Just Managing: The Monty Python Syndrome

For a window into the predicted shakeout of e-everything, check out that managerial primer known as Monty Python and the Holy Grail. In the opening scene, a man in a black hood pushes a cart through town calling, "Bring out your dead." As the townspeople deliver their dearly departed, one man (referred to as the Large Man in the film's script) has a problem - his corpse won't die. The Cart Driver points to the would-be cadaver and says, "'Ere. He says he's not dead."

Large Man: "Yes, he is."

Body: "I'm not!"

Cart Driver: "He isn't."

Large Man: "He will be soon. He's very ill."

Body: "I'm getting better!"

Large Man: "You're not. You'll be stone dead in a few minutes."

And so the argument continues until the Large Man, eager to seal the deal, finally persuades the Cart Driver to send the Body to his maker with a bonk on the head.

Substitute e-retailers for that ailing corpse-to-be, journalists and analysts for the Large Man, and the money crowd for the Cart Driver - and you've got a pretty good depiction of today's e-retailing sector. Many e-retailers are facing imminence, yet they aren't giving up the ghost.

There are several reasons that many high-tech firms linger with the irritating resiliency of the Body in the cart. Most companies actually fold a lot slower, and far more unpredictably, than the vulture-like critics hovering overhead imagine. Despite the growth business in predicting apocalypse, it's excruciatingly hard to find companies that have completely tanked.

I asked Amar Bhide, who wrote the definitive book on startups, The Origin and Evolution of New Business, and he e-mailed me with examples like Peapod.com, Iridium.com and Drkoop.com. Troubled companies to be sure - but in the words of Monty Python, not dead yet. (In fact, with the recent capital infusion from Royal Ahold, Peapod just might "go for a walk.")

Certainly the surplus of venture money propping up firms that deserve to be cadavers has played a role in the Monty Python Syndrome. When nobody has to make money, it kind of makes sense that the traditional cause of death no longer results in death. This makes failure in the Internet economy difficult to define. Most people are still so smitten with visions of Amazon.com that they consider anything less than IPO-associated billions a disappointment.

One smart contact of mine (Professor Robert Merges at the University of California at Berkeley School of Law) referred me to his friend Nat Goldhaber, whose "failure" consisted of recently agreeing to sell his company, Cybergold, for only $157 million worth of stock in MyPoints.com. Another well-connected friend, Adam Honig, had sold his company, Open Environment, to Borland Software four years ago for a mere $100 million in what also also considered a failure.

Honig points out that many promising companies fail to crash and burn spectacularly. "It's really, really hard to kill a technology company that has an intellectual asset," Honig says. "They don't really fold. They just go down that long asymptote."

Silicon Valley has a long-cherished tradition of embracing failure, of placing value on learning from risk. The belief is that there's more to be learned from a good company that fails for reasons beyond its control than from a mediocre one that endures despite all good sense and reason. The challenge of a failed company is to learn from the experience and apply it to the next venture.

Such was the case with a recently folded company called HipO.com, based in Atlanta, Ga. In spring 1999, Tim Cobb, who cofounded Web-traffic tracker Relevant Knowledge, sold his company to Media Metrix before starting HipO. The company was planned as an online destination for the group of 12- to 19-year-old consumers dubbed Generation Y. Armed with $4 million in private backing, the company designed a cool site, hired 50 employees and launched in August of that year in hopes of blending community with commerce.

Cobb says that at the time, he didn't believe an advertising-driven site would be significantly profitable, so he based the company's fiscal health on its ability to sell goods, primarily apparel. The challenges were significant. According to Seema Williams of Forrester Research, HipO was targeting a market of consumers who don't have much money to spend and who rarely have access to credit cards to make online purchases.

Earlier this year, HipO shut down its site, let go half of its employees and watched much of its top management defect. Cobb says the tragic flaw in the HipO business model was an assumption that major apparel companies would be willing to partner up with an online vendor. They weren't, and HipO was forced to offer apparel from lesser-known brands.

But Cobb found opportunity in the ordeal. As he worked with smaller apparel manufacturers, he discovered that most of them were seeking help in conducting business online. "We were spending a considerable amount of time with the manufacturers, helping them to solve their Internet problems," Cobb says. A light bulb went on for him, one that culminated in what he calls a "come to Jesus" moment at the end of the year. "Our experience as a small retailer made it clear that there was a huge opportunity to create a business-to-business site, a trading hub for huge manufacturers and their partners," he says.

Cobb shut down HipO and earlier this year launched Edaflow.com, an online marketplace for apparel manufacturers. The site allows clients to browse through customized 3-D showrooms online and to track order life cycles. In essence, it gives companies the ability to manage their orders on the Net. Earlier this month, the company announced a $7 million investment led by Harbinger, a publicly held company that supplies b-to-b software.

"I wouldn't say we went out of business," says Russell Griffin, VP of Edaflow. "I'd say we transferred our knowledge base to a new venture." A positive spin, to be sure. But it's spin that's now backed with $7 million and a handful of partners.

So even though the man in the black hood came calling for HipO, he left empty-handed. Whether Edaflow might one day rest in his cart is a story for the next reel.

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