Dot.coms: survival of the fittest.

If the hype surrounding the bursting of the dot.com bubble is to be believed, only doom and gloom lie ahead for internet businesses. Promising-looking hi-tech outfits staffed by thirtysomethings set on rewriting the rule book on business have seen their fortunes crash – and many personal dreams have been dismantled along with the companies themselves. There was no shortage of predictions. A raft of reports released before and during the recent high-profile collapse of boo.com, the online fashion e-tailer, predicted a huge shake-out among e-commerce companies. Predictions that the dot.com bubble was to burst on the new economy descended as boo.com went to the wall after just 20 months in business. But according to industry experts, things are not quite as bad as they seem. Entrepreneurs and investors who view the internet revolution as a flash in the pan are missing the point. The technology behind boo’s site may have been sold for a paltry #250,000, but there is mileage in internet-driven enterprise providing your business model is sound. Boo.com’s short history has been much repeated and much exaggerated. Tales of boo.com sales executives and their monumental overspends are already legendary. The company had seemed destined for greatness when two Swedes, former model Kajsa Leander, and chief executive, Ernst Malmsten set it up. They raised $135m before the launch, making it one of the best-funded business-to-consumer dot.coms in Europe. But from the outset the company was plagued with problems. The hi-tech website that was to allow the company to sell in 18 international markets was five months late and when the site finally went live, users criticised it as too slow. Technical problems were only one part of the story. Equally important was the fact that the company spent six months searching for a finance director, and when it did recruit – Dean Hawkins from Adidas – he left after only two months. Hawkins’ departure of course dealt a massive blow to boo’s financial credibility. When the recent application for a further $30m of funds became public, stories detailing extravagance from staff including champagne dinners, Concorde flights and caviar lifestyles began to emerge. At the same time, the collapse of news provider Net Imperative also sent tremors through the dot.com world and raised questions about the strength of financial controls in the new economy. Research from PricewaterhouseCoopers and Shop.org in conjunction with the Boston Consulting Group, warned many more dot.coms were set to burn out due to lack of financial control. The research confirmed the sector had been spending money at such a high rate that many were, and are not, expected to reach their proposed break-even points. From the obituaries, it appears many dot.coms forgot or chose to ignore the value of the accountant, whether as a full-time employee or hired on a consultative basis. Certainly many failed to seek the right advice. This could be a fatal mistake. Accountants have a vital role to play in the dot.com world. ‘A conventional financial structure is essential for any up-and-coming dot.com company in order to make the leap to becoming a fully fledged company,’ says an ACCA spokesperson. Dot.coms must draw on the conventional skills of accountants. At the moment, however, dot.coms are at one end of the spectrum and accountants are at the other – but the two worlds are moving ever closer together. ‘Dot.coms need to get used to the idea of creating procedures designed not to slow the business up, but which support the company so that it can continue into the future, essentially they need to manage its cashflow,’ he adds. In many ways, cashflow is the life force in a venture and its effective management is central to the long-term future. Without skilled application of financial management, new companies run the risk of an early demise. Many experts believe internet companies, by and large, favour living on their wits. They tend to streamline business procedures and end up with minimal structures. As a result they often fail to put in place even the most basic attributes of a well-run business. This where expert advice is essential: ‘The accountant should be a facilitator for them – a source of good professional advice. It’s all very well having a great idea but it must be backed up with a structure that can support long-term presence. Dot.coms have to be ready to pay national insurance bills, taxes and other bills. I’m not certain they are fully aware of these elements at the moment,’ added ACCA. A spokesman for analyst Williams de Broe says: ‘There are two types of dot.com companies – those with the magic powder and those without. ‘Those with the magic powder tend to be the business-to-business type companies such as Baltimore – those with a special and unique product. However the likes of lastminute.com, which has seen its shares plummet since floating, merely rely on being first to market and then waiting for a multitude of similar offerings to appear.’ Unique idea or not, good financial advice is vital. One insolvency practitioner says: ‘The only reason for the failure of any business is management and that is where accountants come in.’ As well as financial management, companies need to focus on customer service, staff retention and good marketing. And they must be able to keep up with growing customer demand. A study by Boston Consulting Group says that during the past year, 28% of all attempted online purchases failed. Firms that cannot deliver are bound to fail. Despite the doom and gloom merchants, the world of e-commerce still has a gold rush feeling about it. In June 1999, only 45% of firms in the UK had an e-commerce strategy in place. A year on and almost two thirds have defined their strategy for the e-commerce future and are now beginning to implement it. Many old economy firms have begun to focus their e-commerce activities. Marco Rochat, leader of GTIG Europe, Middle East and Africa, says: ‘We are in a golden age for European technology companies. ‘Entrepreneurialism is flourishing; technological innovation is continuing to push back the boundaries and investment is increasing dramatically.’ Rochat continues: ‘Recent dot.com crashes have confirmed effective management is as critical to the technology sector as it is to every other. ‘While 2000 has certainly provided challenges for some early stage companies, I believe the opportunity and momentum in the European technology sector is such that, while further shakeout will inevitably occur, significant growth will continue to be achieved during 2000 and beyond.’ What can be learned from the early horror stories? David Harvey, head of ACCA’s small business says: ‘A structured and precise business plan is essential to achieve long-term growth and to show potential backers that the venture’s directors have the required experience, they can make money and they also understand the risks and pitfalls involved. ‘For small firms such working capital management is especially crucial as typically their short-term assets represent a large proportion of total assets employed, and, moreover, they may be reliant on trade credit and have restricted access to long-term funding,’ he adds. However dot.com stocks are being boosted by a fundamental change which is taking place in the way companies and their assets are valued by the markets. Traditionally, companies’ balance sheets – and market values – have reflected first and foremost the tangible assets they own. These assets have been valued in accordance with accounting principles, which presume they have a finite useful life, a presumption that must be reflected by a provision for the depreciating value of the assets concerned. Analysts are aware that, given the rate at which the e-commerce sector is growing, and given the speed with which technology is advancing, a company’s ‘intellectual’ resources can be of decisive market significance. New approaches are being taken to the valuation and management of intellectual capital resources. These take into account factors such as the skills and expertise of individual staff; domain names, patents, trademarks and R&D investment, as well as goodwill and market awareness of and reaction to the company’s products. But, according to PricewaterhouseCoopers, a quarter of the 28 internet firms listed on the London Stock Exchange will run out of cash within the next six months. All but three could fail in the next 15 months because their rate of spending is so high. But as one PwC expert points out: ‘Just because one shop on the High Street goes bust, it doesn’t mean the whole High Street is going to disappear.’ Of wider significance to the worldwide accountancy profession is the gap which the dot.com phenomenon has highlighted between its own accounting-based valuation rules and those which the markets are happy to use for their purposes. How to address this gap is vital for the profession and the dot.coms in the early part of this century if further horror stories are to be avoided. www.pwcglobal.com www.hlbkidsons.co.uk E-business on the rise: www.accountancyage.com/business/1104274 ONLINE OR NOT, BUSINESS SKILLS ARE KEY Take three UK ACAs, one CIMA and add an Australian ACA. This was our line up last November as we entered the unfamiliar dot.com world with a brand new idea for an online training site, says Anita Monteith. Since then, we have built a fully functioning website supporting a database of thousands of courses and conferences and have recruited a highly skilled IT staff. Did we need so many accountants? Of course not. In fact our first ‘debate’ was who should take on the bookkeeping duties! But we had all pursued very different careers. Mine had focused heavily on providing training. Yvonne Hardy had been national training manager with Deloitte & Touche and had spent many years buying training. The others brought with them considerable marketing and IT skills, and the fifth was a venture capitalist. It is precisely this range of skills that places accountancy at the top of the list for those seeking a career in business. The dot.com world is no different from any other. The media has painted a glamorous, exciting and fast moving picture. Of those adjectives, I have found only the last to be true. I am not surprised at the failure rate amongst fellow dot.coms, set up by young and exciting groups, but which totally lack real business experience. The grim reality is that unless a business can manage its cash flow, no matter what its long term prospects, it is doomed to failure. It doesn’t matter how good the idea is. Our CEO kept us strictly under control during the period leading up to raising venture capital funding. And when we visited course providers promising to market their products with the money raised, we could show a sound budget and marketing plan supporting our ideas. It was no surprise when the first VC to see us (E-Vestments plc), led the syndicate that finally backed us. In the past two weeks we have begun marketing our service to professionals in the financial sector who buy training. The response has been staggering. Our next challenge is to attract buyers. The marketing is critical. Will promotions like our ‘free bottle of wine’ offer attract buyers? The experts tell me that it will. I will trust them as I have been trusted to provide tax and accountancy advice. Attracting the right kind of attention is critical in the dot.com world. – Anita Monteith is vertical markets director at worldoftraining.com WEIGHING UP THE ONLINE OPPORTUNITIES So what’s the attraction of a dot.com business for a budding accountant? OK. You’re qualified, you’ve been in the profession, in industry or commerce for a few years. Your career is developing, writes John Oates. New opportunities and challenges are appearing at work, while at the same time other options keep arising and look, if not attractive, certainly worth thinking about. And then the dot.com comes along, perhaps through a work acquaintance, perhaps not the first, but this one seems special. This might be your big opportunity to get-rich-quick, to move to a more exciting role, to something different, to working with the lateral thinkers, with those techies and whizzy marketing people. It could be fun. Despite the hard work, endless figures, meetings and more meetings, long, long nights and the hairy financing issues in which you will be well and truly embroiled. There are many different types of dot.coms. Some are INDO’s (totally internet-dependent organisations), some building on established bases, and some are re-engineering previously existing procedures, such as supply chains. Some will be well run, many will not, as is the case for much new business. The high profile failures in recent months, such as boo.com, remind us that it comes back to basic business principles – objectives, strategy, control and finance. How well are your potential colleagues going to take to the New York trips being in a jumbo rather than on Concorde? And what if after all that hard work it fails, as many will, despite the slog, the frustrations and the worthless share options and valueless shares? And what will that do for your CV? CVs littered with two-year stints and punctuated with failures do not impress. Some caution is required here. Once unlucky, twice careless … So is it the fun, the excitement, the lateral thinking or the get-rich- quick? But hang on. Is working in a bricks and mortar business really that boring? For many it isn’t. And what about issues such as school fees, mortgages and children to clothe. For some the dot.com answer will be ‘yes’, for many it’s ‘no’. It’s very much about what you want to make out of your career, seizing opportunities as they arise, though with care, and steering your career forward. And isn’t that the way it’s been for years? Is it just that the scenery has changed? – John Oates is a partner and national director of IT Services with HLB Kidsons. He is a member of the English ICA’s IT Faculty.