Legend has it that one Internet entrepreneur got his $5m in venture capital before he had even finished the IT course he was studying. However, those days are long gone and funding is a lot thinner on the ground. Today, you are more likely to be working on a small budget that has to last longer.
The challenge then is to identify where the money goes, which activities bring the best returns and what are the most cost-effective ways of doing things.
Marketing makes a significant dent in the budgets of most new e-businesses, whether they are in business-to-business (B2B) supply chain management or selling to consumers. It takes a lot of persuasion to get people to work in a totally new medium.
For a dotcom start-up, marketing frequently represents the single biggest investment it will make. When the online electronics store Jungle.com was launched, the majority of its budget was spent on marketing - an estimated £20m. The site subsequently found that it needed more bandwidth as the system ground to a halt, the irony being that the ad campaign had attracted too many customers. In retrospect, Jungle.com's managing director Steve Bennett admits that some of this money would have been better spent on buying more bandwidth.
The problem with some new Internet businesses is that they throw so much money at marketing, to the detriment of other vital processes such as development and testing, that they end up attracting people to a site that is not ready.
It is a lot cheaper, and can be more effective, to use the Net for marketing. The irony of marketing the new media by throwing millions of pounds at the old media is not lost on Jeremy Crowe, director of Dowcarter, an Internet marketing company. "It is odd that companies don't take advantage of the medium of the Internet when they try to promote an Internet company. It is more creative and far cheaper. The other great advantage is that you can start off slowly and build on that success. A traditional marketing campaign is much less flexible," says Crowe.
Even B2B portals, which have fewer potential clients, still need to spend to gain a critical mass of buyers and sellers before they become a viable proposition. Again, there is a more effective and cheaper way to do this using the Web.
Webmethods, a company that helps establish B2B trade, has set up a portal, B2B.com, that acts as a hub for advertising a service online. It provides the software tools that the client sends out to customers and suppliers, which makes it easier to hook up to the portal and get into the trading system. "It is a lot more effective to get sales people to phone potential users and offer them free software, than have to entice people with adverts," explains Jeremy McGee, Webmethods' marketing manager.
The biggest mistake most start-ups make is trying to integrate their systems themselves, says McGee. "People waste too much money on developing and personalising their systems. Then they compound the problem with long, drawn-out integration processes. Integration is now a question of using a package which has a control panel to automate the integration of systems. Too many companies still integrate systems by writing pages and pages of Java code."
One of the biggest mistakes is investing heavily in software. Developing your own code might well enable you to differentiate your system from everyone else's, but the value of this is questionable. In most cases it certainly doesn't justify the expenditure, according to Greg Darmohray, head of Europe at Webridge, a supplier of B2B e-commerce solutions.
"Developing bespoke, customised solutions is a big mistake," says Darmohray. "In a lot of cases companies simply can't afford it. But for some reason they seem to think it's vital."
Darmohray cites a recent report by research company Gartner Group, which found that a typical B2B site costs about £750,000 to develop and takes at least six months to build. "You can't afford either. The biggest cost and time factor in these sites - over 80% - is custom coding of infrastructure such as authentication and security. Pre-built e-business solutions can halve these costs and cut time by two-thirds by using a building-block approach," he says.
There are ample examples to back up Darmohray's belief that custom code is a bad investment. The most risible failure in recent times is that of online retail outfit Boo.com, which raised only £250,000 from the sale of its technology when the company folded, even though the kit was reputedly worth £26m.
Similarly, Netimperative.com, an online information service, was recently sold for £126,000 despite a £650,000 investment only a year ago. Clearly, the value of the software was not highly rated by the liquidators. The lesson is simple. "Don't waste time or money building custom infrastructure - get it out of the box," says Darmohray.
Staff, needless to say, are a rare and expensive resource. In building a B2B system, the most important people to have onboard are not those with high-premium Web design skills, but people with industry knowledge. The latest buzzword in investment circles is "domain knowledge", meaning industry knowledge and contacts. Even with Internet companies, people costs can absorb up to 60% of expenditure. The core skills are not technology but business-related.
Even the most basic Web sites will need staff to have operational and technical expertise in over 100 different technologies. Have you got the time and money to find these?
"Key management will often find themselves spending precious time dealing with the IT system when they really want and need to focus on the sales and marketing," says Martin Gaskell, marketing director of Madge.web.
