By Christopher Kenton
Now that Internet hype and disaster have long since faded from the headlines, it's interesting to watch the pattern of businesses making a play for the Web. You probably won't see it on the cover of Fortune or Business 2.0, but there's a surprisingly consistent profile of small businesses that are quietly picking up the pieces of the dot-com wreck. They're not venture-backed technology firms or Global 2000 incubator projects, and they're not eBay-style (EBAY ) entrepreneurs turning their living rooms into warehouses. These are small companies that have been around for a long time with steady sources of revenue. They didn't make big investments during the Internet boom-and-bomb, but suddenly, they're responding to an opportunity -- and a need -- to bring their businesses into the Internet Age. And their successes are built directly on the failures of the dotcoms.
I've been working recently with a number of businesses that fit this profile, and it's refreshing. Instead of the political crucible I'm used to seeing in businesses backed by aggressive venture capitalists (VCs), I'm encountering a lot of new business among companies that, typically, have been bootstrapped by a founder, who continues to run the outfit and serve customers on a day-to-day basis. These companies have trailed the technology bandwagon only to make solid strides as many of their dot-com predecessors become distant memories. Clearly, the Internet's tools and technologies have evolved and become more accessible to more businesses. But why did so many of the companies that innovated these ideas and technologies fail?
A lot changes when a company takes on venture capital. While entrepreneurs create opportunities, VCs look for opportunities that meet a specific calculus for success. Once a businesses becomes part of a venture portfolio, it's less accountable to its customers than to a string of powerful investors and banks -- and it lives or dies according to their formulas. Each business represents one small part of the VC portfolio, selected to ensure that if most of the portfolio crashes, one or more fabulous successes will generate a net return that outperforms the SP500. That mindset guides the operations of each company as the VC firm safeguards its investment. Often, decisions are driven not by the market, but by the VC's market. I can't tell you how many companies we've seen yanked from one market focus to another in order to attract another round of investment and dilute a bad risk, or to rebalance the VC's portfolio.
Bootstrapped companies on the other hand may only be accountable to the CEO, whose outlook and experience typically shapes the entire company. Bootstrapping CEOs are usually passionate about their business, and often see the product of their business as a defining characteristic of their identity -- rather than just the process of business success. Decision-making could be much quicker in a bootstrapped company, but it tends to be more conservative, in part because of the lack of expertise and money, and the absence of pressure that comes from a chain of powerful investors. That may have made many small businesses look slow and out of step a few years ago, but it's making them look like success stories today.
While venture capital dominated the business landscape, VCs used their formulas and cash to find businesses and products with the best chance of making a profit -- at least in theory. But the more the economy flourished, the more venture capital became speculative. The result: A lot of bad ideas and bad companies were tossed into the marketplace. Whether those failures led to the train wreck that followed, or simply came with it, they have become an object lesson on the dangers of ignoring the fundamentals, often compared to the Tulip Craze and the Gold Rush. But from a historical point of view, those failures will look more like the first experiments in a cycle of innovation that created a technology-based framework of business skills, tools, and programs.
As I work with bootstrapped companies, I begin to realize the depth of what we learned during that cycle. We learned that businesses can change at tremendous speed, and we learned many of the risks associated with such change. We learned that despite what marketers say, technology is a means to an end, not a solution. We learned that business automation is critical, but that it becomes a commodity too quickly for it to represent a true competitive advantage. We learned countless new systems for managing business and product development more efficiently and effectively. And though I'm not convinced we've really learned to appreciate the fundamentals, we have learned more about the power of the customer and the importance of business metrics.
Now, small businesses are benefiting from these lessons underwritten by the great VC bubble -- not only by way of abstract business concepts, but in scooping up talented veterans who understand the pace and process of new ventures. For now, the bootstrapped businesses I'm seeing are making tentative grabs at the low-hanging fruit. They're investing in their public Web sites -- remarkably cheap these days -- and in Internet marketing. They're exploring simple programs to automate key bottlenecks in supply chains, sales channels, and customer support. They're investing modestly in the technology infrastructure of their business offices. It's not a transformation happening in what we used to know as "Internet time", but that may be one of the fundamental lessons from this phase of the evolutionary cycle: Not every step is a revolution.