Sharpen Your Dot-Com Skepticism

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Could we have seen PlanetRX.com (PLRX:Nasdaq - news - boards) coming? Could we have just looked at a snapshot of all of the hoopla around this stock and recognized it as the short it became ? Could we have avoided it?

I don't think so. I think a reasonable person, doing due diligence on a sector, would have gotten suckered in. Because this one had all of the great buzzwords and partnerships and connections.

So let's stand all of that on its head. Let's go over what doesn't buy you success so we don't get fooled again. Here is your checklist of skepticism about some shibboleths that have gone unquestioned during the last 18 months.

1. Don't bank on venture capitalists to get this stuff right. Sequoia Partners and Benchmark Partners provided the first round of financing for this company. Both of these companies are considered can't-miss on this stuff. Let's remember that they aren't.

2. It takes some time to get in this game. This site was launched just a few months before the company came public. That's not enough time between going into business and going public. This company was too immature to run. It hadn't walked yet.

3. Don't bank on the endorsement of underwriters as any sort of seal of approval. There were top-flight underwriters all over this deal, including Goldman Sachs, and that was a guarantor of nothing.

4. The Web is more than just a logistical feat. We were supposed to be in awe of a Fedex (FDX:NYSE - news - boards) exec at the helm of a dot-com that had to transport product. Overrated. Just get me good business people with passion. I don't care that they know how to move packages.

5. Sponsorships, especially "exclusive" sponsorships, with other Web companies are often just deals to get stocks going, not merchandise out the door. The exclusive partnership with AOL (AOL:NYSE - news - boards) for these guys gave them the right to have a tile right next drugstore.com (DSCM:Nasdaq - news - boards). Whoop-de-do! That's exclusive all right. The $20 million iVillage (IVIL:Nasdaq - news - boards) deal? Ouch, I mean, what the heck was that about?

6. Don't buy into the old-world partnership thing. This pattern of dot-coms taking in public money and giving part of it to an established player to link with them simply hasn't produced the traffic it was supposed to, on virtually any part of the Net.

7. If you give away stuff, people want it, but if you make people pay regular freight, they could care less. Buying stuff on the Web ain't so neat that people want to do it. If it is subsidized, they will, but then you have to recognize that the customers are "hot" and can't really be modeled because they will go elsewhere when the subsidies eventually end.

8. When it comes to the Web, believe the risk-factor list. Most of these companies did not raise enough capital to do the job. They say they didn't right in the prospectus. We had all come to believe, after years of fairly successful underwritings, that these factors were just something the lawyers made business people put in to cover the butts of the board. Not when it comes to dot-coms.

9. Community can't be purchased or created, it must be nurtured and developed almost organically. One of the defining selling points of this business was it would foster a sense of community. You can't. Community isn't some soulless set of links and clicks. It is hard-working, hard-fought interactivity, of the kind we have with many of you. Don't believe it when someone says they have "community." It is not a commodity.

10. Really good people screw up all of the time, but you usually don't see them do it. This company, had it stayed private, would have disappeared without any embarrassment to anybody. But it came public. And now it's plenty public.

Let's not forget this lesson in humility and frailty and hubris. Can it while it is fresh. I have a feeling that we will have to remember it again, very soon.

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James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at [e-mail].