B2C, B2B, and what we learned from the dot com boom

New Perspectives on Innovation for Retailers and Banks
John Freeman, Helzel Professor of Entrepreneurship and Innovation, Haas School of Business, UC Berkeley
March 26, 2004
Summary: This was a look-back on the dot com bubble and an analysis of what venture capitalists are looking for in a startup company as opposed to what type of innovations corporations are good at. Key remark: “Retailing is as much theatre as it is commerce.”

John started by saying that, contrary to common perception, it’s not all over in the dot-com world: eBay, Amazon, Google are doing extremely well.
He then went on to discuss how to assess innovations, using a three-dimensional framework from Onset Ventures. The dimensions were market need (existing vs. new), type of product (new vs. faster-cheaper-better), and business model (known vs. unknown). VCs will never invest in something with an unknown business model. Unmet market needs demand training of the customer. Business model clarity is a big problem – it can be unclear, or it can conflict with the existing business model. For technology products or applications, success depends not only on the technology but on the enabling technology.
The VC sweet spot – where VCs are most likely to invest – is in something where there is an existing need, where the business model is clear, and where the application is new. The reason for that is because going down the learning curve helps the company – lower unit costs, service costs, etc. They are not looking for wild technology and unmet needs.
Having great technology is no guarantee of success – John gave an example of company with very cool and useful technology that is hard pressed to make it because the market needs, while numerous, are in small niches and dependent on the ability of other technology companies to come up with systems surrounding the technology.
The corporate sweet spot for investment is in something where there is an existing need and a faster-better-cheaper technology – large companies are better equipped to handle the execution risk.
John then went on to reflect on some of the retailing B2C and B2B startups.
The B2C dot.com startups had some chronic problems: The VCs were techies, not retailers – they had a tendency to herd behavior. Retail companies such as Pets.com and Webvan were not technology plays, so the people who analyzed them should have been retail experts, not techies. They just applied the wrong model. There was also a frequent belief in the inevitability of oligopoly, epitomized in the phrase “we will own this space.” Many of the startups did not understand that a lack of barriers to entry could not be helped by spending vast amounts of investor money on branding. Lastly, as order fulfillment problems became known, traditional retailers proved formidable competitors, also online. Amazon’s initial retail model, for instance, didn’t work – it turned out they had to own inventory in order to get the discounts and be able to fulfill orders quickly (plus, Barnes and Noble bought Ingram books, their most important suppliers).
John then gave some examples of companies that had problems according to the framework.

  • no business model: Hotmail.com, recruited 200,000 customers per week with no revenue model aside from banner ads, eventually sold it to MS who wanted to recruit people to msn.com.

  • order fulfillment problem: ToyTime.com, founded with 35m investment promising people they knew how do to order fulfillment. Ended up with the whole corporate staff flying to Ohio to staff the warehouse during Christmas. Bankruptcy in May 2001

The B2B startups had different problems – many of them were founded on the economist’s dream of the perfectly competitive market (such as Ariba), and as this came about, the margins on the products sold became very small – and so did the revenues of the market providers. One student commented that “The Internet is a buying tool, not a selling tool.”
When the Internet started, existing companies just didn’t know what to do with it. Williams-Sonoma CEO Harold Lester (who started the Lester Center for Innovation and Entrepreneurship) asked students in 1997 how many had bought something on the Internet – and found to his surprise that the whole class raised their hands. Students then educated him, and Williams-Sonoma spent about 2.5 years to understand how to use it – now they are very good at it. Their business requires style – and a challenge was how to provide stylishness over the web?
One comment by John – “Retailing is as much theater as it is commerce.” – took the students by surprise. Retailing has very little to do with theater in Norway, perhaps it should.
John also discussed the social consequences of the Internet: It allows very small business access to a large market, through eBay (as well as excess inventory). Helping this is access to cheap web design, as well as ability to search for information – and a problem with that is that information tends to be wide but shallow on the net.