Taking the Plunge

California CPA, Jan, 2001 by Lloyd Chartrand

What You Need to Know About Working With Internet Startups

DOT-COM SUCCESS IS not just about huge venture-capital backed companies, but encompasses millions of startup enterprises, which are developing new infrastructure, "enabling" technologies, and changing the way we live our lives. These new-economy enterprises need CPAs to assist them not only with their compliance requirements, but with their corporate finance, planning and implementation activities. However, if you don't have corporate finance and valuation experience, don't attempt to practice in this area; rather, make a corporate financial consultant part of your outside adviser team. The new economy offers great opportunity for CPAs, but before taking the plunge, you need to understand the playing field.

NO MORE EASY MONEY

Know this: The days of easy money are gone. Prior to April 2000, venture capitalists and investment bankers drove the Internet economy. The rush to initial public offering (IPO) was simple: you get a good team together, fund a business model, have an IPO and shift the risk of your flawed business model onto the unsuspecting public investor. This greed-driven process made fortunes for those lucky enough to get out before the bubble burst.

Many thought the recent market correction would cull dot-coms with flawed business models and only companies with sound business models would survive. However, others believe this market correction is in fact a market crash--part of the natural evolutionary process of the Internet economy. Whatever theory you choose, the entire Internet sector has been painted with the same brush, and many Internet blue chip companies are getting slammed at the same time. Companies like AOL, Yahoo!, eBay and Amazon with sound business models and experienced management have seen their stock values plummet.

As a result, this market adjustment has had an adverse impact on capital markets and their appetite for funding Internet startups. Today, the bottom line is this: Unless your Internet startup falls into broadband, infrastructure, wireless, or optical networking plays, your ability to raise private equity or venture capital is negligible.

THE PLAYING FIELD

All is not lost, there is still opportunity to build a profitable Internet company now that the Internet economy has become more traditional. Knowing which Internet segments are currently in favor is key to a startup's success. The darlings of the business-to-consumer (B2C) segment have become the villains of the new economy. B2C companies such as FogDog.com, Pets.com and Furniture.com have either closed their doors, or are on the brink of closing.

On the other hand, traditional companies are "dot-coming" themselves and finding success. Doing well are those Internet technologies that create efficiencies, assist in bringing customers back to commerce sites, or develop psychographics. Unlike demographics that track information such as age, gender or income, psychographics focus on what interests people, their hobbies, personal beliefs and preferences. Psychographics distinguish the BMW buyer from the VW buyer. Another segment that is active and developing quickly is people-to-people, which includes sites like datingfaces.com and chat areas found on many major portals.

TARGETING YOUR MARKET

A new startup needs a precise and well-defined focus. Startups targeting the B2C or business-to-business segments are going to find it very difficult, if not impossible, to succeed unless their play is unique. Concepts must build value by exploiting Internet efficiencies in new ways.

Stay away from the retail, content and financial services sectors--the established Internet players and off-line industry giants will smash you like a bug. Don't assume that e-business is more efficient and profitable than off-line businesses with long-standing infrastructures; WebVan and Amazon are learning this hard lesson.

Technologies that speed up connectivity and enable existing Internet companies to conduct business more efficiently are in demand. The Industry Standard reported 39 venture capital investments from Nov. 1-10, 2000. The largest of these deals focused on broadband and enabling technologies. Success depends on knowing where your technology fits, being able to protect it and reaching the market before your competition.

Your startup's plans to generate income are critical. If a startup's business plan calls for relying upon banner ads as a primary revenue source, it will be difficult to succeed. But if you target opt-in e-mail, which directly correlates with advertisers' demographics, you may find the going much easier. Know and target the appropriate revenue sources.

THE TEAM

Quality startups are comprised of a team of internal and external advisers with entrepreneurial and technical experience. Many Internet startups have struggled because they have been lead by technological experts who are unskilled in the entrepreneurial process. For example, when Yahoo! was a startup, before venture capitalists would provide funding, they insisted that Tim Koogle be brought on as the company's president and CEO to provide the business acumen that is essential for success.