Return of the Dot-Com?  A New Dot-Com Wave is coming, but it will be very different

Michael Girdley, 10/24/02

Is the classic Dot-Com really dead for good beyond a few hardy survivors like Amazon.com and Expedia.com?  The answer is No.  Obviously, we already see companies beginning to approach their own Dot-Com as a high leverage way to win new business and cut costs.  Brick-and-mortar businesses like OfficeDepot.com and Safeway.com are successful examples.  What's interesting is that the majority of the New Dot-Com businesses will mainly arrive as "mom and pop," niche operations.  Entrepreneurs will be flocking en masse to create these New Dot-Com’s to solve many of the same customer pains as the 1990s Dot-Com’s, but will be mostly bootstrap funded and building their companies appropriately for their smaller market opportunities.  And, the mass of these companies will happen outside of the classic regions for technology innovation, such as Silicon Valley or Boston.

Several factors are behind this trend.  First, continued spread of the Internet means one will continue to be able to make good money on the web, though not as much as envisioned in the late 1990's.  Examples abound: there are also people who will buy cat toys over the Internet, but cat toys (i.e. what was Pets.com) are not going to be a $500 million a year business.  Numerous companies are springing up that are selling sales leads generated from Web searches and browsing.  Or, they are providing an easy way for people to play games online for prizes for a fee.  These obviously aren't billion dollar businesses, but are great examples of similar, if not the exact same, Dot-Com business ideas working with the correct expectations about the market opportunity.

Second, there are a great number of highly motivated individuals with knowledge of how to build and run a Dot-Com floating around.  The boom and bust cycle has forced a mass education on the Web technologies for hundreds of thousands of these potential entrepreneurs.  In the current economic situation, the golden handcuffs of highflying stock options are removed for many potential entrepreneurs who are still employed.  A great many more are unemployed and wondering how they are going to afford a 1-bedroom condominium for $550k in Silicon Valley.  These people will view small $5 million businesses, that they can own outright, as relatively attractive. 

The New Dot-Com's are completely unsuitable for venture capital, as they'll never go public or be acquired at large premiums.  So, they won’t need to be near the VCs.  They’ll also be bootstrapped.  These two factors mean that expensive, venture capital rich locales like Silicon Alley, Boston, Silicon Valley, etc. won't be where the wave starts.  Instead, expect places like Austin, Boulder/Denver, and Los Angeles to lead the way, as it’s possible there to keep costs down while still finding Internet-savvy talent.

So, expect the Dot-Com to be back and in force as existing companies consider their own presence to be viable and as small businesses spring up on the web.  People are asking, “what’s the next wave to drive the American economy?”  The reality is that small businesses took a beating in the 1990s due to a number of factors including increased labor and cost of capital[1], not to mention competition from the likes of corporations like Wal-Mart driving them off of Main Street.  Look for the New Dot-Com’s to drive the resurgence of the small businesses that have been beaten back -- at least until the next generation of Sam Walton’s arrives to do to these new Dot-Com’s what Wal-Mart did to our small-town downtowns.

To would-be entrepreneurs, if you’re looking for a business idea you may need to go no further than tracking down some copies of the business plans submitted to Sand Hill Road VC firms in the late 1990s.  Just make sure you don’t let anyone convince you that CatToys.com should be a venture capital backed business.