The Myths, and Realities, of Running an Internet Startup

By Jon Huggett, Vice-President Bain & Company

Published in The Globe and Mail, Toronto on July 29, 1999

Jack Welch, General Electric Co.’s chief executive officer recently declared that electronic commerce is to become his company’s No. 1 priority. That statement from one of North America’s most influential CEOs sends a clear message: Leaders who want to win at E-commerce are moving now. But an important question remains: How should companies organize to compete in this new business environment?

To get it right, CEOs need to look beyond the myths about their brash new on-line competition and actually learn from successful Internet startups — the same way that discount brokerage Charles Schwab & Co. Inc. has learned from upstart E*Trade Group Inc.

Without a cold look at the facts, the mythology about what drives on-line business success can be blinding. Despite the huge transformational power of the Internet, E-commerce has not repealed the fundamental laws of economics. Dispelling the myths about Internet startups provides insight into the crucial decisions that a company must make early on — determining the right structure of the organization, the extent of integration with the core business and the level and sources of funding.

Once the smoke screen is lifted, the organizational principles used by successful Internet startups look surprisingly similar to tried-and-true business principles.

Let’s examine these on-line myths:

MYTH: Internet startups are unstructured and anarchic.

Executives at Internet startups often have strange titles such as chief imagination officer, wear funny clothes and work odd hours. This fuels the notion that they have unstructured and anarchic organizations, throwing into question the importance of strong, accountable leadership. But don’t be fooled.

Successful Internet startups have clearly defined roles for managers. Few venture capital firms would lend money to a company without a clear leader in charge. In spite of the frills, power structures still exist within E-commerce companies, just as in traditional companies. The similarities are exemplified in the often painful and nasty transition from founder to the next CEO.

REALITY: Strong leadership and accountability are indispensable.
Similarly, dedicated and accountable senior leadership must be empowered to exploit the radical shifts in the landscape. Uncoordinated and fragmented initiatives by individual departments fail to fully capture the strategic impact of the Internet, leaving companies vulnerable to competitors. They also have difficulty reaching critical mass and making a difference.

The truth is, E-commerce ventures may have to compete with the very business model of the company that spawned them. They also need to be exceptionally entrepreneurial, with a risk-taking spirit that most established companies keep in coffee-table books about their history. For this reason, companies should consider creating a separate entity to jump start their E-commerce venture, with minimal degrees of integration with the core business.

Being separate also creates the potential to spin out all or part of a company’s E-commerce assets, providing two key benefits: It helps recruit good people and provides access to low-cost capital.

Either way, leadership and accountability are essential. The CEO must make E-commerce his top priority or create a separate entity led by someone who will.

MYTH: Internet startups are completely technology-focused.

America Online Inc. CEO Steve Case runs the most highly capitalized E-commerce company in the world with a market valuation of $116-billion (U.S.). He’s no technology whiz. His background at consumer products giant Procter & Gamble Co. is an asset, not a handicap, because E-commerce battles are won with customer focus, not technology.

The Internet creates opportunities to communicate with customers. It allows for the creation of communities around products and services, and makes market research easier to conduct., the on-line bookstore, has shown how content and personalized service can provide a competitive advantage in E-commerce. The Internet can quickly regroup and redefine customer segments, rapidly creating new customer wants and needs. Charles Schwab gained a dominant position in the on-line brokerage industry by identifying the new market and responding quickly.

REALITY: Focus on customers, not technology.
Customers respond to brands — in both the real and virtual worlds. The best companies in the world have developed branding expertise. So can Internet startups. For example, they can use their initial public offerings as “branding events.”

Moreover, many Internet startups often outsource technology issues to suppliers in order to maintain their customer focus. It’s not a bad strategy.

MYTH: Internet startups are all about zero profitability and irrational stock prices.

In fact, successful Internet startups are extremely results-focused. The stock market and venture capitalists are looking at hard indicators of future success, even if the profitability is not there at present.

Staff compensation is geared toward results (with base salaries a fraction of what people earn in large companies), which should attract highly motivated talent. Top-flight masters of business administration graduates lured by these companies aren’t falling for hype — they mean business.

REALITY: Set clear objectives, demand results and reward success.
In the early years, benchmarks other than profitability, such as revenue, share of viewers and “stickiness” (tendency of Web site visitors to stay and return), may be appropriate to measure and reward progress. These markers, whatever they may be, are no less important simply because they will require constant review and adjustment in a fast-paced competitive environment. Without them your E-commerce organization will be adrift.

Rewarding performance based on objective results will also help attract top talent — an elusive prerequisite to success in the E-commerce arena.

Behind the newly created myths lie the time-tested principles of successful business practices: Put in place strong and accountable leadership, maintain your customer focus, set clear objectives and reward results. Think of your E-commerce venture as old wine in a new bottle — but just uncork it right away.