Lessons in Mid-Crash

Doc takes a moment to stop and observe the technology-sector crunch from inside the trenches.

A few years ago I did a lot of work in France. Like most countries outside North America, drivers in France are relatively aggressive. In American terms, they tend to tailgate—as if their cars were sustained by the exhaust fumes of the cars they follow. Multiple-car crashes are not uncommon.

One day my friend Lief, a Swedish dude with a very dry sense of humor, came into a meeting and said, “Did you hear how many cars were involved in the big accident yesterday?”

“No”, we answered.

“Guess”, he said.

“Ten?” one of us replied.

Lief shook his head and made a thumbs-up gesture.

“Thirty?”

His thumb poked upward.

“Sixty?”

Still upward.

“A hundred?”

“Two hundred?”

The thumb stayed up.

“We give up.”

“Two hundred thirty-eight”, he replied.

“Was anybody killed?”

“Nope.”

This story comes to mind when I think about the dot-com crash. I'd guess right now (I'm writing this in late June 2001), we're about 180 cars into this thing. It's now obvious that the crashing will continue, right up to the point when every public- and venture-funded technology company that was never a real business ceases attempting to become one. In most cases, that will happen when they finish burning their investors' money—after crashing their investors' cars while smoking one anothers' exhaust.

When the “internet economy” was still a high-speed traffic jam somewhere back in 1999, I was at a party in San Francisco. Most of the folks there were young, hip “entrepreneurs”. Lots of all-black outfits, spiky haircuts, goatees and face jewelry. I fell into conversation with one of these guys—a smart, eager young chap I'd met at other gatherings. He was on his second or third startup and eagerly evangelizing his new company's “mission” with a stream of buzzwords.

“What does your company do, exactly?” I asked.

“We're an arms merchant to the portals industry”, he replied.

When I pressed him for more details (How are portals an industry? What kind of arms are you selling?), I got more buzzwords back. Finally, I asked a rude question. “How are sales?”

“They're great. We just closed our second round of financing.”

Thus I was delivered an epiphany: every company has two markets—one for its goods and services, and one for itself—and the latter had overcome the former. We actually thought selling companies to investors was a real business model. We lost sight of the plain fact that any company that needs to articulate a business model doesn't really have one.

This idea—making money by selling a potential hit company concept to investors—had a familiar sound to it. After all, VCs seemed to be looking for big IPO scores the way entertainment companies look for blockbusters. VC-funded companies had more in common with movies and Broadway plays than with real enterprises that worked toward profits and persistence from day one. In the parlance of the entertainment biz, these companies were really just projects.

In fact, the dot-com business model was scripted a quarter century earlier by Mel Brooks as the premise of his first hit movie, The Producers, which is now revived as a hit Broadway musical. Coincidence? I don't think so. Check out this dialogue between the two main characters, down-and-out Broadway producer Max Bialystock and his accountant Neil Bloom:

“How can a producer make more money with a flop than he could with a hit?”

“It's simply a matter of creative accounting...you simply raise more money than you need. If you were really a bald criminal, you could have raised a million.”

“But the play cost nearly $60,000 to produce. You know how long it had run? One night!”

“You see? If you...raised a million dollars you could have put on a $60,000 flop and kept the rest.”

“But what if the play was a hit?”

“Then you'd go to jail. Once the play was a hit you'd have to pay off all the backers, and with so many backers there would never be enough profits to go around. Get it?”

“So in order for this scheme to work, we have to find a sure-fire flop!”

Of course, nobody goes into business intending to flop. But plenty of people went into dot-com flops intending both to get rich quick and live comfortably off the investment proceeds in the meantime. And those proceeds were enormous. At its peak in early 2000, VCs were spending two dozen billion dollars on a per-annum basis in Silicon Valley alone. Over half the world's countries have smaller gross domestic products. Lots of that money went to providing upper-class lifestyles to hot young e-xecutives. Just ask the BMW dealers in Silicon Valley.

But why was the rush so big? Because dumb investors were willing to take all the risk. That's what makes the Bialystock scheme work. In a normal business startup, the risk is shared by investor and entrepreneur.

Think about it. If you want to start a restaurant or a small manufacturing company, you go to the bank and get a loan collateralized by very real assets belonging to you or somebody willing to take the risk for you (like, say, your friendly Godfather). But if you want to start CoApathetic.com, you get your VCs and other investors to take all the risk. Play it right and all you expose are your time and reputation. Yes, your holdings in the company are exposed, too; but the company isn't really a company in the traditional sense. Again, it's a project: a false-front store on the main street of a gold-rush town. Your main job is to make IPO money for your backers. So you attract attention by publicly burning the millions of dollars your backers put up. You buy other companies, rent out cool office space in SOMA, hire a chief marketing officer to put big bucks into “branding”--or whatever it takes to tailgate with everybody else in that high-speed, dot-com traffic jam. (To mix a few metaphors I can't resist.)

Last week I met an interesting dude at our own garage sale. In his own words he had just finished “failing” his company. The sad thing, he said, was that his company actually had good customers—lots of them, and big ones, too—and a good idea (he told me what it was, and I agreed). His problem was that the software didn't work. And the reason it didn't work was that he wasn't a programmer. He had jobbed out the labor. “I learned you can't outsource your core competency”, he said. In the absence of that competency, he shouldn't have been in the business. “You can't get somebody else to breathe for you.” That was his first lesson.

His second was discovering who to blame for the dot-com crash. “I blame marketing”, he said. Why? Because it's so disconnected from reality—from what customers are actually doing in the real world. Always has been, always will be. Marketing is so delusional, and so good at producing delusions, that it tempted thousands of investors and investees to speed their way into a high-speed traffic jam of companies rushing to make money by selling advertising, of all things (like TV! like billboards!) on the Web—in spite of the fact that there is negative demand for the stuff, as demonstrated by the MUTE button on every remote control sold with every consumer electronic device that carries advertising. Worse, it fooled lots of people into thinking they could sell what the Net made free—especially the efficiencies that the Net itself began to produce before eager investors projected fantasies all over it.

But his third lesson was the one that really mattered. “The Net still changed everything”, he said. “In spite of all these failures and all this insanity, it's just fine.” Why? Because it's real, and its benefits are real. “The Net is the biggest and best thing that ever happened to business”, he said. “Even though you can't really sell it.”

Likewise, I submit that Linux is the biggest and best thing that ever happened to software, even though you can't really sell it. Like the Net (which is thick with Linux and other free and open forms of UNIX), it changes everything by giving us something with vast and far-reaching practical benefits. If your company does anything with software, there's a good chance you can put Linux to good work.

Maybe that's why the big companies that have fallen in love with Linux all went through their IPOs a long time ago.

Doc Searls is senior editor of Linux Journal and coauthor of The Cluetrain Manifesto. His next book will be Real Markets: What They Are and How They Work.

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Doc Searls is Senior Editor of Linux Journal

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