Common Sense at the turn of the century

It’s not the New Economy. It’s not the Old Economy. It’s the economy: simple supply and demand. Success in business has always been about solving customers’ needs with services or products for which they willingly pay. But during the past five years, the markets forgot that simple principle. Demand was so inflated by fear, uncertainty and lack of knowledge that supply couldn’t keep up.

Now it’s all about instant gratification. Who wants to be a millionaire? Everyone. Who wants to work 40 years to earn the security that comes from being a millionaire? No one. Smith Barney had it right 15 years ago: “We make our money the old fashioned way… we earn it.”

That message is passé today. Boomers want youth in a pill. Youth wants instant clout. Society wants fitness in a bottle. Lose 10 pounds this weekend on the Hollywood Diet. “Eat-anything-you-want-and-burn-fat” infomercials promise all that and rock hard abs in three minutes a day. What ever happened to eat less, exercise more?

Business caught the same disease. Employees demanded stock options and unrealistic salaries. It became less about working for something, and more about being due those perks. Executives blindly followed Internet fiction. And companies foolishly paid ridiculous amounts to get it because they were scared their competitors might beat them to the promised land, scared that the startups’ “increasing returns” rationale was indeed rational, scared that without being the first to market they would be forced to pay a huge multiple of the newcomers’ costs.

They were scared because they didn’t have all the facts. Nobody did.

Intelligent people invested serious money in terrible ideas, ones that didn’t make sense for any economy. How many pets do you know who shop for food on the Internet? These ideas were based on the “dollars for eyeballs” falsity that after building market share, a company could achieve increasing returns. Profitability would obviously follow that.

The media fed the frenzy. Suddenly IPOs, stock options and exit strategies were in fashion. First time entrepreneurs told the world (and many actually believed their own press) that they had the skills necessary to run public companies. Unbelievably, investors didn’t balk. Even more farcical was the notion that only time stood in the way of these ventures putting stodgy brick and mortar companies out of business. Few pundits bothered to mention that the old school companies had actual paying customers.

The fiction continued with valuations that were just plain ludicrous.

Somehow many believed that “best to market” no longer mattered in the face of “first to market.” And venture capitalists did little to lead protégés with time-tested business acumen. Many individual and institutional investors believed—mistakenly—that those companies’ fantastic success was based on talent and not timing. Today those same investors must decide which ideas have any value and which should be cut off from further investment. It should be an interesting tax return season.

A few sobering links may further qualify these ideas. The Internet Wasteland chart shows more than 250 companies whose value has dropped over 90% in the past 12 months. Investors will ultimately decide their fate.

Others may not be so lucky. A recent Industry Standard article lists more than 250 publicly traded firms in danger of being delisted by their stock exchange. Delisting is death for a public company. Most mutual funds and hedge funds do not permit ownership of stocks not listed on the major exchanges. And there are not enough individuals interested in penny stocks or pink sheets to merit keeping those businesses afloat. The public trough is dry and these companies are dead. They just haven’t locked the doors yet.

Supply and demand, monetary policy, interest rates and wage expectations: it seemed so complicated and “old school” in college economics class. It seems so clear today. The markets work. And it takes hard work to build businesses that survive in markets.

Welcome to the new millennium, when the economy matters, just like it always has. When success depends on the simple time-tested theories of supply and demand. When customers have more information to make better decisions than ever before. When Internet technologies further enhance the ultimate decisions of those customers—buying decisions.

And when common sense makes a most welcome comeback.

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