Those Mighty Mini-Dots

I was afraid it would come to this–just not so soon. Suddenly, the World
Wide Web is looking like the Land of the Giants. Check out Nielsen/NetRatings’
list of the 15 most-visited Web sites over the holidays: Online Goliath
Amazon.com leads the way, with the help of partner Toys ‘R’ Us –a team
that may well hasten the demise of the No. 2 site, troubled eToys. Ten other
sites are run by physical-world megachains such as Barnes & Noble and
Wal-Mart Stores. A few years ago, who would have thought cyberspace would look
so much like suburbia?

Yet there’s more than meets the eye if you click past the familiar bland
names–I mean brand names. Tens of thousands of small businesses you’ve never
heard of are quietly making a go of it online, providing welcome relief from the
big brands. And despite continuing consolidation online, I think the best of
these mini-dots will thrive.

Why? Partly because the Net continues to give even the little guys
unprecedented opportunity to cut costs and reach new customers. The
Florida-based owners of the online antiques emporium eGalleriaMall.com, for
instance, saved 90% on overhead by closing their physical stores and selling
exclusively online. Says co-owner Joan Valente: “Now, with the Internet, we
wait for the world to come to us.’’ That it does, to the tune of $100,000 in
sales per month, which Valente expects to double next year. But mostly these
small businesses thrive because they’re avoiding the mistakes of their big
brothers. For one, since they’re often operated by folks who already run small
businesses in the physical world, they don’t need multimillion-dollar portal
deals to reach customers. ElectricShaver.com, for instance, was started in 1995
by Gary Burns, the tech-savvy son of the owner of Electric Shaver Service, a
62-year-old store in Nebraska. This no-frills site, which got started simply by
registering the right Web site name early on, sent me replacement parts that I
couldn’t find easily in my area. That led me to take a chance on the company’s
repair service–which fixed a job botched by a local shop. I’m not the only
one who’s sold on Electric Shaver: Burns says 90% of the company’s nearly $1
million in revenue is now from the Web.

Other mini-dots knew not to get too big for their britches. They’re focused
on narrow niches they know really well, allowing them to provide intensely
personal service.

Stethoscopes4u.com, for instance, is operated part-time by Joseph A Rybicki,
a nurse anesthetist in New Jersey. Call up his 800 number and you’ll get
Rybicki himself, who can tell you which stethoscope can detect your baby-to-be’s
heartbeat in the womb. Says Andrew Beebe, chairman of the small-business
services site Bigstep.com: “The personal touch is what will make them
succeed.’’

Of course, most traditional small businesses fail, and many of those online
will, too. But surprisingly, it probably won’t be because the big guys stomped
them. Indeed, some of the online giants are their biggest boosters. eBay’s
auction site, for instance, has helped tens of thousands of people create online
businesses selling everything from printer cartridges to Beanie Babies. Amazon
and Yahoo! also run marketplaces and auction sites that make it easy for
individuals to start businesses and existing companies to get new customers
around the world. That’s one reason it appears that the Internet may well
prevent, not accelerate, the demise of many small businesses. According to
market researcher Keenan Vision, the 70,000 US e-merchants in 1999 will balloon
to 525,000 this year and 2.6 million in 2004–or almost a third of all small
businesses.

OK, so these sites don’t always look too slick. So their owners aren’t on
the cover of e.biz. So they don’t earn a ton of money or make venture
capitalists and investment banks even richer. So what? By making a living and
doing a great job for customers, they’re showing the big guys what really
matters.

By ROBERT D HOF
in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Divine overhaul

Some of the cash-rich, market-cap-poor companies are taking the opposite
approach. Realizing their original business plans were failures, they’ve done
180-degree turns and overhauled their strategies. Divine interVentures, for
example, went public as an incubator and started up more than 50 companies. In
February, with its stock market value lower than the $190 million in cash on its
balance sheet, Divine announced plans to remake itself into a software company–CEO
Andrew Filipowski’s area of expertise. It even changed its name to Divine. The
moves have helped a little: The stock of the Chicago outfit has climbed from its
low of $1 a share to $1.69, although that’s still well off the $9 a share at
which the company went public last July.

In December, the California company, Ventro, closed two of its online
business-to-business marketplaces–the Chemdex market that allowed companies to
buy and sell chemicals on the Net and the Promedix market for medical supplies.
Ventro then said it would change its focus to helping other companies build
marketplace sites. So far, they haven’t convinced investors that its new plan
is any more viable than its last one. Its market capitalization is still only
$50 million, even though it has a treasure trove of $235 million on its balance
sheet.

Free Cash? It’s
Going Fast

Some
Internet companies may look like bargains because the entire company is
valued at less than the cash it has on its balance sheet. But don’t
expect a rash of takeovers. Many companies are burning cash so fast that
the excess probably won’t last long. Here are a few examples:

COMPANY

MARKET
CAPITALIZATION

CASH

DIFFERENCE
Ventro

50.4

235.1

184.7

NetZero

101.5

217.4

115.9

NBC
Internet

124

230

106

Onvia.com

57

159.1

102.1

MyPoints.com

44.9

129.2

84.3

Webvan
Group

132.5

211.8

79.3

Drugstore.com

80.4

129.8

49.4

Quokka
Sports

7.9

50

42.1

Autobytel.com

40.7

81.9

41.2

IVillage

38.1

48.9

10.8

(All
figures are in $ millions.)

Data: Standard & Poor’s

Then there are those companies that are sticking to their guns. They simply
think the stock market is unfairly punishing them and, if they perform well,
their stocks will recover. Consider Neupert at Drugstore.com. "We’ve made
a lot of changes in the last six months–laid off a substantial part of the
workforce, dramatically reduced marketing plans, and reconstructed the business
model to break even," he says. That’s why he’s confident his business
will survive, even though its stock has dropped from $67.60 in 1999 to $1.31.

Autobytel is staying the course, too. The company, with $82 million in cash
and a $41 million market valuation, expects investors will become bullish once
it hits operating profitability in the third quarter. "We are well enough
established that we aren’t taking down marketing costs, nor are we
anticipating any large-scale layoffs," says CEO Mark Lorimer. "After
all, we’re going to post profits in a few (months)."

Despite the risks, cash can be a powerful lure for potential acquirers. If a
purchase can be completed quickly, the leftover cash can help fund the
operations of the surviving company. The women’s site iVillage acquired
Women.com Networks for stock in February, partly to get its hands on its
one-time rival’s $30 million in cash. The two sites combined some operations
to reduce expenses and now should have plenty of money to make it to the third
quarter when the business is expected to begin generating cash. "The deal
that we cut with Women.com makes sure that we have enough dollars for a rainy
day," says iVillage CEO Douglas McCormick.

There may yet be a handful of deals like McCormick’s in the wings. But it’s
a treacherous market these days and potential acquirers will have to weigh the
risks carefully–before moving licketysplit. The free cash is disappearing
fast.

Pallavi Gogoi–BusinessWeek

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