Dot-com survivors downunder

Has it really been six years since the world’s first wave of internet entrepreneurs fell through that plump cloud they’d conjured in the sky, taking with them the turgid hopes of our fledgling new economy? It’s been six years peppered with hard luck stories, investor reluctance and, lately, cautious hope rekindled. Australian internet startups were in the thick of it back then. The survivors emerged with slightly bloodied noses and wisdom far beyond their years.

Remember the late nineties, when all that dot-com hot air became ensnared in the distended membrane of our false expectations? With 20-20 hindsight, it was inevitable that the tech bubble would burst – almost six years ago to the day. But back then, it seemed that all you needed was a website and a business plan and you were well on your way to securing a lucrative IPO. The hype began in Silicon Valley and spread cross the developed world like a modern-day gold rush.

Of course, at its heart, the internet is nothing more than a technology – a communications tool linking people together more efficiently than anything that preceded it. But for a brief time in the late ’90s, the World Wide Web seemed to take on a character and momentum of its own; a pied piper skipping off into the new millennium with scores of entranced entrepreneurs in tow.

Back in November, 23 of Australia’s internet luminaries gathered for events in Sydney and Melbourne to compare scar tissue and reflect on the internet’s rollercoaster first decade. The forums, entitled ‘Rewind Fast Forward’ (organised by the tech savvy people behind Slattery’s IT Watch), offered a uniquely Australian take on the giddying dot-com journey, from boom to bust to the tentative optimism of today.

The Melbourne event, held high up in the Rialto Tower, featured such big names as David Spence (Unwired), Domenic Carosa (destra Corporation), Sandra Davey (AIMIA), David Gibbs (eChoice), Rob Fitzpatrick (Wishlist Holdings) and Simon Smith (eBay). All expressed strong points of view, each based on their unique experiences in the industry, and few were in any mood to pull their punches.

Martin Hosking, a co-founder of the one-time jewel in Australia’s dot-com crown, LookSmart, launched straight in. “I’m in a state of almost unrelieved gloom, verging on despair,” he confided to the 100-plus audience. Hosking’s melancholy was, of course, coloured by the decline of LookSmart’s Nasdaq market capitalisation, which in the early day of 2000 was valued in the billions.

“Australian venture capital is dead,” Hosking continued, “and I can’t think of a truly successful Australian company from Internet 1.0 that succeeded on a global basis. However, my despair is not total. The tyranny of distance is receding and Australia is positioned where it can succeed as the engine of the local economy in Southeast Asia.”

These were passionate words indeed, and Hosking seemed to take veiled pleasure in the way they rippled through the room.

MY HORSE FOR A KINGDOM

The defining characteristic of the dot-com bubble was the absurd amounts of money being poured into immature and ill-conceived businesses. People were putting up “good money for good names”, as the BBC’s Richard Quest put it back in April 2000.

When the average person recalls the dot-com boom and bust, they think Silicon Valley and New York and for good reason. The outstanding fly-on-the-wall documentary ‘Startup.com’ begins with Kaleil Tuzman leaving his comfortable job at Goldman Sachs to join school friend Tom Herman in launching GovWorks.com, a website linking citizens to local government services. Over the course of the movie (fortuitously filmed from early 1999 to just after the bust in April 2000), GovWorks swells from two employees to 30 in August, 70 in October and 233 the following April, then down to … well, none. By the end they have raised some US$75 million in three rounds of funding and burned through pretty much all of it.

The US was far and away the world’s most tumultuous dot-com market. The highs were so much higher, the cheques so much fatter, the hype far more contagious than anywhere else. And, of course, when the bubble burst, there was so much further to fall.

The Australian dot-com market (as with others around the world) shared many characteristics with the US. After all, it was the same bubble. But as you can see from figures 1 and 2, the crash of April 2000 appeared as a mere blip on our All Ordinaries index compared with the breathtaking freefall seen on the US tech-heavy Nasdaq index. The Australian market was insulated from greater carnage thanks to the prevalence of the dependable primary industries sector. But this doesn’t mean that our dot-com entrepreneurs and investors didn’t feel the pinch when things turned sour.

TIMING IS EVERYTHING

Domenic Carosa and his sister Anna formed destra Corporation (then know as Sprint) in 1993, selling video games. They were early to grasp the commercial potential of the internet (even though Domenic is adamant that no one really knew what it meant). By 1998, destra ran a number of the leading entertainment websites in the country (including MP3.com.au for unsigned musicians), and in February 1999 signed a deal to buy mining shell, Richfield Resources, and ‘reverse’ list on the Australian Stock Exchange. The process dragged on far longer than expected, but the listing finally went through … a matter of hours before the crash on Wall Street.

