The upside of a downturn
The dot-com revolution is a bust. Or is it? It all depends on how you look at it.
By D.C. Denison, Globe Staff, 4/1/2001
Alvin Graylin's company, iCompass, is barely a year old. Its core product is built on free, open software developed or vastly improved in the last three years and readily available online.
"The software we're using ... is very high-quality software," Graylin said. "It would have cost us $10 million if we had to create it ourselves."
While the bursting of the Internet bubble has fed a steady stream of recriminations and second-guessing, Graylin is much more generous in assessing the boom. For him, the millions lavished on failed dot-coms, the frenzy over stock options, and the dizzying valuations placed on practically any company in the the high-tech sector, are only one part of the story.
"No doubt about it, a lot of value was created during the Internet boom," Graylin said, adding that it would have been virtually impossible to launch his company without the tools that emerged from the dot-com boom.
Graylin is far from alone in his views. As the Internet phenomenon fades, many new economy entrepreneurs and traditional businesses agree that, despite all of its faults, the Web revolution generated fresh ideas, innovations, and strategies that have changed the way companies operate.
Until recently, these developments have largely been ignored in the tumult that followed the spectacular collapse of the tech-laden Nasdaq Composite index - a plunge that saw $4 trillion in stock value evaporate as investors realized that many dot-coms were built on little more than wishful thinking. But some observers note that the bloodletting has given way to a sober examination of the positive aspects of the run-up.
"The panic is over," said Bruce Weinberg, associate professor of marketing and e-commerce at the McCallum Graduate School of Business at Bentley College. "Now we can concentrate on what's valuable about this new medium."
Weinberg cites the Internet's unique ability to foster interaction between businesses and customers as its most enduring contribution to the marketplace.
"The Internet is a wonderful informational medium," Weinberg said, "but during the peak of the dot-com mania, most of the new companies were just using it to acquire customers. They had to do that: They were brand new."
According to Weinberg, Internet technology is better suited to maintaining existing customers, using a combination of interactive Web site design and e-mail.
"For established companies it's much more efficient to try to keep current customers, rather than acquire new ones," Weinberg said. "That's what we're seeing now, and it's changing the way companies and customers interact."
Weinberg doesn't mourn some of the practices that fueled the Internet's dramatic rise in the late 1990s.
"It's a good thing that many of the practices we saw during the dot-com period failed," he said. "The idea that people could say, 'I want it now, give it to me, and I want it for less than cost.' This is not reality. That is not healthy interaction. What if that succeeded?"
Weinberg also applauds the end of the frantic job-hopping that marked the dot-com boom, as tech-savvy workers took advantage of an overheated job market to maximize their stock options. "Was this progress or was it decadence?" he asked. "Thank goodness it failed."
But on the positive side, Weinberg points to the Internet's demonstrated capability for "dialogue and customer relationship." Looking ahead, Weinberg predicts that this aspect of the recent dot-com era will have a significant impact on commerce.
"We've emerged from the face-to-face era," he said. "That worked for thousands of years, but it's over. We've developed some cues for telephone interaction, but the Internet has much more promise in terms of allowing the development of trusted relationships between merchants and consumers."
Companies are much more flexible in the wake of the Internet boom. For example, iCompass, which Graylin cofounded, is based in the large recreation room of its chief technology officer's Weston home. After pricing office space, the founders decided they didn't need a traditional headquarters.
"Everything and everybody is connected via the Web, and we're all on broadband now, so a central location isn't necessary," Graylin said. ICompass's business plan focuses on helping consumers manage relationships with Web sites and Web marketers.
The computers at the core of iCompass's operation are located in a facility in the Midwest. "You should see the size of some of the files we move around," Graylin added. "You couldn't do that efficiently a few years ago."
Graylin's Internet experience is hard-earned. A graduate of MIT's Sloan School of Management, he did not emerge unscathed from the dot-com fluctuations of the last few years. During his first year at Sloan, he founded a consumer-oriented financial advice company. It fizzled as investors' fancy turned from business-to-consumer models to business-to-business. Graylin also admits that his personal stock portfolio is now "a fraction" of its previous value.
All of which has left him determined to take advantage of Internet efficiencies, like using remote services, and free open software. And though his early Net experience was not a success, he is determined to stay in the tumultuous dot-com start- up environment.
"I worked for both IBM and Intel before I got to Sloan," he said. "I like the small start-up environment much better."
