Why Are So Many Dot-Coms Going Under?

There are lots of reasons, of course, but the key reason seems to be that those that are failing do not have a profitable business plan. Whats more, most of them never did. Why did they get funded in the first place?

The answer seems to be that their promoters were following the AOL model. America Online became successful by giving away six diskettes to every man, woman and child in America over a period of about four years. As a result, they grew so huge that they were able to take over Prodigy, Compuserve, and eventually Time Warner. Their investors grew very rich. During most of the growth phase, AOL did not make a profit. Hence, the model goes, growth in customers is everything. Profit is unimportant.

Some dot-coms succeeded with this model. They grew. They had an IPO without profits, and their investors grew very rich. So thousands more tried to do the same thing. Why have these others failed, when AOL succeeded? For a simple reason: early in the game AOL switched from pay-per-view to a fixed monthly fee. As AOL grew, it had $20 or more coming in every month from the millions of customers that they acquired. Most of the failing dot-coms have no such source of revenue. They were counting on growth in customers alone.

A customer without revenue is not a customer. Such a customer has no lifetime value. Eventually, the venture capitalists realized that they had financed companies that would never succeed. They saw that the emperor had no clothes. The bubble burst.

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