At the turn of the 1990s and 2000s business blindly believed in the magical power of the Internet. Soon startups built around the worldwide web and considered as high-potential assets collapsed. Due to speculation and unjustified optimism investors lost about $5 trillion. The phenomenon was called the “dotcom bubble”.
What was it and why are analysts talking about history repeating itself? Let’s find out.
WHAT IS DOTCOM?
Dotcom (dot-com) is a term applied to companies whose business model is entirely based on working within the Internet. It emerged and became widespread in the late 1990s at the time of the Internet business boom. The name comes from .com – top-level domain, owned mainly by commercial organizations' websites.
After the collapse of dotcoms, the term is also used as a denomination for some immature, ill-conceived, or ineffective business concepts.
HOW IT ALL STARTED?
The rapid development of dotcoms was associated with increased public attention to the new opportunities provided by the worldwide network. The heyday of dotcoms was also characterized by the low cost of raising debt and investment capital for any projects related to the Internet.
It has led to the emergence of a huge number of companies that, using the mention of the Internet as a magic spell, easily received significant investments not only from venture funds, but also from traditional financial institutions.
LIST OF THE MOST POPULAR DOTCOMS
THE FIRST STEPS OF THE DOTCOMS
1990s. More and more users are starting to have personal computers. Companies are massively shifting their focus to the Internet and launching websites.
At the same time, the first online-only projects were born: eBay online auction, Amazon online bookstore, and Yahoo! (now owned by Verizon). But the industry remained young, and most people did not have a clear understanding of how to manage such businesses. Huge money was pumped into startups, and soon the value of newborn companies inflated like a balloon. Marketing and advertising budgets started to grow. The motto of that time was – grow fast or disappear.
1996. FRS Chairman Alan Grispan warned the market, calling the boom "irrational optimism."
1999. 39% of venture capital is poured into Internet companies, according to Investopedia.
January 2000. The culmination of rampant marketing spending. All at once, 14 dot-com startups ordered expensive advertising on the Super Bowl, one of the most important sporting events of the United States. And in March, the NASDAQ index began to collapse.
THE COLLAPSE OF NETWORK COMPANIES
The dot-com boom ended in March 2000 with a massive drop of the NASDAQ index and the bankruptcy of hundreds of companies generated by the Silicon Valley’s "information economy". The collapse of dotcoms caused funds outflow from the Internet sector of the economy and an overall loss of confidence in this type of business.
WHAT HAPPENED AFTER THE BUBBLE BURST?
Money has evaporated from the tech sector. Thousands of companies simply vanished. Industry leaders suffered huge losses. For example, shares of telecommunications company Cisco fell by 86%, shares of Amazon collapsed by 93%.
THE REVIVAL OF THE NETWORK BUSINESS
Since 2004, Internet projects have begun to gain strength again, but as more balanced and thoughtful ones. A significant positive role in this process was played by a few well-established business platforms and technologies that continued to work effectively despite the general industry decline, as well as a very impressive IPO of Google.
Nowadays, thanks to the accumulated experience and well-established systems, the network business is in no way inferior to other more “physical” industries.
IS THE WORLD IN A BUBBLE AGAIN?
A few years after the collapse of 2000, the NASDAQ index rose above 7 thousand points. The growth of unicorn companies accelerated. If in 2008 there were 15 unicorns, in 2013 there were 51 and in 2018 – at least 150. At the same time, according to the US National Bureau of Economic Research, on average, startups with valuation exceeding $1 billion are overvalued by about 50%.
The listings of Uber and Lyft reminded many experts of the dot-com days — these two companies also went public with big plans and even bigger losses. Nevertheless, banks valued them in the tens of billions. This time market actors, inspired by success stories of Google, Amazon and Facebook, are convinced that most tech startups will find a profitable niche over time. They are ready to invest money, not demanding income in a year or two, but counting on it in the long run.
IN A NUTSHELL
Despite controversial parallels, the Internet market has changed, banker and investor Carol Roth pointed out. Today's technology companies can count on a much more developed infrastructure and increased consumers’ anticipation of new products and services.
