'Cyberphobia' Subsiding As Strong Web Firms Emerge

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It appears the implosion of the dot-com industry is slowing with only 93 online companies shutting down or going bankrupt in the first six months of this year, compared to 345 in the first half of 2001.

“We are beginning to see signs that the market’s irrational fear of the Internet, or what we would call ‘cyberphobia,’ is beginning to subside as successful business models emerge,” says a spokesman for San Francisco-based research firm, Webmergers.com. “Hints of financial health in sectors like online travel, e-recruiting and a surprise profit from Amazon.com helped revive faith in at least these sectors.”

According to Webmergers.com, which keeps a running tally of dot-com shutdowns and bankruptcy filings, there have now been 835 dot-com casualties since 2000. But the death rate is slowing. In April, there were only 12 shutdowns and bankruptcies, compared to 60 in April of last year. And April was the fifth month in a row in which the number of dot-com failures declined from the month before.

Consumer casualties dominate the total so far this year but there’s been a recent spike in the death of dot-coms that sell software or services to the business sector.

While analysts say it’s always positive when there are fewer failures, at this point part of that can be attributed to the fact that there simply are fewer dot-coms left to fail.

“The dot-coms that were really pathetic — the ones you couldn’t understand how they got funded — they went really fast,” says Judith Hurwitz, a principal at CycleBridge Technologies LLC, an analyst firm in Newton, Mass. “Then you lost the ones that had the good technology but might have burned through $30 million, $40 million or $50 million and just didn’t have any more left. Now you’re down to the businesses making revenue and offering something strategic to their customer base and they’re being very, very careful to stay afloat.”

The new Internet economy? The one where businesses grew faster than profits and venture capital flowed like lattes. It’s dead. Actually, no. It never existed. And the dot-com shake out only proved that.

Long gone are the days of the lavish parties, playing Nerf football in an office decorated with miniature golf holes and foosball tables. No more cappuccino breaks and Herman Miller chairs. Remember when the old guys in the gray suits were laughed out onto the curb by the CEO who was barely old enough to shave and only wore shorts and flip flops to the office?

Well, the kid has gone back to school and the men and women in the suits — the ones with all the money-making, project-mapping, kick-your-butt-if-you’re-late experience — are back. And they’re running the show again.

“Experience is popular again,” says Hurwitz. “A few years ago, if you actually had 10 years of experience, you were a pariah. Now they see that it’s valuable…Everybody is in survival mode and they’re bringing the experienced guns back to the head of the table.”

The death march may be over but analysts warn that there will be more dot-coms to fall before the cleansing is complete.

“No, I don’t think we’ve hit bottom,” says Hurwitz. “I think there are a lot of companies out there hanging by a thread. If a company gets those three big contracts they’ve been negotiating for the past 18 months, they’ll live another day. If they don’t, they’ll go out of business. We’re definitely not out of the woods yet.”

Gordon Haff, an analyst at Illuminata, an analyst firm in Nashua, N.H., agrees that the dot-com industry isn’t wholly out of the woods yet but he says the full frontal assault of the dot-com backlash looks like it’s over. Now that grownups are in charge of most of the businesses and making a profit is once again a must, people are starting to regain some confidence in the sector.

“The Internet is here to stay and clearly there are businesses that the Internet makes possible,” says Haff. “Through both the great bubble and the great fall there developed an understanding of the types of businesses that the Internet can enable.”

Haff noted that it might have been cool for Pets.com to sell pet toys and food over the Internet but it was less than feasible — or ultimately successful — to ship cat litter by Federal Express across the country. On the other hand, eBay has found a successful niche, bringing people together in the world’s largest flea market. Amazon.com, with its warehouses of available books, has found its own successful market.

Researchers at Webmergers.com say signs are popping up around the industry that the backlash is waning.

“April’s slowdown in casualties comes amid anecdotal signs of a lessening in the intense aversion to the Internet that reached epidemic stages in mid-2001 at the peak of the bloody dot-com shakeout,” the company said in a written statement. “At that time, fearful investors slaughtered Internet company stocks indiscriminately, while Internet executives raced to strip the “.com” from their names and cleanse their product descriptions of Web lingo. This negative reaction was every bit as nonsensical as the early inane exuberance about cyberspace.”

Haff says dot-com failures probably have dwindled to the failure rate of the average business.

“There’s still VC money out there,” says Haff. “There’s not as much as during the boom and it’s been allocated very carefully. A good business now means it’s not only innovative but it has to look like something that could actually make money down the road.”