On the Road Again

From time to time, I call Garage.com’s head of recruiting, Amy Vernetti, to
chat about Silicon Valley trends. She usually returns my call around 5 p.m., and
I smile at the faint crackle of static, the sporadic horn honk, and the
occasional "Ack!" that punctuate our conversation during Vernetti’s
70- to 90-minute drive from her Palo Alto home to Oakland (where she resumes her
second work shift after picking up her kids).

The last time I called Vernetti, I was as interested in her perspective as a
hard-core commuter as in her recruiting insights. Like almost everybody I know
around here, I find myself increasingly inconvenienced, infuriated, and
exhausted by soul-sapping traffic. The California Transportation Department says
Bay Area freeway congestion in the heart of the Valley grew 26% from 1998 to
1999–representing a one-year leap in the daily delay from 29,300 to 36,900
vehicle hours. I’m betting numbers will soon show it jumped at least that much
again from 1999 to 2000. Local chatter about "windows" rarely means an
operating system anymore, but rather those brief traffic gaps when it’s safe
to try and drive somewhere.

With all our recent woes, logic would suggest those cars should be streaming
out again, now that so many dot-coms are splattered across the windshield of the
recession rolling through here at 400 megahertz. In fact, you can separate the
dot-come-latelys from Valley old-timers by how they react to gloomy news about
earnings shortfalls and layoffs. Newcomers: "Oh no! I’ve missed my chance
to retire by 30." Old-timers: "Maybe now we’ll finally get some
relief from the @#$%*&% traffic."

Vernetti is among a number of locals who have told me her commute nightmares
peaked a few months ago and things are looking up. Part of her rationale for
believing that also comes from recruiting young hotshot job candidates.
"People’s appetite to commute long distances has fallen in direct
proportion to Nasdaq," she reports. "It’s like ‘If I’m not gonna
make a gazillion dollars, I’m not driving to Timbuktu.’" Not wanting to
be named an accomplice to a vehicular felony (Ack!), I never argue with anybody
calling me from a traffic jam. But when Vernetti told me this, I hung up and
thought: Is a recession the time to get even pickier about where you’ll work?

In any event, though, I’m sorry to disappoint locals, but my investigations
yield little evidence that traffic is measurably reduced–much less proof that
the exodus has commenced. For one thing, Officer Steve Oreglia of the California
Highway Patrol pointed me to the sobering view from the hills along the Valley’s
eastern border. A bumper-to-bumper parade extends east of here on Highway 680
for 30 to 50 miles some days during commute hours. "Because of the cost of
living, a lot of people are moving to the Central Valley. You can get a nice
home there for $225,000. But you only have one interchange to get back
here," he says. If traffic seems lighter, in general, he says it’s
probably just the spring arrival of longer daylight, fewer accident-prompting
storms, and school breaks. A bunch of new road projects are about to exacerbate
travel even more.

I worry most about those Central Valley commuters. I don’t think they’re
after a gazillion dollars like the young hotshots. They brave their exhausting
commutes to try to grab something resembling a comfortable middle-class life and
yard for the kids at affordable prices. If their Valley jobs disappear, the
mostly agricultural and bedroom communities in which they’ve settled won’t
be able to employ them. They may be finding themselves in a whole new traffic
jam–on the road to the unemployment office.

By Joan O’C Hamilton
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