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Back To Basics
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
Feb 4th 2000

By Brent Holliday

“Get back,
 Get back,
Get back to where you once belonged.” – The Beatles, Get Back

Amazon.com reported ever widening losses today ($185 MM).  But revenue shot up to $676 MM last quarter, 3X last year’s holiday period.  In after market trading, the stock has gone, are you ready for this,… up.  {Sigh}  At first blush, the gigantic jump in revenue is impressive.  But any retailer knows that revenue is not the important number.  It’s the margins that you make on the sale.  Then throw in your S,G & A and hope your profit is still positive.  Jeff Bezos knows this.  That’s why he laid off 200 people this week.  And he vowed to stop the red ink.  Jeff is getting back to basics, because the market should start to pummel him if he doesn’t start making money.

Value America and Beyond.com fired staff and announced major restructuring and re-positioning this month.  Buy.com, the retailer that sells below cost is now allowing prices to creep back up on all but the hottest items.  Well, duh.  Your neighbourhood Safeway has been selling milk cheaper (near or at a loss) than the 7/11 to get you into their store to buy other higher margin goods.  And they have been doing this for 50 years.  Holy new economy, Batman, the on-line retailers are getting back to basics!

The dotcoms are suddenly ice cold in the IPO market and VCs are less and less inclined to fund Golfballs.com {oops, sorry, someone funded that in early January}.  The bloom is off the tulips.  Time to get back to a workable business model and a predictable revenue model.  Don’t get me wrong, the first movers in the on-line retailing space made a fortune in the stock market and deservedly so.  They staked their claim and branded the 50 MM or so of us that used the Net before 1999.  And, they will undoubtedly find the right model to make vast profits in the future.  But they will have to get back to basics.

The initial run up of consumer focused e-commerce on the Net has produced new business and revenue models from the ridiculous to the sublime to the familiar.  We’ve had advertising-supported content, affiliate marketing, the rise of the various auction types, the group buying and name your price models, the aforementioned sell at less than cost and many, many more.  There has been a huge new world opened to all of us with seemingly unlimited potential.  But as the B2C e-commerce industry matures, the reality is that, whatever your funky method, it has to make money.

In start-up world, there is a strong movement to sane business propositions again.  Despite the jaw-dropping amount of capital being raised for VC in the US and Canada, there is no mad rush to fund companies that say, “We have a team and an idea.  The business model is evolving.  We’ll figure it out as we go.”  Eighteen months ago in the e-commerce space, it was de rigeur.

I mean, you would expect that if there was an oversupply of capital that increasingly dumb deals with no hope of success would be funded.  And there will be a few stinkers. But, the sophistication of the investors and the entrepreneurs has increased along with the supply of capital.  Very smart entrepreneurs with great ideas are not getting funded in a microsecond as you may think (For more on what to do when you are turned away by an investor, see my last column).

What are the investors looking for now?  The discriminating investor, with an eye on an increasingly unstable public market, might want to see a well thought out revenue model right out of the gate for any form of e-commerce deal.  Consumers, being much more fickle and much more expensive to get and keep loyal, are becoming an anathema.  That’s why B2B has been hot for the past 8 months or so.  Businesses, post Y2K, are much better and more reliable customers.  So, if you have an idea for selling to businesses or helping businesses sell to each other or helping businesses buy their supplies, you will have an easier time demonstrating a workable revenue model to an investor. 

The arms dealers are hot again.  The e-commerce build out has rekindled the idea of making a piece of software (or piecing together other pieces to form a complete solution) and selling it to companies to make them more productive.  A couple of years ago, if you said enterprise software or middleware to a VC, they would run screaming.  Tools were not hot and the new Net language, Java was fizzling.  Now, say XML and they start shaking their pen to see if the ink is ready to flow.  Why?  Yeah, you know, back to basics.  If I make a toolkit or pieces of code that make your company more productive (there’s that selling to business thing again) then you will pay me for it.  There is a revenue model.

