Doesn’t Anyone Want to Run a Dot-Com?

As if things weren’t tough enough for dot-coms grappling with a reeling
economy, lousy business models, and sinking stock prices. Now even the best
among them have one more headache: an increasingly bleak outlook for executive
recruiting.

For the first time, even solid Internet companies are struggling to fill
their top-level executive vacancies. Suddenly saddled with the departure of its
CEO Timothy Koogle, Internet blue chip Yahoo! has already been hunting for a new
sales chief for about half a year, according to industry sources. Online broker
Ameritrade Holding missed a self-imposed December deadline to fill its
seven-month-old CEO vacancy, finally hiring Merrill Lynch senior vice-president
Joseph Moglia in early March. Covisint, an online exchange for the auto
industry, has had an empty CEO seat for the past 13 months. Other sites, such as
search engine AltaVista and bookseller Barnesandnoble.com, have also been
stymied. Their CEO posts have been vacant for four and 13 months, respectively.
“This is in stark contrast to just a year ago.” says John Thompson,
head of the CEO practice at recruiting firm Heidrick & Struggles
International.

No guarantees

Making the situation dicier, the number of vacancies is going up. Internet
portals Yahoo! and Terra Lycos, for instance, have lost seven top executives
between them since the start of February, including Yahoo’s top honchos in
Europe and Asia. Despite the array of explanations, ranging from family reasons
to other job opportunities, one thing is certain: Net companies have gone from
changing the world to fighting for survival–a bitter pill for many current and
potential executives to swallow. Moreover, the number of e-commerce CEO
departures has numbered nearly one per day, with 26 such execs exiting their
jobs in January alone, according to outplacement firm Challenger, Gray &
Christmas.

What gives?

Help Really Wanted

Even the top sites are having trouble filling spots

COMPANY/POSITION

MONTHS VACANT

BARNESANDNOBLE.COM
CEO
13
COVISINT
CEO
13
EBAY
Head of Sales
5
ALTAVISTA
CEO
4

It’s a simple matter of risk vs reward. Once, compensation packages heavy
on stock options could lure traditional execs with the promise of quick riches.
Today, with Net stocks out of favor, some candidates doubt the stocks will rise
enough to make a risky move worth their while. “Options don’t mean
anything,” says one media executive who turned down an offer of $1
million-plus in salary and stock options to head Yahoo’s sales division.
“Yahoo’s an A-class Internet company, but the offer didn’t outweigh the
risks.”

Equally important, candidates want to be sure an Internet company’s slide
has bottomed out before considering a move. The idea: to avoid a situation where
a company’s decline has so much momentum that it doesn’t matter what
decisions management makes.

That’s a lesson newbie dot-com executives have had to learn the hard way of
late. George Shaheen, the former CEO of Andersen Consulting, for instance, took
the top job at online grocer WebVan Group in September, 1999, only to see its
stock plunge 99% from its all-time high, to 33 cents. Similarly, Joseph Galli Jr,
the former CEO of online marketplace VerticalNet, left his position in January,
after a mere six months, to join housewares maker Newell Rubbermaid. During
Galli’s brief tenure, the Internet company’s stock tanked 93%, to $3.91.

True believers

None of this bodes well for Internet companies, many of which are in sore
need of experienced management talent. “A bad leadership fit is the single
most important reason (Internet companies) are failing,” asserts one
high-tech venture capitalist.

To be sure, not all brick-and-mortar execs are shunning Internet jobs. On
February 28, former Compaq Computer vice-president Ray Villareal took the helm
at Internet startup HelloBrain.com, an information site. He even took a package
that was heavy on equity. “I believe in the business, so why not?”
says the 41-year-old Villareal, who insists the Internet sector still has much
appeal to traditional execs. “There’s always going to be pull to go to a
fast-moving environment.” It’s a leap of faith, however, that many execs
are no longer willing to make.