Domenic Carosa (destra Corporation) Photography: John Warkentin

“Whether it was synchronicity or fate, whatever you want to call it, we closed our issue on the Friday (Australian time). About 10 hours later – Friday US time (Saturday our time) – the US market crashed,” says Domenic Carosa, eyes wide. “If we had been a day later, it wouldn’t have happened. Someone upstairs must have been saying, ‘Let these guys go through because they have something to prove.'”

Whether it was divine intervention or pure luck, destra listed (then Ehyou.com) by the skin of its teeth. Over the course of 2000, excitement remained and a market rally in September gave cause for hope that the dive in April had only been a modest correction. However, by the end of the year it became evident that things were not improving. In January 2001, the Carosas made the decision to sack half of their team of 60.

“It was one of the toughest things I’ve ever had to do in my life,” says Domenic. “We brought good people on with the positive intent to grow the company with them, and then we had to turn around and tell them that things haven’t worked out and we have to let you go.”

Anna Carosa agrees it was difficult, but says it was the only way to save the company. “Dom and I were paying salaries with our credit cards at one stage. We had our parent’s house on mortgage. It was tough. You’d wake up in the morning thinking, ‘Why am I actually doing this. How am I going to get through today?'”

But they did, by complimenting their digital music passion with a virtual web hosting business, which rose to become the second largest in Australia within 12 months. On the back of stronger revenues, they re-launched destra Music almost two years ago with the largest digital music collection in Australia.

The Carosas remain majority shareholder in destra Corporation, but Anna now runs her own mail-order and online fashion accessories label, MsAnna. Reflecting on the tech wreck, she recalls that the writing was on the wall, but nobody could stop it tumbling.

“When the mums and dads start investing in whatever the hype stocks of the moment are – at that time it was dot-coms – they are looking to buy in, get out quickly and make some money. That’s what happened. They didn’t take the long-term view or do their research. So a correction happened, and the industry has been forced to consolidate. That consolidation with the big players will continue for the next two to three years, and then there will be more of a level playing field for everyone.”

QUESTIONS AND ANSWERS

Australian dot-com success story Wotif.com began life in March 2000, just as the storm clouds were gathering. Cofounder and CEO Graeme Wood did not run the gauntlet of raising venture capital in such an inclement atmosphere, instead offering the investment opportunity to three associates, who formed Wotif’s board.

Graeme Wood (Wotif) Photography: Steven Pam

Wood came up with the idea for a website to host last minute distress rates for hotel rooms after speaking to a hotelier who wanted to be able to reach the market with his vacant rooms at discounted rates due to late cancellations. Wood thought the internet was the perfect medium to deliver this. He set about quietly planning Wotif and launched it at the peak of dotcom hysteria.

“The market was very confused,” says Wood. “A lot of investor money was going into a lot of silly ideas. It just had all the hallmarks of a bubble. When you sat back and looked at some of the ideas, the business models were just wrong.”

Wotif has inspired many imitators, but none have replicated its model of giving the hoteliers complete control over pricing and placement of inventory. Wood believes Wotif’s success grew directly from this astute business model.

“We thought very hard about the business model that we were working on and felt that it was solid. But it wasn’t until six to 12 months later that we realised we were really on to something – based on the reaction we were getting from the consumer market.”

Wotif has certainly been recognised for its success, being ranked Australia’s best ‘Travel – Destinations and Accommodation’ website for the past two years by internet intelligence service Hitwise. And late last year, Wood was awarded the national Ernst & Young Entrepreneur of the Year Award in the Technology, Communications, E-commerce and Life Sciences category. The judges pointed specifically to Wotif’s “impressive business model and outstanding financial returns”. In short, Wotif is everything that the vast majority of dot-com casualties weren’t – a real business.

GETTING IT RIGHT THE FIRST TIME

The 1990s are often referred to as the decade of self-absorption and hubris. In this context, the dot-com bubble is perceived as the quintessential manifestation of nineties materialism and excess.

Certainly the financial community fuelled it all with loads of cash, which in turn shifted the emphasis to growth rather than profits. Domenic Carosa remembers the prevailing attitude that “if you were burning cash it must have meant that you were gathering market share like crazy”. This was exposed as false in April 2000, stripping many dot-com emperors of their clothes. The survivors were companies that had been churning out profits considered amusingly modest until then.

