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The biotechnology industry, which with development cycles of a decade or more was possibly one of the most speculative in the world, went through the same process of consolidation a couple of years ago.

Many dot.coms are sinking under the waves with years of technology and infrastructure still intact. That means that companies robust enough to weather the storm will have the opportunity to do some wreck diving. They won't be the first ones in the water; Fashionmall.com snatched upthe remains of super-hyped fashion retailer Boo.com, and Information Handling Services Group (IHS) purchased Industry.net, a pioneering business to business e-commerce site, to recast it as a destination portal for engineers.

The potential benefits for acquiring a failed dot.com startup are many, but one of the most compelling reasons is to leapfrog your own development cycle by revamping and rebuilding someone else's efforts. Boo.com, for example, invested millions in a custom-made customer-fulfillment system, while IHS purchased Industry.net initially to gain access to the site's 450,000-strong member community. While these attributes didn't save the sites the first time around, they could become powerful tools under more capable management.

But if other companies failed while wielding these same powerful components, why should you hope to succeed? The answer is, you shouldn't, unless you first understand the reasons behind the dot.com massacre, and work to ensure that you don't repeat those mistakes.

Lesson No1: Think smaller.

During the exuberance of the dot.com heyday, when small Silicon Valley start-ups were spending their entire year's advertising budgets on a single Super Bowl spot, bigger was often better. This thinking turned out to be flawed as dot.coms grew too large, too fast, and then fell prey to bloat-free competitors.

Industry.net, for example, began rather humbly in 1995 as a distribution channel for hardcopy industry product and service locators. But by 1996 the company's goals had ballooned to include the construction of an entirely new electronic marketplace where buyers and sellers of industrial parts - from simple fasteners to turbine engines - could find one another through their desktops. This vision was fed by hype both internal and external, and it was soon expected that the Web site would link 180,000 buyers wielding some $165 billion in purchasing power. Experts spoke of networks that would lower the cost of commerce for professions such as law and medicine. Industry.net was out to blanket the globe, and collect a commission on every transaction conducted on its network.

But the complexity involved in realizing this goal, and the market's willingness to adopt new technologies, was significantly underestimated by Industry.net's management. The result: a devastating crash landing in late 1997, when the company went bankrupt.

Is the lesson here that you should never aspire to grow your newly acquired dot.com or its components? No, but remember that Amazon.com was exclusively an online bookseller before it branched out into toys, electronics and auctions. Grow strategically, not haphazardly. Don't make the mistake of Boo.com, which had swank offices in Munich, Paris, New York and Amsterdam before the site even launched.

Lesson No2: run your e-business like any other.

Recently, the Internet was seen as a magic bullet for commerce, and any company on the Web was seen as being hip, current, forward-looking and viable. Companies that weren't on the Web were slow, behind the times, dinosaurs. As it turned out, many venture-funded dot.coms had little true substance, and were no match for industry giants which, while slow to accept the Internet as a legitimate business channel, nevertheless held a powerful advantage in experience, infrastructure and cash built up over the years.

Be humble. Web businesses have to compete and prove their worth and capture market share through blood and tears, the same as companies in any other industry. The same basic principles of good management, having thought-out business plans and revenue models, and solid partnerships do apply to dot.coms. Remember that the dot.coms you may be looking to acquire probably failed because they didn't have these things.

Lesson No3: in business to business applications, go after individuals.

When business to business e-commerce was in its infancy, the trend was to sell "Webified" software suites to corporate customers. There are limitations to this approach: for some niche industries, there is a finite customer pool to be squabbled over by several competitors, buy-in is required from corporate executives who may or may not have technical savvy, and fears about Internet security means that many companies would prefer to host the software on their own servers.

Today, many companies are realizing that the way to go with the application service provider model (ASP) may be to target individual users. In its core business, IHS sells large databases to such massive organizations as the armed forces and government contractors, but has revamped Industry.net into TechSavvy, a means to offer pay-per-use services to individual engineers at small- to mid-sized businesses.

The key to making these new breeds of application service succeed is to lower barriers, in terms of both use and cost. The application must be near intuitive in its use, and cost-effective enough to be used by individuals at their discretion, without having to gain permission from superiors. Think pay-per-use, and narrow your audience to one key segment. Much of the functionality necessary to pull this off will have to be created in-house, but salvaging an engine from another dot.com can save you time and give you a solid framework in which to tinker.

Lesson No4: seek alternatives to the transaction-based revenue model.

Obviously, not every company, in every situation will be able or want to focus on the individual customer, but even when going after small-, mid- or even large-sized companies, consider alternative revenue models. Many dot.coms are finding that the transaction-based revenue model is not translating into the huge profits that were expected. Consider instead alternate methods for generating revenue such as fee for sales referrals and banner ads.

Lesson No5: build your brand, but watch those marketing dollars.

Many dot.coms failed because they were built around poorly branded products. Narrow, niche markets such as pet food or toys will support only two or three competitors, and the rest will be squeezed out in the form of consolidations or failure. When picking up the pieces for your own e-business, first ask yourself if the new components will enable you to brand your company as something unique and valuable. Does the acquisition allow you to expand into new markets that integrate with your business model, like Amazon.com? Will that new digital signature functionality you purchased give you a unique advantage over competitors?

If so, then don't be afraid to spend on branding. Like any other business, yours will have a greater chance of success if people associate it with an ingrained, positive feeling, set of values or opinion about its basic worth.

Why do you need to be different before you should brand? You don't. Many virtually identical products can be differentiated only by their brand identity. But remember that Boo.com, one of the most hyped, heavily-branded Web sites from the dot.com heyday, might still be around now if it had spent less on publicity and more on its business plan.

Don't take the same chances with your business. Your branding efforts will reap greater rewards if there is real substance to your company.

Final Lesson: don't become enamoured with being a dot.com that you ignore traditional business strategies.

The next generation of Internet companies will stake their success on more than just their Web savvy. Integration with physical distribution and manufacturing centers, increased human customer service, and new technologies will all play a role in the new Web economy. In other words, be careful of purchasing a failed dot.com in order to revamp it into a better dot.com. Revamp it into a better business.


Summary

The dot.com meltdown is an opportunity to strengthen your business by acquiring valuable technologies, infrastructure and employees. Don't purchase blindly or for the mere sake of jumping on the Web-enabled bandwagon. Understand that, while many dot.coms failed because of natural market pressures, others fell to their own over-exuberance and misguided overconfidence that the digital economy was the way of the future while traditional business models were slow and outdated. While the Internet still offers countless opportunities, don't ignore basic business principles when constructing second-generation dot.coms. Strong management, solid business plans, strategic partnerships and flexibility are key requirements of any successful business... even an e-business.