Net profits: how to make an online fortune
In the Nineties, the first web trailblazers turned their dotcom dreams into cold, hard cash. But is it still possible to earn millions online today? Alice-Azania Jarvis asks the ones who made it
Wednesday 11 August 2010
Remember the dotcom boom? When all canny investors needed to do was add a ".com" to the name of their company to watch stock soar? And to think that all of this took place in a world where dial-up still dominated. Where a business's investors, customers, even founders, would have to clunk their way around the world wide web (as it was then known), waiting for pages to load, inch-by-inelegant-inch, all while keeping one eye on the clock (the internet was expensive, after all) and batting away those around them who wanted to make a call but couldn't because the only phone line in the house was being occupied.
It was, in many ways, another world. Certainly, it was for those first explorative entrepreneurs who, in the murky early years of e-business, carved out their camp on the web's frontier – the Lastminute.coms, the GeoCities, the Boo.coms.
For some, the experiment paid off. Sabeer Bhatia, an India-born entrepreneur who, after a stint at Apple and the start-up company Firepower Systems, co-founded Hotmail with a former colleague and then went on to sell his business – one of the first web-based email systems, distinguished by its groundbreaking decision not to charge users for the service – for $400m [£253.8m] on his 29th birthday. For others, it didn't. When Boo.com turned to bust it did so in now-notorious style: after eating through $135m of venture capital in the first 18 months, and amid tales of Gatsby-esque spending on the part of the fashion e-tailer's Swedish founders, the firm was declared bankrupt, leaving more than 400 contractors and staff redundant.
It might have been dismissed as a one-off, the sudden dissolution of riches a kind of modern morality tale of excess. But it wasn't. The world of the web millionaire continued to grow and, a decade on, stories of bright ideas leading to great riches abound. YouTube received its unceremonious baptism in 2005 when three PayPal employees uploaded a video of a trip to the zoo. All pixelated footage and bumbling narration ("the cool thing about elephants is that they have really really, really, really long ... um ... trunks."), it was the video that launched countless others. Now more than two billion are watched every day and it was the promise of viewing figures like these that saw Google snap up the company for $1.65bn just 18 months after it first launched. Shortly before YouTube's birth, in what is now internet legend, a Harvard student named Mark Zuckerberg had launched thefacebook.com (later facebook.com), from his dorm room. These days he can be found conversing with Prime Ministers via video link, and is personally worth an estimated $4bn.
Crucially, these were a different breed of dotcoms, distinguished from the ill-fated experiments of the Nineties by their durability. Founders got rich quick and stayed it. The relative security of these operations – not to mention the sums they have earned their creators – has revived the idea that the internet is paved with gold. Nowadays, every Tom, Dick, and Harry can (or thinks they can) have a go. Enter the words "internet millionaire" into Google, and you are directed to endless ranks of advice-peddling websites claiming to have the answer, whether it assumes the form of five secrets of successful e-trepreneurs or 50 (are all of these sites run by millionaires? Is setting one up the answer?). The same is true in the bookstore: shelves heave under the weight of advice manuals. But to what avail?
As founder of the online auction site QXL, Tim Jackson rode the first wave of dotcoms with mixed success (the business had the dubious honour of admittance to the so-called "99 per cent club" of businesses that lost 99 per cent of their value when the dotcom bubble burst, though it eventually recovered) and is now involved in competitions site Miss Win It.
"The internet changes the business game," he argues. "It offers the chance to access people without much material machinery, so that start up costs are lower. It also makes it easier for people to access you. You have scale, reach and speed as well as reduced costs." It's no wonder the net is an attractive prospect for entrepreneurs, particularly those of the ordinary "civilian" variety, who might not have much capital behind them.
What's more, despite the explosion of ideas that we have already seen, the market is unlikely to saturate. Far from it: one of the defining characteristics of online entrepreneurship is the role of market creation. Some successful start-ups meet needs. Far more, though, create them, carving out their own market in the process. Jackson's Miss Win It colleague is Ramsey Khoury, a seasoned web developer and founder of the digital consultancy Head London. Along with his business partner Kate Amarnani, he came up with the concept of the "competition creation and information" site when talking about promotion space. "It's almost a non-existent market," he said. "You find a new market driven by the experiences you can offer."