Andrew Burge (iSUBSCRIBE)

Australian entrepreneur Andrew Burge went live with his one-stop-shop magazine subscription website iSUBSCRIBE in the market malaise of late 2000. There was a gap in the market, and having made money through the outdoor advertising business that he set up to capitalise on the Sydney Olympics, Burge admits to being seduced by everyone else’s dot-com bullishness.

“I suppose, like most people, I got carried away with the whole media hype about it,” says Burge. “I couldn’t believe the dollars that were flying around. I thought, ‘I’ve got to get a piece of this.’ People were becoming millionaires overnight… and I had a bit of time on my hands.”

Burge began as a one-man operation. A week after he leased an office, the market crashed. But he claims that the crash was the best thing to happen to his business and to the dot-com sector in general. He funded iSUBSCRIBE himself rather than rushing out to raise capital. This forced him to keep costs to a minimum and meant that the business could only grow when profits were available for reinvestment – a fairly conventional financial imperative.

“I believed it was a very sound concept and a business that you could run at a very lean rate for a long period of time until the market picked up,” says Burge. “The only outgoings for the first nine months were on getting the site built. I didn’t pay myself a wage and there was no advertising because we weren’t live. Throughout the first year I had one staff member and the only advertising we did was search engine optimisation. Then, as the sales came in, we could put that money back into the business to grow it.”

In recent times, iSUBSCRIBE has used its solid foundations to expand to New Zealand, the US and UK, making it the only global online subscription agency. In addition, the company has broadened its offerings to include PayTV, DVD rentals and a book club.

Burge scoffs at talk of another dot-com bubble on the horizon, saying too many investors learnt their lesson the hard way.

“We’re seeing a resurgence in investment and acquisitions by big corporations. But the difference between now and the nineties is that today, people are only investing in real businesses. I think the dot-com companies that survived through the downtime are successful businesses that are making profit and offering a value-added service.”

INVENTION’S MOTHER

One Aussie web veteran who knows all about the realities of building a real web business is David Gibbs, co-founder of pioneering financial services dot-com, eChoice.

Gibbs caught a glimpse of the internet’s commercial potential while consulting for McKinsey & Co (with LookSmart founder, Evan Thornley) in Malaysia’s multimedia super-corridor in the mid-nineties. He decided that he wanted to be a part of it and one of the business plans he wrote was for eChoice, a website that conducted a social dialogue with prospective home loan buyers and passed the leads on to lending institutions.

According to Gibbs, one of the main reasons why Allen & Buckeridge invested in eChoice was because it was obviously a real, measurable business “rather than the pie-in-the-sky business plans” that were beginning to emerge.

Gibbs was grappling with eChoice’s revenue difficulties long before the crash held the mirror up to most other dot-com entrepreneurs. From the moment it launched in the last days of 1997, the company was inundated with home loan enquiries, but the conversion rate on the lender’s end was a measly 0.5 percent. The company was raising more capital when the crash struck, leading to a slightly disappointing final deal. But Gibbs says this forced them to innovate to turn things around.

“We raised with the board the possibility of hiring a few mobile lenders in-house. The board turned around and said, ‘You’re a dot-com business. We have no interests in adding costs of that nature to the business and you have no skills to run a physical sales force.’ So we said, ‘What if we told you that our conversion rate of 0.5 percent would leap to 25 percent?’ They laughed and said we could never hit that. So I said, ‘Well the four we hired two months ago are doing that. Can we keep them?'”

eChoice gradually built a successful sales force of its own and turned things around. Gibbs is now heading up an eChoice spin-off company, dSales (Direct Sales), which is applying the eChoice model to sell through the internet rather than responding to people who want to buy things.

“In retrospect,” says Gibbs, “had someone told me how hard the journey was going to be, would I have committed in the first place? No way. But we did end up building, on the eChoice side, a real and valuable business.”

A BIGGER PIE

When corporate media heavyweights, such as News Corp and PBL, are investing billions in online, you know the sector is becoming both profitable and mainstream. One only needs to glance at the rapid uptake of broadband and the dramatic migration to online advertising to grasp that the dot-com promise is finally being realised – this time through sustainable businesses.

Six years on, the lessons of the tech wreck are clear. There’s no such thing as money for nothing. The temptation in the 1990s was that because dot-com companies held tenancy in cyberspace, they required a new set of rules. It was a new frontier, and like the nineteenth century land grabs in the American west, those who did more grabbing than building were eventually exposed.

If the insights shared at the ‘Rewind Fast Forward’ forum were a reliable guide, Australia’s dot-com survivors may not be richer than they were six years ago. But they are wiser and more astute business people, and the business world is much better for it.

Paul Ryan is editor of Australian Anthill.