Get someone else to do it - but make sure you retain control of your systems and keep staff skilled so that they can understand the architecture and service levels required to support their business. Transactions are a particularly tricky operation to manage and these can be outsourced to a company such as Madgeweb.
Practically every aspect of IT can be provided by a host company, such as MRS. Transactions, hosting, Web creation and updates, even storage is being catered for by service providers. As has been pointed out previously in E-Business Review, hosting may not always prove cheaper, but it does not require a massive up-front investment and is considerably quicker. And it gives you the flexibility to change.
Say you want to house your server on your business premises, installing a 64Kbyte leased line from a typical service provider has a minimum cost of about £4,000. Add to that the monthly running costs, the cost of installing air conditioning and an uninterrupted power supply, plus the cost of employing a full-time engineer to look after your server and you are looking at spending at least £25,000.
With hosting companies such as MRI and Redbus Interhouse, the cost of hosting a server and connecting it to a burstable 64Kbyte line (ie, one that can easily expand up to 10Mbytes) can be as low as £3,800.
The biggest danger in outsourcing is in managing the contract. "One of the biggest pitfalls is tying yourself into a lengthy contract," says Kevin Neal, managing director of Redbus Interhouse. "Business moves so fast that new services emerge daily. You won't be able to take advantage if you're tied up in a long contract."
The moral is to only outsource to a supplier that can offer monthly renewable contracts. Forrester Research has predicted that the co-location market will grow tenfold by the end of 2003 to $10bn (£6.25bn) worldwide, so there should be plenty of choice.
Given that a Web business is largely about content, you would not expect this to be an area that lends itself to cost cutting. But there is scope to get content cheaply without compromising the integrity of your site.
Moreover.com, is an online news and information aggregation service. It does not provide content, but only links to content, directing other users there, it supplies the benefit of fresh, up-to date content at a fraction of the cost. "The Web is only a Web because of links. Maintaining links to relevant content is time-consuming and expensive," says David Galbraith, chief architect and co-founder of the site.
There are considerable tax advantages in locating in tax havens, such as Bermuda, the Cayman Islands or Guernsey. However, the common misconception is that this makes you exempt from the UK's trading laws - the EC's e-commerce directive says users are protected by their national laws. The EC's distance selling directive applies here too.
Still, if an e-business is set up offshore, trading through a computer server sited offshore, it is possible for the business to take advantage of the tax regime in that offshore jurisdiction. Many of these countries are currently introducing legislation to ensure that e-businesses are able to take advantage of their favourable tax regimes.
Bermuda has been the first to establish e-commerce regulations, with the adoption of the Electronic Transactions Code Act and the newly established Standard of Electronic Transactions. And it is probably the nicest location for holding the obligatory company meeting that proves you are a bona fide offshore company.
honda's viral marketing campaign
Internet marketing company Dowcarter conducted a "viral marketing campaign" for one of its clients, Honda. Unlike a traditional media campaign the costs were modest (£150, 000) but the response evoked was five million hits on the company's Web site.
Viral marketing may sound a little ominous but is, in this case, the use of humour to create word-of-mouth interest in a product. Dowcarter produced a series of 10 "movies", short film sequences that could be e-mailed as attachments to individuals. Each cost £10,000 to produce and, on Crowe's admission, only two of them really captured the public's imagination. But this was enough.
Many of us will be familiar with the film clip of a Honda pulling up at traffic lights and being confronted by a pair of Squeegee merchants. As the driver's window winds down, suddenly a gush of water flies from inside the car and drenches the dreaded windscreen washing traffic pests. This happy story of the motorist's revenge was followed by the name of a Web site, www.hondajoymachine.com. This short sequence of film was responsible for generating the majority of the five million hits on the Honda site.
Having created the site for £50,000, Honda set about publicising it using its own staff. Five hundred individuals at Honda Motor Europe, Honda UK, the Leith Agency and Dowcarter e-mailed this film clip and the link to the Web site to personal contacts. They presumably liked the clip and e-mailed it on to their own friends. The campaign snowballed from there.
The success of an Internet campaign is not only cheaper, it is easier to monitor. The site was only promoted by the movies, and the growth in demand on the site was more manageable as word spread. Much more qualitative analysis is available for this sort of exercise and it is more likely to be accurate. Server statistics show that the average time spent looking at the site was six minutes, whereas there is no accurate way of guessing the attentiveness of a consumer watching a normal advert.