Evaluating Business Ideas

Why the New Economy Failed

Here's my take on why the new economy's dot-com companies failed in their mission to change the world and make life better and more profitable for all of us.

Why did the new economy fail?

new economy failure

It's known as the dot-bom crash, an economic collapse ending the dot-com boom years, a heady time when young entrpreneurs and venture capitalist thought they could crush established companies. But that new economy didn't pan out for most of the entrepreneurs and their investors.

Everybody has a take on this but here's my take on it. If you've seen it somewhere else, let me know because I haven't.

The new economy failed because the old economy kicked its ass.

I was a new economy entrepreneur, playing in the beauty industry. We created an offering that customers loved and that made the whole industry more efficient and more profitable.

Nearly everybody bought into the concept, but a few old-economy, 800-pound gorillas who dominated the beauty jungle decided not to play along. Estee Lauder and Lancome said thanks but no thanks.

We tried every trick in the book: creating a great offering, convincing them with reason, befriending them, flattering them, building a trojan horse, allying with industry insiders, giving our offering away, positioning old economy competitors against each other, scaring them, creatively helping them to achieve their accounting objectives, offering them half of our company if they would cooperate, haranging them for being dinosaurs, and of course -- the oldest trick in the book -- credibly promising more than we could deliver.

In normal selling situations, these techniques work. But this was different.

The beauty industry operates as a near-monopoly. A select group of companies controls the distribution of the products. All the small players live on the leftovers after the big players have eaten. The small players' dream is to one day be bought out by the big players, which happens every so often, when a smart small player starts figuring out how to become a bigger player.

Needless to say, the small players were eager to work with us because they saw it as an opportunity to change the industry dynamics, reinvent the game, and possibly become a big player.

But the 800 lb. gorillas showed that they could stop all of us simply through polite non-participation.

I'd have done the same thing if I were them.

If we changed things, even if for the betterment of customers and the entire industry, the 800 lb. gorillas were not sure if they'd be better off.

Maybe things might change so much that we'd be more powerful than them. Was that worth their putting everything at risk? Definitely not.

Maybe, in a more efficient world, a small player might rise to prominence and usurp the power of the gorillas. Over time, if things changed enough, the gorillas might not even survive.

Do you think the gorillas wanted that? No way.

That's why Lauder and Lancome never jumped onto our new economy bandwagon.

So, they smiled at us, met with us frequently to keep tabs on us, complimented us on our execution, but never participated in our dream.

As it turned out, by not participating, because they had so much market power, they could crush our dream.

Perhaps they saw some merits in our B2C vision of one-stop shopping that would have all the prestige and mass products available to consumers in one convenient place.

Perhaps they agreed too with our B2B vision of a common efficient and industry-owned infrastructure for handling the flow of goods and information throughout the industry.

But agreement with what makes sense for an industry is one thing. Self-interest is another.

Old economy companies figured out pretty quick that the best approach to the new economy was not "if you can't beat them, join them" but rather "you can beat them if you refuse to join them, refuse to play their game, and outlast them."

So all us new economy companies have died.

Blame the stock market's irrational exuberance if you like. Blame half-baked business plans or wet-behind-the-ears venture capitalists if you prefer.

We insiders know better as to why we failed, as to why we died.

We wanted to change the world. The old economy liked the world the way it was. We waged war against the old economy and got whooped.

Why did we die? We died because the old economy companies killed us.

As far as I can tell, they got away with murder.

Share this article

Additional Resources for Entrepreneurs

Lists of Venture Capital and Private Equity Firms

Franchise Opportunities


Business Glossary


Conversation Board

Have thoughts on why the dot-com economy crashed? We've recently opened up this article for comments. Let us know what you are thinking.

Leave a Reply

Questions, Comments, Tips, and Advice

Email will not be posted or shared
Code Image - Please contact webmaster if you have problems seeing this image code

Problem Viewing Image? Load New Code