Bandwidth enhancing hardware and software is red hot.  Yup, still is.  The build out of the Net ain’t anywhere near over yet.  We even have a whole new world opening up with wireless, fixed and mobile.  We all want it faster and we want it cheaper.  Imagine going back to 1994 and looking at the world with a slightly more thoughtful eye once again.  The Internet was just catching on to the mainstream.  It had every indication of being absolutely huge.  None of the new business models had been dreamed up yet and more people thought it was interactive TV’s precursor.  But one thing was for sure, the guys building the pipes and the boxes at the end of those pipes were going to make a fortune, no matter what was carried over the Internet.  Seems so easy in hindsight.  “Sell the house Ethel, we’re buying Cisco shares!”  If Warren Buffet’s so smart, why didn’t he… oh, never mind.

Let’s recap.  The subtle shift for investors these days is back to companies that know how to create revenue models that make economically rational sense.  Having said that, there are still nascent industries, like wireless data, that haven’t sorted through all of the possible business models yet.  You could throw money at a momentum building company in this space, out to create a brand, and hope that it figures out the right model.  There’s still time.  But, eventually, that window will close too.

There will always be opportunities in maturing industries to make money.  Clever people will come up with quantum leaps in technology to serve existing marketspaces.  The “follower” strategy can make entrepreneurs and investors a fortune if they execute properly and leverage their “unique” advantage over the incumbents and take away market share.  My point today is that investors may need a lot more convincing to enter a market that is maturing vs. one that is wide open.  Make sure that you understand these dynamics as it relates to your business proposal.  You might need to reassure the VC that you are getting back to basics.


Random Thoughts –

- The BC Early Stage Technology Index (BC ESTI) is at 8 out of 10 today.  I remain quite bullish on the early stage entrepreneurs around here, especially given the recent swath of “optionairres” (as Peter Ladner put it) at Pivotal and Creo.  February means that all the year end bonus cheques are cashed and people are looking for new adventures.  Canada is becoming world reknowned for its wireless technology and international investors are arriving to see what the next Sierra Wireless or 724 Solution might be.  I am not looking forward to the budget of Paul Martin.  This could knock my ESTI down significantly if there is no serious tax relief. 

Letters From Last Column:

Hi Brent,

I've been paying indirect attention to the VC/Angel/raising-money-in-general situation both because I've some personal projects that I want to do and also because the more I know about everything the less likely I'll be tripped.

Your column really highlights the difference between the creator dreaming of the project the company wants to make and the financial structure that's needed to make the dream happen.  Too often, people get

terrific ideas and think/hope they've thought of it first (this has happened to me far too often), then expect money people to jump aboard because of the emotion generated by a terrific idea; the thought of being responsible for someone's investment, professional or private, isn't part of the equation most of the time and should be.

The other half of this is that, once again, the government is supposed to save us all from our folly....which is ironic, given that the government's house is far from orderly and is about ten years behind the rest of society (if not more).

There's a huge amount of emotional/psychological madness today in maintaining a dream through the tunnel of raising capital, especially in the IT sector, where conditions change weekly (if not daily).  Keeping up with THAT will likely require hospitalization by the end of the journey.

While I understand the need to have solid management/financial structuring for attracting the attention of people who'll (hopefully) invest, there's an equally difficult struggle in maintaining a dream - semi-intact - over the course of raising that funding....which assumes that the same people are doing the  creative/financing.

Looking forward to your next column,

Roger Brown



Raising money is the hardest thing you can do in business.  You quickly learn that people may show interest, but it doesn’t mean they will invest.  I’m acutely aware of the agony of waiting for an e-mail or a phone call just to show some progress.  How many times will you pencil someone in and then have your hopes dashed as they pull out late in the game.  It’s a roller coaster of highs and lows.  Doing it alone requires incredible emotional stability.  Doing it with a team requires that at least one of you be able to pull the others out of a funk or pull the others off the ceiling.  And everyone wants to give you advice.  You may become so discombobulated in incorporating everyone’s thoughts that your own dream becomes incoherent to others.  Keep the core dream the same and stick to your key messages.  Fine tuning will be needed, but major changes mid fund raising are usually fatal.  Great letter.

What Do You Think? Talk Back To Brent Holliday

Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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