For the present, then, the future of the online goldmine looks secure. Indeed, technologies have so improved that establishing your brand is easier than ever. Malcolm Graham is chief executive of the web development firm LimeTree Online. Having watched the changing conditions over the last 15 years, he is confident there has never been a better time for investment. "It's a great time. A lot of ideas have been explored but there's still plenty of opportunity. The technology is stable now, which was a major problem with the 1990s. The skills are out there and readily available, which makes staffing your business easier."
Naturally, not every online chancer is guaranteed a hit. As Khoury puts it: "There is a lot of noise on the web." Success depends upon the ability to retain relevance, be that by smoothing the path to your company's door, boosting your company's online profile, or maintaining an active relationship with your customers.
"User experience is key," says Khoury. "You need to make things simple for people." That might be by ensuring people know where to find your web page, or designing the page to be as straightforward and clear as possible. Certainly, the latter is crucial. The clean layout of Facebook is credited for luring users away from MySpace and allowing the younger upstart to overtake its more established rival, a cycle that has continued with the runaway success of the even more simple Twitter. "You need to get an understanding for your audience and you need to build a dialogue allowing for feedback," he adds. "Social networking is great. For Miss Win It, much of our audience is on Facebook for instance."
Much of this, of course, is basic business sense. If customer relations is a key component of success, well, 'twas ever thus. Since the series began five years ago, Dragon's Den has welcomed a steady stream of would-be web sensations. But, the criteria on which they are judged differs little from the standards set for other, more traditional offerings. "When I look to invest I don't just invest in the product," says James Caan. "I invest in the people. If the individual or team have the motivation and passion for what they are doing, then ultimately the business is more likely to be successful – regardless of whether it's online or offline."
The same could be said of growth management. In the same way that a shopkeeper or restaurant owner who tries to take over the high street before their first outlet has made a profit could be setting themselves up for failure, web developers who aim immediately for world domination are liable – just like Boo.com – to collapse in on themselves. No one was more wary of this than Nathalie Massenet who, just a month after the infamous clothing store liquidated, turned an almost identical concept into realty – and, in turn, into one of the most significant, seminal, successes of the digital age. She launched Net-a-Porter in June 2000, the wreckage of the bust still scattered around her. Founded in a tiny flat in Chelsea, the online department store employed only 15 people and kept borrowing costs at a minimum. "Initially we were really held back by how much we could buy," Massenet has said. "Because we had no money to buy product."
Web success, then, is part technological savvy, part old-fashioned nous. The pioneers of the early Noughties may have nabbed their spot in the history books, but the trail that they blazed is a long way from being worn down. The web remains an accessible arena for entrepreneurship, and things look likely to stay that way. Indeed, the advent of the smart phone has opened up a new gap in the development market – in the form phone applications – and has opened up a new audience in the form of the phone-carrying populations of Asia and Africa. For the time being, the second dotcom bubble appears a long way from bursting.
Are smartphone applications a goldmine in the making? It's not yet clear. Certainly, apps have become a phenomenon in their own right. Before they existed, it was near-impossible for independent software programmers to gain wide exposure and the profits that come with it; now Apple, Android, BlackBerry and Nokia boast app stores that provide a platform for freelance developers. In June, the five-billionth app download was made on Apple's store and more than 225,000 apps are available there. There are also dotcom-style tales of great wealth being won. Last year, engineer Ethan Nicholas developed the tank artillery game iShoot, leaving his day job shortly after. When the game was at number one in the sales chart, he made $37,000 [£23,400] a day. Still, some are sceptical of their potential. "In general terms, I think talk of get-rich-quick is a bit sensational," says Tim Jackson, founder of the online auction site, QXL. "Developers get a lot of coverage but if you look at many of them, the potential for money-making is limited." Strict rules about pricing, content and revenues also make the app market a restrictive place to make a fortune.
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