Internet Strategies That Work (Maybe)

The thrill is gone. Sure, some great Internet companies will be built over the next 10 years, and the power of digital technologies to reshape companies and industries is going to grow. But the strategies that are required to build those companies and the leadership skills that are necessary to achieve deep-seated change (rather than merely talking about it) are just now being devised and identified.

Thanks to the carnage of the past 10 months, we have a pretty good idea of which business strategies don't work anymore. But what will work in the future? Which strategies will help big companies make the necessary adjustments so that they can become players in the fast-moving Internet economy? Are there better ways for startups to challenge conventional wisdom, make big bets on new markets, and stay in the game long enough to become profitable?

The case studies that follow address these and other questions. Consider them to be examples of next-generation Internet strategies. The game has changed: It's more exacting, less exuberant. But the opportunities are still enormous. Here's how a collection of smart executives from London to Silicon Valley are working to realize those opportunities.

The Empire Strikes Back

The ocean-shipping business has been conducted the same way for centuries: Brokers match shipowners with cargo merchants and take a percentage of the transaction.

But earlier this year, an old-line industry entered a new era. In January, a cargo of oil that was bound from Singapore to Rotterdam was matched up with a tanker and secured by contract. This time, the parties conducted their business entirely online. It was the first official transaction for LevelSeas Ltd., a London-headquartered Internet exchange that handles bulk-cargo transport on ocean freighters.

More than two dozen online shipping exchanges have been vying for business, many of them classic Web-based startups, a few with the backing of giants like Texaco. But when BP Amoco, Cargill Inc., and Shell combined forces to form LevelSeas, they brought with them 10% of the bulk-cargo chartering business. That's 10% of about $70 billion, which is the annual value of seaborne bulk freight (mostly oil, coal, and grains). On January 7, some of the world's largest shipowners and cargo brokers also invested in LevelSeas, making it the closest thing to an industry-wide platform. What's left for competing exchanges? "Not much," boasts Richard Hext, CEO of LevelSeas. "Our strategy from the outset has been to come to market with so much scale that we could overwhelm anyone else attempting to do this, or we could come bloody close." The race to reinvent the shipping business is underway -- and the winner may well have been determined on the very day that LevelSeas entered the contest.

This is the new look of the Internet economy. The first round of innovation was powered by venturesome entrepreneurs who were starting from scratch -- young companies that brought energy, enthusiasm, and a we-can-change-the-world zeal to their startups. The second round has more of a sober quality to it. Big, established companies are discovering that their advantages of scale, their established brands, their loyal customers, and their long-standing relationships with suppliers are just as valuable online as they are offline. That doesn't mean that the force of their innovations is any less dramatic -- or that the challenges to success are any less real. It turns out that history, experience, and wisdom have their virtues -- but only if established companies can forget many of their old ideas about the logic of strategy and about the best ways to make decisions.

All of which make LevelSeas instructive, particularly since it is the first Net company built by eVolution Global Partners. EVolution itself is a novel creation of the Internet economy. Its financial backers are a trio of powerful business mercenaries: consultancy Bain & Co., venture-capital firm Kleiner Perkins Caufield & Byers, and private-equity specialists Texas Pacific Group. These players saw an opportunity to carve out the assets of established companies and combine them to form new Internet companies that would have the instant advantage of scale. It's not a repudiation of the Internet business model, but a culling of its most-effective attributes: the speed of flat organizations, the power of networks to rewire big business problems, and a slate of financial incentives for everyone involved that still assumes that the venture will pay off handsomely.

"We are a venture-capital company," says Stan Miranda, 45, a managing director of eVolution's European corporate development and the chairman of LevelSeas. "But we only help the empire strike back." Indeed, eVolution's partners see themselves as a new type of general contractor that oversees the construction of Internet companies with staying power. "In all cases, we're leveraging some big-company assets to give these new businesses a head start," says Kleiner Perkins partner Ted Schlein, 36, a director of eVolution. "If we're doing our job right, then these companies are starting out with a huge unfair advantage."