According to Roth, even companies that went bankrupt in the early 2000s could do well if they entered the market today.
What was it and why are analysts talking about history repeating itself? Let’s find out.
WHAT IS DOTCOM?
Dotcom (dot-com) is a term applied to companies whose business model is entirely based on working within the Internet. It emerged and became widespread in the late 1990s at the time of the Internet business boom. The name comes from .com – top-level domain, owned mainly by commercial organizations' websites.
After the collapse of dotcoms, the term is also used as a denomination for some immature, ill-conceived, or ineffective business concepts.
HOW IT ALL STARTED?
The rapid development of dotcoms was associated with increased public attention to the new opportunities provided by the worldwide network. The heyday of dotcoms was also characterized by the low cost of raising debt and investment capital for any projects related to the Internet.
It has led to the emergence of a huge number of companies that, using the mention of the Internet as a magic spell, easily received significant investments not only from venture funds, but also from traditional financial institutions.
LIST OF THE MOST POPULAR DOTCOMS
- Amazon;
- AOL;
- eBay;
- Google;
- MSN;
- Yahoo!
THE FIRST STEPS OF THE DOTCOMS
1990s. More and more users are starting to have personal computers. Companies are massively shifting their focus to the Internet and launching websites.
At the same time, the first online-only projects were born: eBay online auction, Amazon online bookstore, and Yahoo! (now owned by Verizon). But the industry remained young, and most people did not have a clear understanding of how to manage such businesses. Huge money was pumped into startups, and soon the value of newborn companies inflated like a balloon. Marketing and advertising budgets started to grow. The motto of that time was – grow fast or disappear.
1996. FRS Chairman Alan Grispan warned the market, calling the boom "irrational optimism."
1999. 39% of venture capital is poured into Internet companies, according to Investopedia.
January 2000. The culmination of rampant marketing spending. All at once, 14 dot-com startups ordered expensive advertising on the Super Bowl, one of the most important sporting events of the United States. And in March, the NASDAQ index began to collapse.
THE COLLAPSE OF NETWORK COMPANIES
The dot-com boom ended in March 2000 with a massive drop of the NASDAQ index and the bankruptcy of hundreds of companies generated by the Silicon Valley’s "information economy". The collapse of dotcoms caused funds outflow from the Internet sector of the economy and an overall loss of confidence in this type of business.
WHAT HAPPENED AFTER THE BUBBLE BURST?
Money has evaporated from the tech sector. Thousands of companies simply vanished. Industry leaders suffered huge losses. For example, shares of telecommunications company Cisco fell by 86%, shares of Amazon collapsed by 93%.
THE REVIVAL OF THE NETWORK BUSINESS
Since 2004, Internet projects have begun to gain strength again, but as more balanced and thoughtful ones. A significant positive role in this process was played by a few well-established business platforms and technologies that continued to work effectively despite the general industry decline, as well as a very impressive IPO of Google.
Nowadays, thanks to the accumulated experience and well-established systems, the network business is in no way inferior to other more “physical” industries.
IS THE WORLD IN A BUBBLE AGAIN?
A few years after the collapse of 2000, the NASDAQ index rose above 7 thousand points. The growth of unicorn companies accelerated. If in 2008 there were 15 unicorns, in 2013 there were 51 and in 2018 – at least 150. At the same time, according to the US National Bureau of Economic Research, on average, startups with valuation exceeding $1 billion are overvalued by about 50%.
The listings of Uber and Lyft reminded many experts of the dot-com days — these two companies also went public with big plans and even bigger losses. Nevertheless, banks valued them in the tens of billions. This time market actors, inspired by success stories of Google, Amazon and Facebook, are convinced that most tech startups will find a profitable niche over time. They are ready to invest money, not demanding income in a year or two, but counting on it in the long run.
IN A NUTSHELL
Despite controversial parallels, the Internet market has changed, banker and investor Carol Roth pointed out. Today's technology companies can count on a much more developed infrastructure and increased consumers’ anticipation of new products and services.
According to Roth, even companies that went bankrupt in the early 2000s could do well if they entered the market today.
