CXO

Warning signs of a dot-com meltdown

Dot-com companies are everywhere—you might even work for one. But they are also prone to failure. How do you tell if your favorite dot com is going to fold? Tim Landgrave offers some clues.


The response to my last article, “Lessons from a failed dot com,” was clear and concise: Readers valued the insight on how to avoid becoming the next dot-com failure. But more importantly, they also wanted more guidance on how to tell if the dot com they’re currently working for, interviewing with, or considering doing business with is going to be in it for the long haul.

After spending some time thinking about the companies I’ve worked with or followed over the last couple of years that didn’t make it, I’ve compiled a list of warning signs that your dot-com employer, customer, or partner might be in trouble.

Has anyone at the company ever said “No?”
The most common killer of all companies, regardless of age, is lack of focus. But for technology companies, the death comes a lot faster since they don’t have any “fat to burn.” This uncertainty about their core strategy almost always manifests itself in their inability to say “No” to an opportunity that’s outside their core business.

Another way to gauge the company’s focus is to ask the receptionist, delivery person, or accounts receivable clerk to give you the company’s “30-second pitch.” Every .COMpany I’ve worked with that succeeded had employees who could recite the 30-second pitch upon request. In most of the companies that failed, the executives never gave the same 30-second pitch twice within a 30-day period.

Does the company make payments on time?
Another sure sign of imminent dot-com failure is the company’s inability to manage money properly. The most common scenario here is a situation in which the controller or CFO convinces the management team that they should be funding their operations with their vendors' money.

Basically, the company doesn’t pay any creditors until they’re threatened with a lawsuit or with having the account turned over to a collection agency. Only vendors providing services that are critical to the revenue-generation capability of the company get paid anywhere near the agreed-upon terms. But how can you find out how the company handles creditors?

Simply contact a credit agency and have the agency run a credit report on the company. Standard credit reports will give you information about the company’s track record in paying vendors. If the company is relatively new and the investors are angel investors, run credit reports on their companies as well. Angel investors almost always “encourage” (i.e., force) their companies to use similar accounting and vendor management methods.

Does the company have opulent space that’s empty?
When asked to reflect upon their first “big mistake,” the owners of many failed dot coms point to their choice of real estate. In most cases, they bought too much space and overspent on the build-out. They bought their furniture and computers outright instead of leasing.

They didn’t realize until it was too late that the space should match their customer’s expectation, not the owner’s expectation. Dot coms sometimes forget that people, not office space, make products and deals.

If you’re trying to figure out if a .COMpany has a future, you should be much less concerned about seeing plywood boards on cinder blocks than you are about seeing mahogany desks in big offices, cherry wood chair rails, and big leather chairs in the conference room. Make sure you visit their offices and see how they spend their money before you make a commitment to a company that will be spending your money as your employer or your business partner.

Has a member of the company’s management team ever said "money's no object?"
I’ve heard this statement at one time or another from every .COMpany I’ve worked with that ultimately failed. Dot coms that don’t understand that money is ultimately the only object are in big trouble.

You should question the CEO or marketing VP on where the company’s profit will come from. If you get lots of disinformation about the large numbers of users, the size of the market, the company’s revenues, or other non-profit-related issues, you should be concerned. Claims like these may also be a sign of other problems, such as the actual capabilities of the company’s product versus the claims it makes for its products. The "mouth writing checks that the feet can’t cash" syndrome is common and predictable.

If the management of a .COMpany you’re dealing with opens the door to discuss financing with a funding claim, then you should always follow up with a question like, “Where does your funding come from?”

As many .COMpanies, their employers, and vendors have recently learned, if the company’s funding is based on stock, the company’s employee base, willingness to do deals, product development, and other key business indicators will fluctuate with the stock market. If you’re expecting something from the company when the stock’s down, you can forget about it.

If the company’s funding is from institutions or the company is a spinoff of a larger, more stable company, then the .COMpany is more likely to get the time and funding it needs to ride out the rough spots in the market.
Have you ever worked with a dot com that showed other warning signs of going under? Tell us what you saw. Start a discussion below.

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