by Real Business - Thursday, 30th August 2007

This is the page

I’ve been a full-time entrepreneur for nearly ten years. I founded IG, a computer games business, when I left university in 1991. When I moved on in June, following a management buy-out, it was a substantial company with over 65 employees.
Over the past couple of years, it feels as if the business world has been turned on its head. This so-called “new economy” raises questions for anyone running their own business.
Sure, I had some kind of insight but I didn’t have the whole picture. How do you inspire people to work for you? What about venture capital? How do you integrate technology into the fabric of the business, not just in a web shop front? Is there such a thing as a “new bottom line” or do you still have to manage costs and turn a profit? I had lots of questions and lots of preconceptions.
I decided to find out more. I wanted to know just what “the new economy” really means for people like me. So I bullied the secretaries and offices of some of the leading lights of the new economy and forced myself into their diaries. Here’s what I found.

Monday 6.30pm
The e-business consultant
Charlie Blackburn, European VP, Scient
Charlie Blackburn is the epitome of the mid-Atlantic consultant. Young and casual, he is eloquent and persuasive. Like so many of his peers in the new economy he has a background in management consulting. His company, Scient, is a fast-growing systems innovation company. In English, that means it implements internet-based projects - such as building e-commerce sites - for start-ups and more established firms moving onto the web.
First, we tackled the idea of “first mover advantage.” This is the idea that the first person to offer a particular service on the internet stakes an undisputed claim to that territory. The reality, I soon realised, is quite different. Some 80 per cent of Scient’s work is for old-economy companies - Goliaths rather than Davids. “There are still many opportunities for new organisations,” says Blackburn, “but they need to be pretty well funded, pretty well connected and be resourced with pretty deep talent.” The Davids need to become a bit more Goliath-like, and vice-versa. One myth punctured.
I had lots more preconceptions about the new economy. Essentially, I thought meant “doing commerce on the internet plus new ways of managing people.” But no. Blackburn painted the fundamentals of a new-economy company:

• New kinds of relationships with customers, employees, investors and suppliers.
  
• “Assetising knowledge.” This is consultant jargon for putting a value on, cultivating and sharing information that does not typically get measured on a balance sheet. Examples include business processes, customer data, or brand identity.
  
• A culture of sharing information and transparency within a business. This is the opposite of the mushroom theory of management (“keep ‘em in the dark and feed them on muck.”)
  
• Flat management hierarchies and a strong emotional and financial alignment between staff, managers and owners. This will likely include wide share ownership.
  
• Keeping close to the market.
  
• Flexibility in a rapidly changing business climate.
  
• Providing accelerated opportunities for staff growth, promotion and self-development. New-economy companies apparently realise that good people are the most important ingredient.
  
• Oh, and doing stuff on the internet.
  

These themes were to recur in almost all of my interviews.
My first response was, how do new-economy companies measure these things? They are so woolly. With “the new bottom line”, explained Blackburn. This accounts for otherwise intangible items such as the costs and rate of customer acquisition. Other elements of the new bottom line include market capitalisation, product cycle times or market share. Now a lot of these new measures may have taken a battering in the dot-com downturn, but they have left their mark. The new reality, says Blackburn, means “there are two different numbers: the things we want to measure to make sure we are being successful and the other is the value that Wall St is going to give for those measures.”
Blackburn challenged a lot of my assumptions about running a business. I realised that by concentrating on revenue and profit growth at IG and not measuring other, less tangible factors, I may have missed out on opportunities to grow the business in a more dynamic way and with greater subsequent value. On the other hand, I clung to the basic idea that making a profit was still pretty important.

