Nowhere is the failure of the dot comes more clearly illustrated than with the bankruptcy of Webvan. This company had everything it should take to be a success: a long list of large-pocketed investors, a bankroll of cash, and some of the most brilliant management minds money could buy. But without the right research and planning, Webvan became the poster child of the dot-com bust.
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Who Was Webvan?
Webvan opened during the dot com boom of the late 1990’s, offering online grocery shopping and delivery of ordered items within 30 minutes. At the heyday of the company, it served ten sizable and deep-pocketed markets, including the Bay Area of San Francisco, Los Angeles, Orange County, San Diego, and Sacramento as well as Portland, OR; Seattle, WA; and Atlanta, GA. The company had plans to expand to 26 markets in short order.
Investors like Benchmark Capital, Softbank Capital, Goldman Sachs, Sequoia Capital, and Yahoo! sunk $850 million into Louis Borders’ Webvan upstart. His 1971 upstart Borders Books had done quite well. Unfortunately, investors never reaped a dime from the ill-fated business.
What Were Webvan’s Mistakes?
The first problem, which was inherent in many failed dot coms, was management’s lack of industry knowledge. Though they had excellent management resumes, not a single one had any prior experience with the grocery business. Second, the upstart planned to do everything themselves: including procurement of inventory, logistics, and building ownership and maintenance. Most upstarts use established suppliers for these services, at least until the business begins generating a profit.
Webvan eventually bought out Homegrocer, a competitor which was also losing money hand over fist, further jeopardizing their financial position. Ironically, Homegrocer was failing for many of the same reasons Webvan was struggling. In the end, the costs of the infrastructure far exceeded sales growth. One problem was Webvan’s overzealous predictions of the public’s behavior.
Webvan failed to do the research to show that consumers were only interested in shopping for groceries occasionally. They assumed that once a shopper had a satisfactory experience shopping for groceries online, they’d want to do this all the time. However, consumers preferred only the occasional convenience of online grocery shopping, and preferred to walk through the stores themselves most of the time. Furthermore, Webvan failed to provide the stellar customer experience they hoped. Poor customer experiences led to the loss of many.
Finally, Webvan tried to grow too big too quickly. As with most dot-com failures, they were overly optimistic about their growth capabilities and combined with their insistence of forgoing the established supply chain, were unable to become profitable in light of their expenditures for buildings, fleet vehicles, and other supplies.
In the end, all of the investor’s capital was squandered on infrastructure that never turned a profit. In 2001, Webvan went bankrupt. Amazon.com bought the deflated and unprofitable business, and has incorporated it into their other vast online offerings.
Lessons Learned
What are the lessons dot coms teach us?
- Every business has to maintain a slow, healthy growth pattern. It can’t be rushed.
- Businesses must be able to turn a profit before over-investing in infrastructure.
- Customer service always matters: even when doing business online.
- Diligent research will uncover successes and failures to be used to avoid problems and play on strengths.
Since Webvan wasn’t the first online grocery retailer in business, there was no excuse for a lack of research that would have inevitably prevented the horrific financial loss and ultimate humiliation of the managers and investors. [/show_to]