By Ben Elgin in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Size matters

Now, these mini-dots are proving they’re an online force to be reckoned
with. Indeed, they’re teaching their bigger rivals a thing or two–including
the value of common sense. Unlike some dot-coms with inexperienced executives,
the mini-dots are succeeding by employing the same strategies that
small-business owners have relied on for centuries: They’re sticking to niches
they know well. They scrimp on expenses, forgoing expensive portal deals and
using Net resources, from e-mail to customer-sharing arrangements, to save
money. And they’re banding together on the Web, presenting a bigger face to
the online world.

So far, it seems to be working–so well that small businesses appear poised
to play a greater role in the growth of e-commerce than anyone expected. Small
companies will see their online sales grow 336% from 2000, to $120 billion by
the end of 2002, predicts ami-Partners, a New York consultant to small and
medium-size businesses. That will outpace overall e-commerce revenue growth of
249%.

Of course, size matters, even in the New Economy. But in some crucial ways,
the Net helps level the playing field for small outfits. For one thing, the cost
savings of selling online and dispensing with store rents or direct-mail costs
makes some businesses viable that otherwise wouldn’t be–say, a home-based
collectibles business.

Moreover, the global nature of the Web goes a long way toward negating one
key disadvantage of the small fry: geographic reach. Now, even a niche seller of
specialty pet supplies can amass enough customers to be viable. Finally, the
easy communications afforded by the Net may make more small businesses,
especially services such as graphic design, attractive to larger businesses
seeking to outsource jobs.

The impact of a mini-dot explosion could have big implications beyond the
Web. By 2004, even the tiniest of these e-merchants–those with fewer than 10
employees and $3 million in annual sales–could account for as much as 10% of
the US gross domestic product, according to e-commerce researcher Keenan Vision.

Maybe so, but big questions remain about how much the Net will boost the
number of small businesses and what impact they’ll truly have on the economy.
For one thing, says William Dunkelberg, chief economist for the National
Federation of Independent Business, it’s possible the Net is simply shifting
existing sales online, not expanding markets enough to support many new
businesses. He adds, it’s likely that the most successful online businesses
will put the other mom-and-pops out of business, lessening the net gain. Most
traditional small businesses fail, and the same may well be true online.

And for all its advantages, the Internet presents a lot of challenges to the
little guys, too. In many parts of the country, pokey Net connections limit how
many visitors these sites can handle. And it can be tough for traditional
businesses coming online to handle both channels at once. Those factors may
explain why, for all the small businesses that have launched online, many more
have not yet moved beyond sites that are nothing more than online brochures.
According to ami-Partners, 22% of small businesses had Web sites in 2000, but
only 8% were engaging in e-commerce.

Still, none of these challenges has stopped a growing number of small
businesses from embracing the Web as a new sales channel and productivity tool.
Many of the online newbies are longtime Main Street merchants or
industrial-goods manufacturers. There’s also a raft of service providers–computer
programmers, graphic designers, lawyers, and such–who have left Corporate
America to hang a shingle on the Internet.

The Web is spawning new breeds of small companies, too. They include tens of
thousands of people who never ran a business before but now make a living
selling collectible ornaments, antique toys, and other odds and ends on sites
such as eBay. About 13,000 stores have sprouted on the Yahoo! Stores section
alone since June, 1998.

What these disparate businesses have discovered is that the Net is less a
magic carpet to a newfound land of riches than a tool to turbocharge an already
sound business model. “The Internet is what the telephone was when it was
invented–a way to further our reach,” says Wendy Haig, founder of
Washington (DC)-based Global Strategy, which counsels troubled dot-coms.
“With its vast reach, the Internet will enhance any small business that
uses it properly.”

How so? First, they’re using the Net’s access to a global customer base
to zero in on defensible niches, instead of offering all things to all Web
surfers. Pets.com, for instance, went bust in December partly because it tried
to sell all kinds of pet supplies–even huge bags of inexpensive dog food with
high shipping costs and margins under 10%. By contrast, Massachusetts based
Waggin’ Tails sells scarce items such as Provi-Tabs dog vitamins and Hi-Tor
prescription cat food. That allows the Web store to charge high enough prices to
turn a 30% profit margin on well under $5 million in annual sales.

