trouble.

6. If you have a good brand name, keep it!

When Webvan.com took over HomeGrocer.com in 2000, one of the first things they did was to get rid of the HomeGrocer name and peach logo. It might have been better for the company if they had kept "HomeGrocer," and done away with the "Webvan" name and logo instead.

By the time it was bought out by Webvan, HomeGrocer had established brand recognition in its hometown. People in and around Seattle were used to seeing HomeGrocer’s peach-colored delivery trucks, with the company's peach-shaped logo on the side. The peach logo gave everyone who saw it an instantly-recognizable symbol of the company and what it offered. When Webvan bought out HomeGrocer, it replaced the peach-logo delivery trucks with its own trucks featuring Webvan's logo, a giant blue-and-green "WV." This logo, of course, told the people who saw it nothing about the company, or what they offered.

But even worse than dropping HomeGrocer's logo, Webvan chose to drop the HomeGrocer name! As with the peach logo, the name "HomeGrocer" gives the potential customer an instant idea of what kind of products and services the company offers. On the other hand, the name "Webvan" gives no indication that the company is an Internet-based grocery delivery service. Someone who had never heard of Webvan might think it was an Internet-based furniture moving service, or an overnight shipping service—or perhaps even an online traveling spider show!

7. Never confuse the concept of your business with the reality.

The founders of Webvan and HomeGrocer had a viable business concept with their online grocery service. The problem was, they were too much in love with the concept itself. They did not see the company as a business, but rather as a slick, high-tech innovation to be sold to investors. The Webvan and HomeGrocer founders believed that all they had to do to stay in businesses was to keep selling their concept to investors until their companies eventually turned a profit. But when the investors stopped buying the concept, both companies started to fall apart.

It takes much more than a great idea to start a business and keep it going for the long run. A business must be treated as a business if it is to survive. Innovative technology and new ways to sell products can't take the place of common sense and good judgement. The Webvan and HomeGrocer founders created a business where selling a concept took precedence over perfecting that concept, and where establishing market share over well-established competitors became more important than turning a profit. In the end, this combination of little experience, excessive overhead, too much money, and little accountability proved to be a disaster for both companies.