5 Tech Survivor Traits

Come with me if you want to live.

Rick Munarriz
Rick Munarriz
Mar 10, 2010 at 12:00AM

It's now been 10 years since the Internet bubble was ruptured.

Before you dig into the anniversary cake, it's probably a good idea to realize why Pets.com, Kozmo, and TheGlobe aren't asking for slices in their original incarnations.

Investors who don't take the time to separate the Webvans from the Amazons are doomed to get smacked again. Thankfully, I've taken the time to break down the five traits that separated the companies that have gone on to survive and thrive from those that went to Obit City.

Follow me on this, because this isn't just about some ancient dot-com mania that came and went. Learning from the past will help you get rich tomorrow.

1. Make money, not excuses
In retrospect, venture capitalists rushed way too many Internet startups to go public before their business models were ready. Underwriters began to justify IPO valuations on eyeballs (page views) instead of earnings power. Speculators began to bid up stocks based on traffic trends or unproven ideas before thinking ahead to monetization aspects or potential obsolescence.

It wasn't all that easy to smoke out the eventual winners at the time.

"Ouch," began Amazon.com (Nasdaq: AMZN) CEO Jeff Bezos in his letter to kick off the online retailer's 2000 annual report. Sales rose a sharp 68% but the company was still deep in the red.

The key to Amazon is that it was already making inroads. Its pro forma operating loss shrank from 26% of sales in the final quarter of 1999 to 6% a year later. Bezos was clearly on the path to profitability, and humble enough to admit its shortcomings.

Pride and crummy income statements obliterated the fallen.

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2. Improve your financial situation by improving the financial situation of others
If you have a company that has a product or service that improves the efficiency of another company, that's a golden ticket waiting to get Wonka-sized.

  • LivePerson (Nasdaq: LPSN) creates chat software that makes e-commerce more engaging and customer service more convenient. A recent study on ShopNBC.com's performance showed that LivePerson's platform helped increase conversions, boost order sizes, and lower order cancellation rates.
  • NetScout (Nasdaq: NTCT) is a leader in monitoring website uptime. This may not seem like much, but it's critical to NetScout's key financial and military clients, where being online is mission critical.
  • Akamai Technologies (Nasdaq: AKAM) is the world's leading content-delivery network. In an online world where speed is important, Akamai is able to serve up Web pages and files far more quickly than its clients could.

3. Adapt or perish
Over the years, Amazon.com has gotten very good at order fulfillment. It has the warehouses and the shipping logistics down to a science. It is so good at physical delivery that it even has a membership program that offers delivery of any Amazon-stocked good in two days.

Amazon could very well rest on those laurels, but it's already thinking about the future. Digital delivery is a disruptor to its media roots, and management is ahead of the curve by offering downloads of music, e-books, movies, and computer games. It's not necessarily the leader outside of e-books through its Kindle presence, but its model is malleable enough to matter in the future.

4. Be a niche leader
Heading into the tech top a decade ago, too many Internet companies tried to do it all. There were too many portals that wanted to do it all, at the risk of diluting their brands.

Many of the survivors are companies that excelled at one thing really, really well.

  • The Knot (Nasdaq: KNOT) is the undisputed hub for engaged women to talk shop with fellow brides-to-be and compare local wedding service providers.
  • Ancestry.com (Nasdaq: ACOM) continues to grow with its subscription plan that digs deep into the roots of family trees.
  • WebMD (Nasdaq: WBMD) is the physically fit 800-lb. gorilla when it comes to health information.

5. Have a realistic plan to matter more tomorrow than today
Some of the current Web 2.0 darlings include Facebook, Twitter, Foursquare, ChatRoulette, and Pandora Music -- companies that don't seem in much of a hurry to go public or cash out to the highest bidder. 

This exercise still works. Facebook is growing exponentially, as every new registration seems to trigger that person persuading someone else to join the world's top social-networking site. It may be harder for ChatRoulette to grow in its unfiltered ways or for Pandora to keep up with escalating music royalty rates.

Amazon had a plan to matter from the beginning. It involved dominating physical media before broadening its categories and going digital. What about the stocks you own? Can you take two steps back and take an unbiased stab at where they will be in a few years? If you can't, you may be holding the wrong investments.

Learn the lessons
In the end, these are the traits of both industry disruptors and the companies that will be able to withstand -- and ideally even profit from -- disruptions.

As part of the Motley Fool Rule Breakers team, I'm always on the lookout for promising stocks that have many of these characteristics. It's not just about making it through the dot-com bubble a decade ago. You want to buy into companies that can make money, improve others, adapt, lead, and be in a better place when it's time to cash out.

Akamai and The Knot, actually, have been active recommendations in the newsletter service for a couple of years now. It's hard not to like their chances in the future, especially after they have lived through so much and learned even more along the way.

Know the survivor traits, my friend -- and join us for a free 30-day trial.

Longtime Fool contributor Rick Munarriz wonders whether Dire Traits would be a good name for a Dire Straits cover band. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Akamai Technologies and The Knot are Motley Fool Rule Breakers recommendations. Amazon.com is a Stock Advisor recommendation.  The Fool has a disclosure policy.