Why (Some) Virtual Enterprises Fail

Last year, someone asked me to write about why virtual enterprises fail. I didn’t have time to do it—but I did start thinking about the question. I've worked for several purely virtual companies (successful and unsuccessful), so I thought I'd pull a few insights together and share them.

As background: It’s not that easy to separate the special hazards of virtual enterprises from the long list of reasons why businesses in general run aground. That includes the big three pitfalls: under-capitalization, inadequate planning, and irrational optimism.

Then if you drill further into the list, you find misjudgment of the marketplace (including both customers and competition), poor hiring decisions, inept management, squabbling among the principals, and just plain bad luck.

But suppose your virtual enterprise avoids all those threats—at least for a while. There are still three problems you might confront that won’t befall brick-and-mortar or hybrid businesses. And they are not problems you’re likely to see coming . . .

I’m going to talk here about the purely virtual model, by which I mean there is no physical (face to face) interaction among workers, ever. That means owners and upper management don’t get together with each other, and neither do workers. Participants may be located in different cities or countries. They may never have met in person.

Some business models are primarily virtual, but not purely—for example, they may mix virtual elements with a conventional component, such as a store or workshop. Although hybrid enterprises face their own challenges, I’m not thinking about those here.

So what are the special problems of the purely virtual enterprise? Here are three worth thinking about.

1. Lack of rent. Yes, that’s right. It’s true that not having to pay rent is one of the most appealing things about starting a purely virtual enterprise, or eliminating the conventional components of a hybrid business. But! The reality-check of a monthly or quarterly rental payment keeps you watching cash flow closely. Ditto if your enterprise makes a product and you have to plan on buying materials, replacing equipment, and so forth. The warning here? When you don’t need “stuff,” or a roof, it’s surprisingly easy to become short-sighted about things like anticipated revenues and available credit.

2. Too much communication. Again, this seems counter-intuitive. After all--if people are not going to be in the same place regularly, don’t you need to make sure they are in frequent contact? Shouldn’t you replace all those in-person meetings with online meetings or teleconferences—and maybe add even more meeting time, just to be sure people are on track and in contact? In a word: No! An enforced regimen of communications will often prove frustrating for workers, and may very well interfere with productivity.

3. The illusion of invisibility. If you thought going virtual would eliminate office politics, think again. While it’s true that no one will have the biggest office and no one will be stuck in a cubicle . . . some people will still have outsized egos, ambitions or attitudes. And it may be more tempting for them to use dominating or even sneaky tactics when they don’t actually have to work with people in person. As everyone knows by now, online environments can bring out the worst in some folks!

There are no magic instructions for avoiding these pitfalls, but prevention is possible. For example: Figure out where you need more attention/control in the virtual environment, and where you need less. You might want to double down on bookkeeping and lighten up on mandatory meetings--or vice versa. But make those decisions based on active needs, not on preconceived ideas, or habits left over from the un-virtual workplace.