ARTICLES

Few Hot Internet Companies are Built to Last

USA Today
by Jim Collins
May 17, 1999
With the surge of Internet stock offerings and surreal valuations, the question arises: Are Internet companies built to last? Will today's hot, young Internet companies be the enduring great companies of the 21st century—what General Electric, Sony, Disney, and Wal-Mart were to the 20th century?

Most will not. In fact, most of today's Internet companies will not even exist in two decades.

That's not to say that all will go by the wayside or be gobbled up by other companies. A small fraction of today's Internet companies will become powerful pistons in the economic engine of society and last for many decades. But these will be the rare exceptions, made even rarer by two fundamental problems.

Right place, temporarily

First is the age-old problem of confusing luck with competence. If you have a great idea and happen to be in the right place at the right time, you can be successful in spite of your management practices—for a while. However, a single hit cannot carry a firm forever. Sooner or later, management incompetence, if it exists, will cripple or kill the company.

At Apple Computer in the late 1980s, for example, the insanely great Macintosh compensated for a multitude of management sins. Blinded by the success of the Mac, Apple's executives failed to confront the brutal facts of reality about the changing dynamics of their industry.

Worse, in my opinion, these executives used the company as a platform to advance their own celebrity and neglected the arduous, nuts-and-bolts task of building a well-oiled machine that could create a continuous stream of insanely great products. Then, once the Macintosh was no longer a unique product, the poor practices that had been there all along nearly killed the company.

History repeats

The history of high technology is full of similar examples, and the Internet world will be no exception.

Don't get me wrong. I'm not saying that all Internet companies have incompetent management. Indeed, some of the most competent executives in business have moved toward Internet-related companies. Steve Hooper and Craig McCaw of Teledesic and Joy Covey of Amazon.com are notable examples of executive excellence.

What I am saying is that the Internet bubble is so large that even poor management can attract people and money—at least until the bubble bursts.

At one Internet company, for example, the founder and chief executive routinely abuses and demoralizes people. Employees dread coming to work with this tyrannical executive. And yet they stay.

Why? For the simple reason that he has a great idea that can be packaged for a hot initial public offering in the next 12 months. Once the company goes public and those stock options vest, the best people will hit the self-eject button as quickly as possible. They're not trying to build a company; they're trying to go public. And once they reach the top of that mountain—once they can say "we've arrived"—they have no substantial plans for taking the company from hot stock to great company.

And that brings me to the second problem: the Gold Rush mentality. Much of today's Internet culture is simply the 1849 California Gold Rush all over again.

Many of the people starting Internet companies today hope to stake their claim, hit the right vein, get rich quick and check out. They're no more interested in building something of lasting value than the swarming hoards of miners who scoured the foothills of California for the precious yellow metal 150 years ago. Any company founded principally to capitalize on the Internet Gold Rush will not become an enduring great company. Sadly, in the go-go world of cybercommerce, I fear most are gold rushers.

But some Internet executives want to do more than just strike it rich. They want to build something to last. The executives at Amazon.com, for example, have been working hard to make the transition from hot start-up to great company.

And there are others. Some of my former students from Stanford Business School, such as Mark Selcow of BabyCenter.com, have launched Internet enterprises with the explicit goal to build an enduring great company.

Far-sighted leadership

Will these companies make it in the long run? I don't know. But they have one giant advantage not shared by many of their Internet counterparts: Their executives want to build something of lasting value.

Out of every technology revolution, a few significant players emerge. General Electric grew out of the invention of electricity. Ford was one of more than 500 start-up auto companies. Disney was one of hundreds of garage studios in the early days of film. Sony, a ramshackle small company in the early 1950s, emerged from the early consumer electronics frenzy to play a role in all of our lives today.

Similarly, 50 years from now a tiny percentage of today's Internet companies will be as central to our lives as GE, Ford, Disney and Sony. The Internet as a vital force in commerce and society is here to stay. To ignore it is to ignore reality—never a very smart life strategy.

But which Internet companies are here to stay? Well, that's entirely another question.

I am not an investment expert. Nor do I invest in Internet companies unless I personally know their leaders and their motivations. To me, putting money in Internet companies at this point—unless you really know the people involved and their long-range plans—is no different from putting money into gold miners heading off into the California foothills to stake a claim.

Sure, some lucky souls will make a short-term bundle. But it is a very high-stakes form of speculation, and speculation is not investment.

It is gambling, and the long-term odds are with the house.

Copyright © 1999 Jim Collins, All rights reserved.