By Jerry Useem
First-Person Interviews by Eryn Brown
"Branding" is not a strategy. The concept of Internet time also spawned a highly abnormal approach to company-building. Since time immemorial, most businesses had grown organically, using operating profits from early customers (think Wal-Mart's first store in Bentonville, Ark.) to fund expansion and ad campaigns. But the Internet craze--invariably described either as a "land grab" or a "gold rush"--turned the process on its head. First build a "brand," the thinking went. Then get eyeballs. Then turn them into paying customers. Then figure out how to make a business out of it.
If there is one element of the dot-com experiment that can be declared a categorical failure, it's this attempted creation of the instant company. Except in a handful of cases (Amazon.com being the most notable), huge up-front ad expenditures failed to translate into big sales, leading to customer acquisition costs as much as four times higher than those of offline competitors, according to McKinsey & Co. "Lesson numero uno is that the cost of customer acquisition is prohibitively high," says McNamee. "It suggests the Internet is an extraordinary way to communicate with known customers but a terrible way to attract new customers."
It may also be an admonition not to put the marketing cart ahead of the horse. "The fundamental mistake the dot-coms made is they assumed that brand is a thing in itself, separate from the product, and that it created value: 'Just get me known, and all this other stuff will fall into place,' " says Regis McKenna, the dean of Silicon Valley marketers. (This quest for attention has taken on an increasingly desperate air: SocialNet's CEO is offering a date with herself; Half.com has put sloganed rubber pads in urinals; recent e-mails from Pets.com declare "Sock Puppet mania!")
The instant-company approach rested in part on voguish concepts like first-mover advantage and the "network effect," whereby the first company to build a major brand would "lock in" customers. But the eyeballs that Websites managed to attract didn't turn out to be very loyal: One market study reports, for instance, that music e-tailer CDnow has 83% name recognition among online shoppers yet just a 17% loyalty rating. Brand familiarity does not necessarily breed loyalty, it concludes.
Why anyone thought the Internet--where ease of entry attracts an immediate flock of imitators--would promote customer loyalty is hard to account for. As McKenna notes, the billions of dollars poured into venture capital every year are essentially a bet that customers will be disloyal to existing offerings. "The first mover and the network effect clearly win over and over in software," says Nordstrom.com CEO Dan Nordstrom. "But people took those metaphors and tried to apply them to e-commerce," where they didn't necessarily apply. Says Amar Bhide, a Columbia University professor who studies startups: "A lot of what people think of as first movers are really first succeeders."
Many companies are finally capitulating to this reality. "One lesson I've learned is it's not about brand building," says Kenneth Kurtzman, CEO of Ashford.com, a luxury-goods site that ditched its TV ads in favor of more targeted marketing online. "It's about brand experience," or how customers feel when they encounter his product, which involves getting 1,000 little things right. Venture capitalist Steve Jurvetson now has a litmus test for which companies to invest in. "If they're just saying, 'Oh, it's my brand,' that is not the right answer," he says. "Brand is not a strategy."
Entrepreneurship cannot be systematized. Or at least not as easily as the Internet incubators would have us believe. What began as a promising and sensible idea--that a cluster of startups could share services and a core of entrepreneurial expertise--rapidly devolved into a pandemic of me-tooism, with FORTUNE 500 companies and 23-year-olds alike scrambling to set up incubators; one estimate puts the total at 350. Though the jury is still out on whether the best of the lot will create real value, the unsustainable stock prices of many of their offspring have many calling these idea factories "incinerators." "The idea that you can institutionalize the creation of entrepreneurial ventures is absolute bunk," says venture capitalist Bill Unger. Agrees Randy Komisar, author of the bestselling Silicon Valley tale The Monk and the Riddle and a "virtual CEO" who has helped godfather such companies as WebTV and TiVo: "Incubators are the Hula-Hoops of the new-millennium economy."
Next Section: Investors are not your customers.