The 7 Habits of Highly Persistent Dotcoms (And the Two Guys Behind the Rebirth of a Bubble-Era Flameout)
By: Ralph King
Issue: November 2001What does it take for a dotcom to make it these days? For starters, there's grit, tightfistedness, agility, and a greatly reduced sense of grandiosity.
"What's the product number?" Seth Greenberg asks a customer. "That's the Western Pacific engine. Sells for $69. Sorry. Out of stock."
Six months ago Greenberg gazed at palm trees from a swank set of offices in Santa Monica, Calif., where he oversaw a million-dollar marketing budget, ordered a dozen staffers around, and feasted on catered lunches. Now, wedged between two co-workers and stacks of dusty computers in a windowless storeroom in southeast Los Angeles, he spends much of his time on the telephone taking orders and listening to complaints.
It's a big comedown in one sense, a remarkable comeback in another. For when Greenberg's dotcom collapsed, he didn't just cut and run. Instead he persuaded a colleague to help him buy what was left of a seemingly doomed business, and together they found a way to keep it going. Like Greenberg himself, the company, eHobbies, has adjusted its expectations downward. Once billed as the "ultimate online destination" for hobbyists, it boasted a $25 million bank account, 175 employees, and 50,000 square feet of warehouse and office space, complete with a TV studio for producing online entertainment. Today it's a microenterprise with a noisy corner of the warehouse for a headquarters, a staff of seven, and a much more mundane mission.
"I used to brag about being a marketing guy at an Internet company like I was running a Hollywood studio," says Greenberg. "I don't work at an Internet company. Like it or not, all we are is a retailer."
He's a retailer who works in shorts in a steamy warehouse, commuting more than an hour from his Santa Monica home and deferring his salary until who knows when. (For the time being, Greenberg and his partner depend on their wives' paychecks.) But with less than 5 percent of its predecessor's overhead, the new eHobbies manages to generate about 40 percent of its previous sales volume of $6 million. And it's something the old eHobbies never was: profitable. The company is one of a growing number of reborn dotcoms -- anecdotal evidence suggests that there are dozens, but nobody knows for sure -- run by managers who emerged from the meltdown with fresh insight about what really works online and how these businesses should have been built in the first place.
Now that the get-rich-quick prospects have evaporated, the Internet no longer holds much appeal for financiers. But the entrepreneurs -- a small band of them, anyway -- have stuck around, combing through the wreckage of first-wave startups in search of business ideas that might yet be made to work. The result has been the quiet resurrection of some of the biggest names in the dotcom hall of shame, including Homes.com, a customizer of websites for real estate agents; BigWords.com, which finds cheap textbooks for college students; Wine.com, bought out of bankruptcy by a smaller rival; and Garden.com, now a subsidiary of Burpee, the seed giant. Even the goofily named Gazoontite, an online enterprise devoted to "helping people breathe better," has found new life as a plain old brick-and-mortar merchant of allergy remedies.
No doubt there will be failures in this second wave as well, failure being the fate of most new businesses. Even for the luckiest of them, it will be a long, hard, undercompensated struggle, with profitability achieved -- if ever -- more according to the model of the corner grocery or dry-cleaning shop than that of big-time corporate America. Already, though, there's enough of a record to suggest that with tightfisted and focused execution, there's money to be made from all those mouse clicks after all.
"This is not the time to put up a Wal-Mart on the Web," says Geoffrey Moore, author of the best-selling Crossing the Chasm. "What we have is a huge flea market that is open for people to set up tables."
"Surprised to see you guys here," says an importer in a loud tie, eyeing Greenberg's eHobbies T-shirt over a glass case full of model planes at the International Model and Hobby Expo in Chicago. "So what's happening with you guys?"
"We're alive and kicking," Greenberg says, handing him a press release to that effect. "We're a lot smaller," he adds.
