The Internet Bubble Wasn’t All Bad Ideas

We all know the story well: at the end of the 1990’s and the beginning of the 2000’s investors threw caution to the wind and invested heavily in businesses based solely on the fact that they added “.com” to the end of their name. They overlooked standard investment metrics like earnings per share, and instead based their investments on the expectation that new internet customers would lead to earnings booms. Some companies even IPO’ed before making a “net” profit.

And then it happened.

The market corrected, stock prices dropped, and most of these companies went bankrupt. They no longer could get the funding they needed, and since they weren’t making any money, they went under. It became known as the dot-com era bubble.

So now everyone looks at the dot-com bubble and thinks of it as an era filled with bad ideas and poor investment principles. But that’s not actually the case (although the “poor investment principles” label still applies).

Instead of being an era full of bad ideas, most of the businesses were ahead of their time. They were viable ideas that were being pushed ahead of the technical capacity that would make them profitable. They also suffered from an attempt to get too big too quickly.

Example #1: Pets.com

Let’s take Pets.com as an example since they’re known as one of the biggest dot-com era busts. They started operating in August of 1998 and closed down in November of 2000. During that time they became nationally recognized through successful advertising and PR campaigns. This led to sales, but not enough to sustain profitability. By the time they shut down in 2000 they had lost $300 million in investment capital.

So what was the problem?

For starters, 1998 wasn’t the best time to start an online pet supply store. The internet was still in its infancy. People weren’t surfing the web all hours of the day on devices ranging from desktops at work to smart phones in bed. And they weren’t used to making purchases over the internet. The average consumer was more comfortable buying pet supplies from a local store than an online retailer. People weren’t yet ready to make the switch.

So was selling pet supplies online a terrible idea? No, actually it wasn’t. It suffered from bad timing and trying to grow too quickly, but the idea itself wasn’t bad. Pet food alone is a $52 billion per year business with $666 million being sold online in 2011. Today sites like PetCo.com, PetStore.com, and PedMedsExpress.com are making money by selling pet supplies online. PetFlow.com, a two-year-old company based out of New York, was expected to earn $30 million in sales in 2012 based on their subscription model that delivers pet food to customers’ doorsteps.

As you can see, there are now lots of companies that are making money by selling pet supplies online. Are they worthy of $300 million in investments and splashy initial public offerings that appoint them as the next big thing? Probably not. But they’re making money by doing the exact same thing Pets.com did from 1998 to 2000. They’re just being a little smarter about it, and benefiting from the current internet shopping habits of American consumers.

Example #2: Kozmo.com

Another big-time dot-com era bust is Kozmo.com. They attempted to provide same-day delivery of everyday goods like magazines, food, and Starbucks coffee. Kozmo’s numbers in 1999 looked something like this: $3.5 million in revenue and $26.3 million in losses. They also raised around $250 million in funding and offered services in Atlanta, Chicago, Houston, San Fransisco, Seattle, Portland, Boston, New York, Washington D.C., San Diego, and Los Angeles. Unfortunately, they ended up shutting down in April of 2001 which led to the firing of 1,100 employees.

What happened? Was this simply a terrible idea?

No, but it was executed quite poorly. Here’s one description that Wikipedia provides:

Despite serious concern and many suggestions from its employees to require a minimum purchase and/or a delivery charge, Kozmo continued to use the same business model of free delivery no matter what the price, even if it were a $.50 pack of gum or candy bar.

As you can see, Kozmo made the poor decision to offer their service to everyone free of charge. This simply was not sustainable. There needed to be some type of service charge or minimum purchase requirement. It also seems like they grew too quickly by expanding to so many cities without proving their model in a handful of cities like New York, Boston, and San Francisco. But the Kozmo business model wasn’t entirely a bad idea. Parts of the concept are still being used today. Chris Siragusa, the former CTO, went on to found Manhattan-based MaxDelivery which operates with a similar model to Kozmo and is still in business.

There are also many retailers who are considering how to use same-day delivery to boost their sales. Amazon currently offers it in select cities, and other companies like eBay and Wal-Mart are looking into how to offer similar services for their customers. Net-a-Porter, a designer apparel site, offers same day shipping in London and New York for a $25 charge. The U.S. Postal Service is even testing same day shipping in San Francisco.

Based on these examples, it seems like Kozmo was ahead of it’s time and attempted to grow too quickly more than it was a bad idea. There’s no way to know how this same-day-delivery market will evolve, but as these cases show, companies are still looking into how to make money from it, 11 years after Kozmo went out of business.

Example #3: Diapers.com

Similar to Pets.com of the dot-com bubble era, Diapers.com started selling specific products to be shipped by mail, only they started in 2005. Their focus was on baby products which included diapers, wipes, formula, clothes, strollers, etc.

Unlike Pets.com, they ended up being very successful. The company grew quickly, became rated as the #1 retail business by INC. magazine in 2009, and formed a sister company, Soap.com to sell soap-related products, in 2010. Their expected revenue in 2010 was $300 million which was up 67% from the year before and which led to their being acquired by Amazon for a price of $545 million.

Diapers.com is similar to Pets.com in that it offered a niche group of products to specific customers that were sold via the internet and delivered by mail, but it was different in that, instead of losing $300 million of investment capital, it earned over $300 million in revenue and was acquired by the larget e-Retailer in the world for $545 million.

Since the ideas were so similar, what made the difference?

The answer is timing. Consumers weren’t as ready to purchase from e-retailers in 1999 as they were in 2005. Shopping habits have changed over time, and more consumers are both online and willing to purchase via the internet. This is proven by a company like Petflow.com selling $30 million worth of dog food over the internet, and it’s proven by Diapers.com becoming an acquisition target of Amazon.com.

The question to ask

So the question to ask is this: Was the dot-com era filled with bad ideas, or were many businesses started with good ideas that were executed poorly and suffered from bad timing? I tend to think that in a surprising number of cases, the latter is true. Tech pioneer Marc Andreeseen has the same opinion. Here’s what he has to say about the subject:

“One of my working theories right now is basically every single idea from the dotcom era was correct.”


What do you think? Is Marc’s theory true? Was every single idea from the dot-com era correct but ahead of its time? Do you have any other examples of dot-com era busts that have now been proven to be successful? Leave a comment and let’s discuss.

Sources:
Dot-Com Bubble - Wikipedia
Pets.com - Wikipedia
Kozmo.com - Wikipedia
Diapers.com - Wikipedia
Retailers battle for pet food market share - TheCityWire.com
Eight things Marc Andreessen said to Quartz that made us sit up and listen - Quartz.com

  1. davidhauser posted this