Tuesday 3pm
The dot-com celebrity
Brent Hoberman, CEO and co-founder, Lastminute.com
Lastminute.com is the second most visited retail web site in Europe. Founders, Brent Hoberman and Martha Lane Fox, are the poster children of the dot-com revolution. Despite a smart location near Buckingham Palace, their office wasn’t very shiny. It even had a trick lift that didn’t take you where you wanted to go - the receptionist advised me to take the stairs. I did like the meeting room with a table tennis table in it - and the collection of table football games. I was also rather impressed that their offices didn’t look like a Bond villain’s lair (which I’d expected). I hope it shows that investors’ money isn’t being wasted on fancy office interiors.
Hoberman and I talked about rapid change. The new economy is almost Darwinian, he says. Businesses can “get through more stages of evolution quicker.” And the market shake-out is providing the natural selection process. I was used to constant technological change at IG - PCs doubled in power every year; new console game fads came along every two or three years - but the business model remained the same throughout. In the new economy, however, new businesses can be created in months, tested in the marketplace and, if successful, build a dominant position. The lesson for any business is that someone, somewhere is figuring out a new, better way to give your customers what they want. Having lost several good staff in the last year to internet start-ups, it’s my experience that someone, somewhere is also ready to poach your best people. Nowadays competition requires constant improvement.
Hoberman talked at length about customer acquisition. “Generating the demand is one of the most expensive elements of building a new business,” he said. It all made me rather uncomfortable. Treating customers as cattle to be rounded up and penned in seems so contrary to my own experience. The level of sales still seems to be the best measure of customers’ loyalty; and profit the best measure of efficiency. I ran IG on this basis, and although it grew rapidly and was consistently profitable, I do wonder whether I should have traded some profitability for more growth or whether I should have traded some ownership for venture capital. So my next port of call was at a VC firm.

Thursday 9am
The venture capitalist
Thomas Høegh, managing director, Arts Alliance
Of all the people I interviewed, Thomas Høegh has the most unusual background. He combines a Norwegian dramatic arts degree with an MBA from Harvard; and a Scandinavian sensibility for “social profit” with a career in the most rabid branch of capitalism. Among Arts Alliance’s portfolio are Lastminute.com and Douglas Adam’s H2G2 (Hitchhikers’ Guide to the Galaxy).
For Høegh, the new economy means “the introduction of technology into people’s lives: in work, learning, home, entertainment, social lives and personal management.” And the revolution is far from over. The internet can be a collaborative, user-friendly medium, says Høegh. “There is actually a value in the input of many to solve problems.” The internet will make the market more intelligent by more efficiently matching people’s needs to companies’ offerings - and vice versa. Take web sites such as moviecritic.com which recommends movies to you based on a clever collaborative rating system; or the customer reviews on Amazon.co.uk. But these are just the first steps, says Høegh.
When assessing investments, Høegh thinks big. He wants “great ambitions, even if they’re completely blue sky. We don’t fund small ideas.” Second, he looks for a great return on his investments. But the third piece is more conventional - “a stellar management team with solid operational experience in traditional, but high-pressure, businesses like oil production.” I liked that one.
He had some great advice for people trying to learn from the new economy. If I were to start another business, I’d pin this up on the office wall.

• “Map out the whole picture of the company, all the supply chains, all the customer touch points and ask ‘where in this universe does information flow’ and ‘what are the critical elements’ and then go and visit all the areas you don’t know - customers, suppliers, and get the real picture of what’s going on.”
  
• “If you have kids, let them educate you about how the Internet works. Spend the whole day with them at EasyEverything.”
  
• “Find the brightest and youngest members of the company and make them advisers to your board and let them tell you how the business should be run. Not that you should listen to them as to how to run your company but take seriously what they say.”
  

I was in such a thoughtful reverie when I left Høegh’s office that I walked bang into a glass partition and bashed my big toe.