Even though dot-coms have a sullied reputation, Bentley's Weinberg says the desire to start companies is still strong and is another sign of the Internet's positive influence.
"There's definitely been a cultural change since the Internet boom," he said. "Today the attitude is, 'Go ahead and pursue your thing.' In that sense, a lot of young entrepreneurs are liberated. They feel like they are following their dreams. I think that's a good thing for the economy."
Even those who rose and fell with the Internet economy say that pluses outweigh the negatives.
David Hornstein, 45, a Lexington architect who followed his dream into the dot-com revolution, had an intimate view of the Internet's unique characteristics, positive and negative.
As an architect, Hornstein had been struck by the fact that although many of his customers weren't able to verbalize their preferences, they were able to respond to pictures. He decided to design a Web site that allowed a customer to successively cycle through pictures of furniture and furnishings, indicating which ones appealed to him or her. With each decision, the selection was refined, leading, eventually, to a focused visual description of the customer's preferences.
After testing the idea out informally, Hornstein suspended his architectural practice in fall 1999, and began working on his company, Stylepath, full time.
Building his Web site, and his business, quickly took Hornstein into uncharted territory. To create the site he envisioned, Hornstein needed sophisticated algorithms, embedded artificial intelligence, and database management. All of these capabilities required the skills of expensive programmers. To make matters worse, Hornstein discovered there were no precedents to fall back on.
"I was in a completely new field," he recalled. "I didn't know what I didn't know and neither did anyone else."
Very quickly, Hornstein found himself dipping into his savings, devoting marathon days and weeks to the new enterprise. His discussions with venture capitalists didn't help.
"I'd explain my concept to a venture capitalist, and he'd say, 'I don't see a billion-dollar company in three years.' Of course that was an absurd idea, but I'd be urged to go back and expand my business plan, and my projections."
Hornstein's ideas made solid showings in business-plan competitions, but it was not enough. When Internet and tech stocks started tumbling in March 2000, Hornstein couldn't buck the trend.
By the beginning of this year, he had invested over $100,000 of his own savings, plus a year and a half of his time, into his Web project. "I went from having a comfortable nest egg to zip," he said.
Hornstein decided to stop his search for funding and go back to work as an architect.
These days Hornstein is working on a major addition to a client's house in Wellesley. But he is incorporating his hard- earned Web product into his architectural practice, as a way of keeping it alive.
Looking back, and forward, Hornstein is reluctant to dismiss the dot-com boom. He still sees much that is valuable coming out of his experience and the Internet run-up in general.
"I think what happened is that we've had about 10 years of progress condensed into about a year," he said. "It sort of reminds me of the '60s. People thought the world could change overnight; there was this sense that it was all going to be different. And everyone went along for the ride."
And is anything different now?
"I think businesses will definitely take advantage of the interconnectedness that the Internet enables," he said. "That will happen."
Online trading hubs, where like-minded companies gather to facilitate business, are also inevitable, he said. "When everybody's on the Internet, it's very easy to work together." And everybody, and everything, is on its way to hooking up to the Internet, according to Hornstein.
"It's almost unimaginable today that a retail site doesn't have some sort of presence on the Internet," he said. "And that gives Internet companies something to build on. For example, a year ago we were sometimes hampered by the fact that companies didn't have digital images of their products. That's changing, rapidly."
Once he gets started, Hornstein finds it difficult to stop listing promising spinoffs from the Internet boom: the ability to facilitate the assembly and distribution of customized products; the capacity to create global marketplaces; the possibility of collaborative design; the convenience of Internet intelligent agents that will work on behalf of consumers.
So what won't survive? What deserved to die with the dot-com meltdown?
"The speed," Hornstein said. "We're coming out of an era that glorified concepts like 'first-mover,' 'IPO-path,' and 'dominate-the-space.' Technology was adopted out of fear that you were going to be left behind.
"The pressure to grow a business as quickly as possible - that never felt real to me," he added.
Ultimately, a discussion of the positive aspects of the Internet era brings Hornstein back to a familiar analogy.
"It reminds me of the architectural discussions about cities," he said. "The best cities evolve organically over time. I think that's the way it's going to be with some of the ideas that drove the Internet boom."
D.C. Denison can be reached by e-mail at firstname.lastname@example.org.
This story ran on page D1 of the Boston Globe on 4/1/2001.