Online Extra: Embracing the Brick-by-Brick Business Plan
Starting a business is supposed to be hard. And now that it's much tougher than during the dot-coms' heyday -- with the laws of gravity and Darwin restored -- entrepreneurs who are still standing feel vindicated by an invisible hand that has somehow righted a wrong. To many aspiring small-business owners, "it was depressing that people with a line of bull and a PowerPoint presentation were getting funded," says Kenneth Morse, managing director of the MIT Entrepreneurship Center, where students get guidance in how to start a business.
In no more time than it takes to say "See ya!" the line-of-bull business plan has given way to the line-of-revenue business plan, which is based on paying customers rather than on buzz and Web-site page views. That's a relief to Christina Bauer, who founded Mindful Technologies, a customer-service software company in Newton, Mass., just weeks before so many Internet companies began their free fall in spring 2000.
She believes that overfunding, which brought impossibly intense pressure to perform, wiped out several venture-backed businesses that would have been her competitors today. Infrastructures built on free-flowing money had nothing to feed on when the VCs turned off the tap. Having to rely on customers probably saved her, says Bauer, who, like many of today's surviving entrepreneurs, knows more about navigating a tough economy than a booming one.
STAYING LEVEL-HEADED. When Bauer graduated from Syracuse University into the recession of 1991, she went on 30 interviews before she got her first job -- as a copywriter in a Buffalo ad agency for $13,000 a year. Before that, she had some hands-on tutoring in the ways of traditional business-building when, as a teenager, she worked for her father, a consultant to entrepreneurs. He would revise their business plans, then give them to her to type. She remembers how, back then and continuing through the economically heady days of the late '90s, "he was very wary of anything other than customer revenue and then a bank loan" for financing a new company.
More entrepreneurs are returning to this back-to-basics model now that the New Economy version of venture funding has proven fatal to so many businesses. Besides, they're facing a venture-capital drought. Such investments have fallen at least 40% from year-ago levels. And because many VCs are as fond of Internet startups as of typhoid, they're putting their money in biotech, health care, and energy.
This new landscape extends all the way down to the grassroots. At the Enterprise Center, a nonprofit incubator in West Philadelphia that aims to turn $100,000 companies into $4 million ones, "we're seeing much more solid, fundamental, nuts-and-bolts business ideas, not get-rich-quick schemes," says Matt Burgheiser, who, as the center's vice-president, reviews the business plans of entrepreneurs looking for the incubator's guidance. Because Enterprise Center's priority is building long-term stability for its companies -- all the better to improve the downtrodden neighborhood where they're based -- they were skeptical all along of the dot-com boom's gold-rush mentality. "For the most part, it passed by us, and that probably wasn't a bad thing," Burgheiser says.
RESISTING THE HYPE. Dan Feshbach avoided it, too, in spite of pitches from inside and outside his company at the height of the IPO market. As the founder, in 1983, of Mortgage Information Corp., which tracks the performance and risk of 30 million mortgages for the lending industry, he had built the company "brick by brick." When he went looking for equity capital, he did the opposite of what so many entrepreneurs were doing during the boom: He would usually undersell what he thought his company could do, believing it better to err on the side of caution and to overdeliver.
"In the dot-com era, there was lots of pressure to oversell," says Feshbach, who was approached about partnership deals with some Net companies that are now out of business. Pressure also came from his employees "who were wondering why we weren't doing what those other companies were doing." They couldn't understand why he didn't take Mortgage Information public or sell it when the time was ripe.
Given his many years of business experience, "I never could buy into the short product cycles dot-coms were talking about -- our predictive models took us six years to build," Feshbach said. "Getting big companies to buy things from small companies that will change the way they do business does not happen overnight."
LESSONS LEARNED. Feshbach doesn't gloat in the faces of those who got trampled in the first-to-market rush. Many Net startup business plans, even if they ultimately failed, fueled creativity and entrepreneurship and helped develop the Net as a platform for doing business. The fact that Mortgage Information has been able to put its databases on the Internet for clients isn't something he takes for granted. "I know how difficult it was in the early '90s to put your information up online -- you had to be a Reuters or a Bloomberg."
Bauer also resists any urge to brag. Although dying dot-coms are an easy target of derision, she thinks their mortality rate is probably no higher than for new businesses overall, the majority of which fail in the first few years. Net fatalities aren't more numerous, only more high-profile -- the flip side of the hype that helped spawn them.
In any case, the dot-com debacle is unlikely to dampen enthusiasm for startups, even if both VCs and entrepreneurs are resting to lick their wounds. The number of students taking entrepreneurship courses at MIT last year jumped 38%, Morse points out. Applications to both MIT and Harvard's MBA programs are way up, he says, which probably reflects the tightening job market and the fact that failed entrepreneurs realize they have something to learn. "A lot of people got a lot of experience very quickly -- on the way up and on the way down," he said. "Next time they're going to do it right."
That almost certainly means they'll do it the Old Economy way -- with hard work rather than easy money.
By Theresa Forsman in New York