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Everything I Learned about E-Business, I Learned from High-School Chem Lab

As a high-school kid in Iowa, I was a math and physics nerd, but a couple of my best buddies were heavy into chemistry. They liked nothing better than to go to the lab, mix together weird combinations of stuff in ways definitely not in the textbook, and watch what happened.
 
Aside from a bunch of minor explosions, no major scientific discoveries came out of these activities. My friends pretty much confirmed what everybody already knew: certain compounds are, in fact, highly combustible and will blow up. On the plus side, the exercise did keep my buddies off the streets and from cracking up their dads' trucks or tipping cows. A couple of them actually went off into science-related careers.
 
This story pretty much sums up the events of the last few years in the Internet industry: a lot of inexperienced people experimenting with dangerous compounds. The list of experiments was long - business models entirely based on online advertising revenues, "just-add-water" virtual companies, ASPs to replace every major software company, and e-marketplaces to re-order every established supply chain in the western world.
 
While the explosions may have been a bit bigger than those in chem lab (think failed dotcoms and evaporating market caps), the Internet science experiment didn't significantly change the basics of business. In fact, while this will probably be viewed as heresy, I believe that the net gain in innovation would have been the same without the big boom-and-bust cycle of the last four years.
 
But the experiment did confirm a number of things that we already knew: that, for the most part, the fundamentals of business are the same in 2001 as they were in 1901 - or 1801, for that matter. My colleagues and I learned a tremendous amount from watching other venture-backed companies conduct their experiments, rejecting the hype and fantasy, and then applying what we thought were the genuine and lasting innovations to our own company.
 
Here are some of the more important things we learned:
 
Customers Matter: The Internet does make it easier, faster and often less expensive to find, get, keep, build and service customers. But it's more profound than that: it changes the entire essence of the customer-supplier compact. From passive and static to active and dynamic. From simply transactional to collaborative. From information-constrained to information-driven.
 
But the Internet isn't a substitute for customer-oriented business practices, service policies or humans. Customers want to feel that you care about them and have a vested interest in their success. Poor or indifferent corporate attitudes toward customers generally result in poor or indifferent online customer service. With the Internet lowering switching costs for many products, forging tight and sustaining relationships with customers matters more than ever today.
 
Profits and People Matter: You can't spend more money than you take in (at least not indefinitely). Enough said. You also can't win in the market if you don't value your human capital as much as you value profit, and invest aggressively in attracting, growing and keeping creative and talented people. The newspapers are full of stories about once-high-flying companies now grounded by these business fundamentals.
 
Coming from blue-collar backgrounds, my co-founders and I have never forgotten either point since we started Motive. We've spent aggressively but carefully - on people, R&D, sales channels and customer care. No trips to Hawaii for the whole company, no SuperBowl ads, no cars for employees. Yes on options and competitive salaries for employees, Tae Kwon Do classes at lunchtime, and corporate support for local charities selected by our employees.
 
The result: Preservation of capital and minimal ownership dilution ($40 million-plus raised in three rounds), and low employee turnover in one of the US' tightest labor markets. As a result, we entered 2001 well positioned and our employees well conditioned for (and not distracted by) the new economic climate.
 
Real Relationships Matter: While the Internet theoretically makes it easier to forge and change business relationships dynamically as your business changes, we've focused on building and nurturing long-term relationships with partners, vendors, and even customers that we believed were going to be long-term winners in their markets. This notion that you can pick your customers has been both simple and profound for us. It kept us from doing a bunch of vapor deals with unstable early-stage companies that have since evaporated.
 
Yes, we've of course spent a lot of time and effort building technology and channel partnerships, the relationships that help sell product. But we've also expended a lot of effort on building and nurturing relationships with business partners fundamental to daily operations: our law firm, public relations firm, accounting firm, and bankers.
 
When selecting our consultant firms, we went for the best - in most cases, firms we had worked with and trusted while at our previous companies - and grew those relationships. When we had problems, we worked to resolve them, instead of ending the relationship. The result: an extended team that is as vested in our success as we are, as well as minimization of the churn, disruption and expense that happens when your "vendors" are a revolving door.
 
The Internet Matters: Finally, we also learned that the Internet really does matter. The Internet has emerged as a truly viable platform for stripping the cost and complexity out of procurement, customer service, product ownership, communications and other mainstream, fundamental business processes. It has opened up massive opportunities for new software that can deliver sustainable, quantifiable, non-incremental improvements in fundamental business processes.
 
We have used the Internet to help our customers transform the two-way processes of working with customers over the lifetime of the relationship, with great results. The value that we deliver has enabled us to move to a value-pricing model for our software. Customers no longer pay a huge upfront licensing fee, instead paying a smaller initial license fee and back-end annual fees based on usage of our product. This is a win for everybody involved. The customer pays for the value he gets. Motive gets a larger revenue stream, distributed over a number of years, along with the incentive to continually innovate with our software and build lifetime relationships with our customers. The Internet makes it feasible to measure usage and charge this way.
 
We've learned a lot over the last four years by quietly observing and cautiously acting. We've learned that the Internet delivers the most value where it brings out the best in companies. Things like delivering great service to all customers (not just the top 20%), making important business relationships more collaborative and dynamic, and unleashing the power of best practices, strategies and people by automating-away busywork that gets in their way.
 
The best thing about all these lessons: we learned them without blowing ourselves up or landing in detention.
 
Scott Harmon is CEO and co-founder of Motive Communications, Inc., a leading provider of intelligent service software based in Austin, Texas.