Part 2: Funding, crashing and market capitalization

Are VC's still funding dot com companies?
My observation is that VCs are now in triage mode. They are deciding which of their companies are the strongest, and will receive continued funding, and which need to be closed down. Since the IPO market has been closed for some time to most startups, venture capitalists are trying to guess which kinds of companies will appeal to IPO investors when the IPO market opens up again.

VCs are also trying to figure out how long it is likely to be before that time in order to calculate how much money the survivors will need until the IPO window reopens. So the money is going to the fraction of portfolio companies that have already been funded initially. There is some seed funding going on and the quality of the businesses receiving that funding has gone up significantly.

And it's basically now very difficult to get funding if you're a start-up?
The reality is that it is more difficult than ever for a company to gain first round financing from a VC. In order to stand a chance of getting VC funding for a startup, a firm should be run by executives with prior successful startup experience, targeting a huge market, with customers who are willing to pay a high price to obtain the startups' uniquely valuable product or service.

If the startup is also profitable, or likely to become profitable in the next six months, it should have less difficulty obtaining financing. As in other aspects of life, the companies with the greatest chance of obtaining VC funding are the ones that need that funding the least.

Why should companies worry about profits not market share?
Companies worry about maximizing their performance on the variable that will get them the money they need to continue their operations and to maximize their stock price. Before the dot-com crash, investors rewarded companies for achieving dominant market share so companies worried about maximizing market share.

After the crash, investors abandoned companies that focused on market share at the expense of profitability, leaving them to fend for themselves. Simply put, companies that cannot finance their operations through profits will not attract investors and are thus likely to close up. Companies that generate profits from their own operations do not need investors.

When the e-commerce crash rebounds, what business models will be left standing and how can they continue to survive?
The e-commerce crash will not rebound. At least 90% of the dot-coms will go out of business. The companies left standing will be the one or two that were able to generate profits sufficient to finance their growth. The real beneficiaries of the first wave of e-commerce, the dot-com boom, will be the traditional companies that have found ways to use the Internet to alter the way they work in such a way that they enhance the value proposition for their stakeholders.

This means, for example that the survivors will be the ones that can use the Internet to provide customers a more valuable product or service at a lower price.

Do you still believe in the economic benefits of e-commerce?
I still believe in the economic benefits of e-commerce, however, I think it could be a few years before companies are willing to look at e-commerce in a rational way (instead of swinging from fear of losing out to dot-coms to fear of running out of cash as we are now). When executives look at e-commerce as a way to enhance the value created between a firm and its stakeholders (e.g. customers, suppliers, employees and shareholders) then the benefits of e-commerce can be realized.

What should keep every CEO awake at night in regard to the Web and their business?
Every CEO should stay up at night worrying about how they can integrate the Web into their firms' business activities in a way that creates competitively superior value for stakeholders such as customers, suppliers, employees, and shareholders.

Business is an ongoing battle among competitors to attract and retain the best customers, suppliers, employees and shareholders. Firms that offer the best value proposition to these stakeholders on an ongoing basis will create firms with the highest market capitalization. CEOs who lead such firms will reap the rewards.