In some cases, the Web’s global reach has allowed entrepreneurs to offer
entirely new types of narrowly focused services. Patti Glick, a San Francisco
nurse trained in podiatry, makes a living speaking at companies on foot health
and safety. Before, she had to do a lot of personal networking, such as mingling
at Toastmasters meetings. Now, by participating in various online podiatric
sites and women’s portals, Glick has drawn corporate customers intrigued by
her screen name, “footnurse.” She expects to earn $30,000 this year
working part-time hours that allow her to spend time with her 10-year-old twins.

Small businesses also are using the Net to save big bucks–enough, in many
cases, to make a pipe dream a going business. Selling Beanie Babies and other
collectibles online out of a bedroom in his Oklahoma home, Perry Calton is
grossing annual sales in the low six figures.

Besides saving money, the Net also provides mini-dots a wealth of new
marketing channels. E-mail and discussion newsgroups can be far less expensive
and more effective than direct mail and print or TV advertising. Carrie Hardy,
founder of Colorado based scrapbook-supply site Scrappin’ Happy, sends
newsletters to 1,100 past customers and posts messages on scrapbooking
newsgroups. Instead of buying $80, three-line ads in trade magazines that never
drove any traffic anyway, she spends nothing and gets a far better response:
After mailing her February newsletter, sales doubled the next day.

No online marketing channel has proved more effective than online auctions,
pioneered by eBay in 1996. Besides spurring the formation of thousands of new
small businesses online, they have prompted existing businesses to branch out.
Some wholesalers are using eBay to go retail:

Andrew Waites took his Mississippi retail overstock business, Inventory
Procurement Services, directly to consumers over eBay–leading to what he hopes
will be a twofold-plus jump in sales this year, to $7 million, and a gross
profit margin online of 50%, 10 times the original business.

Finally, the Net has allowed far-flung small businesses to gang up and pool
their resources against their bigger and louder competition in ways they can’t
do in the physical world. The American Booksellers Association, which promotes
independent bookstores, runs a program called BookSense.com that allows members
to offer amenities only big chains could offer before, such as gift certificates
good at any member store. Moreover, their online customers can order any book in
print from their site, even if they don’t stock it themselves. Kerry Slattery,
owner of Skylight Books in Los Angeles, partly credits the program for a
higher-than-expected 15% rise in her store’s sales in 2000, to $1 million.

Daunting prospect

All that’s not to say the Web can turn any small business into a raging
success. Most entrepreneurs are running into obstacles on the Web that are hard
to overcome with limited staff and resources. One of the toughest jobs:
providing superior customer service. After all, to make up for what they may
lack in product breadth–not to mention customers’ ability to click instantly
to another site–they have to offer much more personal service.

Another challenge is Internet technology itself. Fast broadband connections
are still largely unavailable, especially in rural areas, leaving many small
businesses stuck with snail-like modem connections. And many worry that they
could lose a lot of customers if their connection goes down. Says Deepinder
Sahni, vice-president at researcher ami-Partners: "What we are hearing is
that they are hesitant to put their crown jewels–their companies–on the
Internet."

For many small businesses, the prospect of competing with the online
behemoths is daunting–for good reason. It may be only a matter of time before
the big guys notice how well they’re doing and jump onto their turf. So they
must stay vigilant, even paranoid, about differentiating their offerings.

That, however, is not the main worry of most small businesses that have moved
online. Their problem: too much business. When Jordan Dossett posted her
graphic-design portfolio a year ago on eLance.com, a Web marketplace for
freelance workers, she was buried under an avalanche of work offers from
companies as far away as Russia. So she quit her job as art director for a law
firm and opened The Design Studio in her Washington (DC) home. After hiring
three employees, she expects to rake in $350,000 in sales–and a tidy gross
profit of $250,000. "I had no idea the amount of demand out there,"
she says. "Suddenly, I’m slammed." Now, that’s a problem a lot of
dead dot-coms would love to have had.

Arlene Weintraub–BusinessWeek

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