Requiem for a Heavyweight

It’s official: eToys is dead.

I was a big eToys fan. We did most of our 1999 Christmas shopping through eToys. I saw CEO Toby Lenk twice that fall, giving his pitch about changing the toy business by caring about kids while targeting parents and showing his innovative commercials.

Lenk talked about listening to the market, about changing from branded to unbranded shipping crates because kids saw the branded ones and wanted their presents before Christmas. In the vernacular I use most often, Toby Lenk really Had a Clue.

So a friend recently wrote to ask, “What does your coroner’s report say about the death of eToys?”

This coroner’s verdict is that eToys never had a chance.

The outward cause of death is obvious, I wrote. The company hired hundreds of people, built a huge warehouse, scaled its site with databases, and bought lots of TV ads. It did everything its backers expected, just as they expected it would.

Unfortunately, eToys was a “bubble baby.” It was born and grew inside the Internet bubble, not the real world. When the bubble burst, it couldn’t survive in our world, just as an anglerfish lives 10,000 feet beneath the sea but dies as soon as it is hauled to the surface.

Let’s go back to 1998 for a moment. What if Toby Lenk predicted the future accurately and told his potential backers that he knew the bubble would burst? What if his business plan said he was going to hire just a few people, that he was going to make money on every sale, and he would grow as the market grew, instead of ahead of it?

Do you know what would have happened? He wouldn’t have gotten a dime. Not a penny. Because those were the days of “first-mover advantage.” Get big or get out, entrepreneurs like Lenk were told. Build for Wall Street, not Main Street.

It turns out, however, that e-tailing is evolutionary, not revolutionary. People have to be lured into it. They’ll try it, back off (even if they’re happy), and then try again. Gradually, however, (and this is the important point) they do come to like it. The Commerce Department reported recently that online sales grew 36 percent between the third and fourth quarters of 2000, reaching $8.686 billion and 1 percent of total sales for the first time. By contrast, general retail sales were up 5.4 percent in the fourth quarter.

Unfortunately, venture capitalists and Wall Street had this crazy idea that e-commerce would represent 10-20 percent or more of the retail economy by now. They forced companies such as eToys to build based on that assumption, and they rewarded it based on its delivery of capacity. When the bubble burst, they abandoned it. The same thing happened to dozens of other companies, from Pets.com to Webvan. What I’m saying here isn’t news.

So was it Wall Street that was to blame for eToys’ fall rather than Toby Lenk? Not necessarily. Imagine a kid blowing a bubble, and somehow a life form grows inside that bubble, depending on that bubble for its existence. What happens when the bubble pops? The kid laughs, and what was inside the bubble dies.

Toby Lenk’s mistake was to believe that the bubble was real. But he made that mistake before he ever walked onto Sand Hill Road.