Thursday 12.30pm
The identity gurus
Robert Jones, head of consultancy, and Charles Wright, managing director, Wolff Olins
For Robert Jones, sitting in Wolff Olins’ funky canal-side offices, the new economy is less to do with the internet than “an emotional climate” in which “categories and boundaries are irrelevant and what you do is less important than what you stand for.” His view of a new economy company is a very open “community of customers, investors, employees, and suppliers.” His conclusion? “The internet is a symptom of the new economy, not what it is about.” That really strikes a chord.
Jones’s ideas seemed abstract at first. But I left the interview thinking, “I wish I’d known this ten years ago.” All companies, he says, have two interdependent parts. On the one hand, there is the business model - a rational, changeable, intellectual piece. On the other, there is the identity, brand or “Big Idea.”* A strong brand identity is the only sustainable competitive advantage a business can have in the long term, says Jones. “Without meaning to, Richard Branson invented the new economy 30 years ago.”
In new-economy companies, employees apparently “feel more like owners.” This is best achieved through share options, says Jones. (Options were common to every business I visited). But options don’t just mean money. As Jones says, “emotional ownership is more important than share ownership.”
In a new business, I would make sure that my staff had stock options. If I could, I would build a culture with a strong sense of self-identity. Jones’s advice was simple and powerful: “think (and feel) very hard about how you want to change the world… so you can be sure that what you stand for is bigger than the thing you do.”
Then I talked to Wright about the importance of creative employees - and what managers can do to encourage them. “All we can do is create the conditions to enable teams to do their best work. The main reason people stay or leave is to do with the work that people are doing,” says Wright. I agree entirely. At IG, the most important thing was recruiting and retaining the best people and motivating (more accurately liberating) them to do their best work. That must be true for all businesses.

Tuesday 3pm
The internet engineer
Graham Seabrook, MD, Ridgeway Systems
Now for the serious technical stuff. Ridgeway is a technology and applications firm. I met managing director, Graham Seabrook, at his offices in a Reading technology park. Ridgeway does a whizzy combination of software and hardware that simplifies video-conferencing and data-sharing over the Net. It’s hard to describe - like explaining a telephone to an ancient Egyptian but, once you’ve used it, it seems very obvious and natural. Instead of selling a service to the consumer, Ridgeway sells boxes and software to internet service providers and telephone companies.
Two elements of Ridgeway’s approach were new to me. First, Seabrook is obsessed by standards. In most cases, companies spend a lot of effort trying to erect barriers to entry; Ridgeway is struggling to lower them. Why? Because of “the network effect” - the more people that can connect using Ridgeway’s system, the more systems it will sell. Second, it needs alliances. So Seabrook and co spent lots of time and effort courting its former employer: “the big company endorsement is worth the time spent courting it. Win BT and the world is your oyster.”
Ridgeway made its first product commercial available in June. Will the transition from R&D to a more commercial model change this culture? “It will increase excitement about what we’re doing - as it becomes real - but as we get bigger the family atmosphere will become harder to maintain,” says Seabrook. But Ridgeway has techniques that should help. I particularly admire its “house” system - small social groups, that cut across functional boundaries, are led or mentored by a different director. Each person in the company belongs to one or another group and each quarter they get a budget to lay on some kind of social event. That’s another idea for my next business.

Tuesday 6pm
The supply chain guru
Simon Palethorpe, VP business development, Buy.com
Simon Palethorpe is a rarity in the dot-com world. He’s actually worked at the coalface of business. I met him in Buy.com’s UK offices in Chelsea. It has over 80 staff, but is still operating in the offices of an “incubator.” It’s like a 30-year-old who hasn’t left home yet. Buy.com’s parent company in the US is the number two internet retail site in the US after Amazon.com with anticipated revenues this year of around $800m. Palethorpe gave up a high-powered job at Levi Strauss because he wanted to build a business and be “part of a defining culture.”
Buy.com is the quintessential business-to-consumer site. It aims to be “an internet superstore” selling everything to everyone at the lowest possible price. The focus at Buy.com is commercial and pragmatic. Price is everything. Simon talks about margins, gross profitability, cost base and the cost of customer acquisition. The strategy is to get the company to a critical mass of revenue and a sufficient customer base.
Buy.com is also a “virtual business.” This means that it subcontracts significant functions such as warehousing, distribution and technical support. The objective is a “low cost supply chain.” This virtual quality gives it “lower costs by sharing fixed assets, flexibility and risk.” Apparently Buy.com is something of a saviour to the distributors it works with. These companies are in fear of being disintermediated by the internet, but Palethorpe describes the relationship with their partner companies as very close - “there needs to be a cultural fit - to some extent they need to be willing to co-venture with us.”
Companies such as Buy.com and Lastminute.com show that the new economy is more than a stockmarket bubble. They demonstrate a new way of doing business. They offer greater choice to the consumer by aggregating many different suppliers through one site and making searches easy and quick. More than that, they reduce the cost of meeting the customers’ needs through the use of technology both in the sales process but also in the supply chain that feeds it. I can’t imagine running a business in the future where at least some of these things were not critical.

