Contents |
Internet startups are viewed by many with a very cautious lens. Companies and individuals begin new businesses and services on the Internet every day. Reuters reported in 2002 that one in five dot-com companies became “dot-bombs�? (Elliott, 2005, p66).
During the 1990s, there was a massive Internet boom, where thousands of startups began yet never took off, and failed with massive losses. The survivors however became very successful, with companies such as Google Inc, eBay and Amazon.com leading examples of very successful startups. The craze has since slowed significantly, and more strategic and planned approaches are being developed.
The biggest issue for Internet startups is the high level of risk and failure. Professor Sea Jin Chang in his article Venture Capital Financing, Strategic Alliances, And The Initial Public Offerings Of Internet Startups identifies some key factors that affect Internet startups. These are:
An initial public offering (first sale of stock to the public) is a measure of success, yet many startups never reach this goal. This is due to the fact that there is a great amount of promise and risk involved with startups that have no “bricks and mortar�? type backing. Startups have a higher rate of failure than established firms because of the added uncertainty that already surrounds internet startups, doubled with the lack of legitimacy, or an established reputation.
Strategic alliances and the reputations of the venture-capital firm had a significant impact on the success of the initial public offering (Chang, 2004, p721). Companies that were backed by venture-capital firms with a higher IPO success rate enjoyed returns far higher than those with a lower success rate, suggesting investors look for venture-capital firms previous success rate before buying stock (Chang, 2004, p721).
There are also many legal risks. Elliot (2005, p67) identifies some being liabilities of web site hosts, internet service providers, manufacturers, privacy and a host of other potential traps. All of these are suggested to form part of the scepticism of many internet startups.
After all of the failures and loss of investments, there have been many insights into what makes a startup successful. Finkelstein (2001, p16) argues there are four main strategic elements a startup needs to be successful. These are customers, capabilities, internal consistency and competitive advantage.
For all businesses, customers are the heart-beat. Particularly for business-to-consumer businesses, it is essential for startups to develop and retain customers (Finkelstein, 2001, p16). Startups fall into the traps when they overspend and over estimate their profits, become too niche orientated (for example Kneehighsocks.com instead of Clothing.com) or underestimating customer acquisition costs (Finkelstein, 2001, p16). The buyer needs to be assured of two things before they purchase online, trust and experience (Finkelstien, 2001, p16). For this too happen, many organisational elements need to be put into place. Simple activities that sort the organisation of the Startup often do not happen, and therefore there are no buyers. Internal operations that will make the company run smoothly and cost efficiently need to fall into place before a customer will place trust into the system (Finkelstein, 2001, p17). Once these systems are in place, these systems must be consistent.
Competitors include not just other internet companies, but also bricks and mortar companies. Developing strong internal capabilities is essential. However if all other companies have similar strategies, then there is not much of a competitive advantage (Finkelstein, 2001, p17).
Chang, S. (2004) “Venture Capital Financing, Strategic Alliances, And The Initial Public Offerings Of Internet Startups�?, Journal of Business Venturing, vol.19, no.5, p721-741.
Elliot, P (2005) “Taking on the Internet�?, Rural Telecommunications, vol.24, Iss.2, p66-68.
Finkelstein, S (2001) “Internet startups: So why can’t they win?�? The Journal of Business Strategy, vol.22, Iss. 4, p16-22.
--SophieUhlhorn 16:31, 24 Oct 2005 (EST)