After a long pause, possibly to ponder whether a company whose name starts with "e" is worthy of belief in the year 2001, the importer warms up, giving an enthusiastic sales pitch about the digital images he can supply for Greenberg's website and his readiness to "drop ship" -- industry jargon for when a manufacturer or wholesaler delivers directly to a retailer's customers.
Greenberg and his partner, Ken Kikkawa have flown here on Spirit Air for $250 apiece round-trip, and they're sharing a hotel room. Even so, the trip qualifies as something of an extravagance for two entrepreneurs who exhausted their savings and took out personal loans to raise the $200,000 stake that put them at the helm of eHobbies after their bosses ran it into the ground last May. They raised additional working capital by, among other things, bidding on as much of the defunct company's spiffy furniture as could be stored in Kikkawa's garage and driveway, and then reselling it. (They say they turned a $10,500 profit on the sale of 30 Aeron chairs.) To get the website redesigned, they traded merchandise credits with a graphics guy who races model cars on the side. They acquired the URL, trademark, and customer list by agreeing to share inventory proceeds with a liquidator, Marty Pichinson, who fondly refers to them as "my guinea pigs."
At lunch in Chicago with an executive of one of the industry's megadistributors, however, Kikkawa gets nowhere with his bid for a major drop-ship deal. Alan Dodds of Horizon Hobby dismisses the idea out of hand. "Unfortunately, it's just not a profitable business model for us," he explains. While some of his competitors may be willing to make such deals, "they don't have the commitment to brick-and-mortar retailers that we do," Dodds says.
Indeed, Horizon has been known to give discounts to hobby shops to combat the low-overhead advantage of dotcoms -- a source of great vexation for Greenberg. "The pendulum has swung too far," he declares, launching into an impassioned protest through which Dodds sits stone-faced with hands folded on the table. The lunch ends quickly, though Kikkawa is encouraged by Horizon's willingness to consider a restoration of eHobbies's credit line.
Back in the 90-degree heat of the California warehouse, is Melissa Jodis -- pulling telescopes, radio-controlled trucks, and model rockets off shelves. Though she earns just half of the salary she had at the old eHobbies, Jodis's new deal includes a bonus for each package that goes out. One recent weekend, Kikkawa recruited a couple of preteen relatives, at $5 an hour, to help with a corporate order for 500 die-cast cars.
In a workplace of extremely broad job descriptions, Kikkawa oversees "things you can touch," such as inventory, while Greenberg attends to "things you can't touch," such as marketing. In that capacity, he scours the Internet for low-cost deals. eHobbies started out doing almost everything in-house, even if it meant hiring a staff of 10 to manage the website. "My mantra used to be, this place could be profitable with seven guys and a Yahoo Store," Greenberg says. "Careful what you wish for..." Now the company relies on the Yahoo Store platform and a host of other third-party arrangements. "Outsourced ASPs [application service providers] are what keep us in business," Greenberg says.
In its "ultimate online destination" days, eHobbies struck marketing deals by the hundreds and casually spent $20,000 on lights for a photo studio. Today it's just a store, focused on the goods that make the most sense online, and watching every penny. In recent months it has cut warehousing costs by scrapping slow-moving categories like coins, stamps, and birding supplies. What Greenberg and Kikkawa are after is a profitable niche.
Finding offbeat ways to make money is an old trick of Greenberg's. As a professional radio contestant in the early 1990s, he disguised his voice so deejays wouldn't hang up on him, and in just 18 months he won $140,000 in cash and prizes, including six trips to Hawaii. Now he's hot to launch a 50 percent discount promotion with the teaser "Take part in the Great Train Robbery."
"The phrase just came to me one day in the car," Greenberg says. A few days later, he sends his train-robbery message to an e-mail list of 130,000 customers before leaving his home in Santa Monica. When he arrives at the warehouse, the first few orders for the $39.99 Bachmann HO Superchief are already in. By the end of the week, 100 train sets have been shipped. Greenberg expects to do even better next time, when he starts tailoring his promotions to customers' prior purchases. "I always want more," he says.