Friday 12.30pm
The porn philosopher
Berth Milton, president and CEO, Private Media Group
I wanted to visit at least one company that was actually making a profit selling things on the internet. The problem was, none sprang immediately to mind. Except in the adult-entertainment sector. So after some diligent research - in the financial pages of the internet, I hasten to add - I found what I was looking for. Private is a Barcelona-based porn company that’s also listed on the NASDAQ stock exchange. Three days later, I was on a flight to Barcelona to meet its owner, Berth Milton. I was somewhat nervous. In fact, apart from what was on the screens, I could have been in the chaste, high-tech office of any internet company. But this wasn’t any old internet company - Private has a $20m-plus turnover and, most important, a net profit margin of around 22 per cent.
A critical characteristic of any business is the need to give the customer what he or she wants. And Private sure does this. At least half of all personal internet users have looked at adult material on the web, says Milton. And 85 to 90 per cent of the adult population buys at least one adult-oriented product each year. Of course, the internet is the perfect medium for porn - it is direct, worldwide and embarrassment-free.
Private wants to build a brand name. His “big idea” is to make Private a “young people’s lifestyle product like Playboy once was.” Porn, he says, has been available to the elite throughout the ages but now he wants to democratise it. Two trends will massively increase the value of his business, he says: growing acceptance of porn and the revolution in distribution caused by the convergence of TV and the Internet. In a sense, the success of Private today is both a cause and an effect of these trends.
Private embodies many of the challenges and opportunities facing traditional businesses moving into the new economy. It is, after all, just a publishing company. Milton may have learned the lessons of my other interviewees, but he remains sceptical. “The internet is not something that solves everything. It’s a good way to spread a rumour quickly. But if your business model doesn’t work in the old economy, don’t go to the internet… If you need a 300 per cent mark-up in the mail order business to be profitable, what has changed for a mail order business on the internet?” For Milton, the new economy hype has all the flavour of a craze, like the South Sea Bubble, in which shareholders speculate but companies don’t get any richer. Ultimately, his advice is “Get the business right first.” I couldn’t agree more.

Matthew Stibbe is a veteran of the software business and a sometime journalist. Contact him on matthew@stibbe.net or www.stibbe.net

* The Big Idea, by Robert Jones

Tags: internet company, economy company, build business, business world, business model, running business, software business, business visited, virtual business, quintessential business, economy companies, economy means, business model remained, imagine running business, mail order business, vp business development, computer games business, economy companies measure, internet stakes, economy hype, business model doesnt work, examples include business processes, internet retail site, sustainable competitive advantage business, internet start ups, company belongs, economy companies apparently realise, internet service providers, internet superstore selling, publishing company, substantial company, personal internet users, economy raises questions, buy, companies dont, found monday 30pmthe business consultantcharlie blackburn, private, economy 30 years ago, managing people, big company endorsement, business tuesday 6pmthe supply chain gurusimon palethorpe, blackburn, buy coms parent company, good people, implements internet based projects, ridgeway, barcelona based porn company, telephone companies, rapidly changing business climate providing accelerated opportunities, businesses tuesday 3pmthe internet engineergraham seabrook, companies offerings, inspire people, partner companies, people interviewed, customer acquisition, social profit, companies spend lot, customer data, ig, jones, making profit, milton, profit growth, seabrook, sufficient customer base buy, fast growing systems innovation company, apparently buy, customer reviews, important thing, market share, offices didnt, private embodies, private today, new economy, start ups, first mover advantage, scient, epitome, old economy, integrate technology, innovation company, systems innovation, raises questions, web shop, management consulting, secretaries,