The dot-com crisis was an economic bubble and a period of exchange speculation and the rapid development of the Internet in 1997–2001, accompanied by rapid growth in the use of the latter by business and consumers. Then there were many network companies, a significant part of which crashed. Bankruptcy of startups like Go.com, Webvan, Pets.com, E-toys.com and Kozmo.com cost investors $ 2.4 billion. Other companies, such as Cisco and Qualcomm, lost a large share of market capitalization, but recovered and exceeded the peak indicators of that period.
The dotcom bubble: how was it?
The second half of the 1990s was marked by the explosive development of a new type of economy, in which stock markets experienced high growth under the influence of venture capital and IPO-funded companies in the Internet sector and related areas. The name “dotcom”, which characterized many of them, refers to commercial websites. It was born as a term for companies with Internet domain names ending in.com. Large volumes of exchange operations were fueled by the fact that it was a new industry with high potential and difficulty in evaluating market participants. Their reason was the high demand for stocks in this sector from investors seeking new investment objects, which also led to a revaluation of many companies in this industry. At its peak, even those enterprises that were not profitable became participants in the stock exchange and were extremely highly quoted, given that in most cases their performance indicators were extremely negative.
Back in 1996, Alan Greenspan, the then chairman of the Fed, warned against "irrational abundance" when a sensible investment was replaced by impulsive investment. On March 10, 2000, the Nasdaq Technology Stock Index peaked at more than 5, 000 points, the day after the fire sale of technical stocks marked the end of the growth of the “new economy”.
Irrational investment
The invention of the Internet has led to one of the largest economic shocks in history. The global network of computers dates back to the early research work of the 1960s, but only after the creation of the world wide network in the 1990s did its widespread distribution and commercialization begin.
As soon as investors and speculators realized that the Internet had created a completely new and unused international market, the IPO of Internet companies began to quickly follow each other.
One of the features of the dot-com crisis is that sometimes the assessment of these enterprises was based only on a concept outlined on a single sheet of paper. The excitement about the commercial possibilities of the Internet was so great that every idea that seemed viable could easily receive millions of dollars of funding.
The basic principles of investment theory regarding understanding when a business will make a profit and whether it will happen at all have been ignored in many cases, as investors were afraid to miss the next big hit. They were ready to invest large sums in companies that did not have a clear business plan. This was rationalized by the so-called. dotcom theory: in order for an Internet enterprise to survive and grow, it required a rapid expansion of its client base, which in most cases meant huge initial costs. The validity of this claim has been proved by Google and Amazon, two extremely successful companies that took several years to show some profit.
Misallocation
Many of the new companies spent their money thoughtlessly. Options made employees and executives IPOs millionaires on the day of the IPO, and enterprises themselves often spent money on luxurious business facilities, as trust in the “new economy” was extremely high. In 1999, the United States conducted 457 initial placements, most of which were organized by Internet and technology companies. Of these, 117 managed to double their value during the first day of trading.
Communication companies, such as mobile network operators and Internet service providers, began to invest heavily in network infrastructure because they wanted to be able to grow with the needs of the new economy. To be able to invest in new network technologies and acquire licenses for a wireless network, huge loans were required, which also contributed to the approach of the dot-com crisis.
How.com companies became dot bombs
On March 10, 2000, the Nasdaq Composite index of technology shares traded on Wall Street peaked at 5, 046.86 points, doubling its value a year earlier. The next day, stock prices began to fall, and the dot-com bubble burst. One of the direct reasons for this was the completion of the antitrust case against Microsoft, which in April 2000 was declared a monopoly. The market expected this, and 10 days after March 10, the Nasdaq index lost 10%. The day after the publication of the official results of the investigation, the technology index experienced a large intraday decline, but returned. However, this did not become a sign of recovery. Nasdaq began a free fall when investors realized that many unprofitable new companies really were. Within a year after the dot-com crisis erupted, most venture capital firms that supported Internet startups lost all their money and went bankrupt when the new funding ran out. Some investors began to call the once stellar companies “dot bombs, ” since they managed to destroy billions of dollars in a very short time.
On October 9, 2002, the Nasdaq hit a low of 1, 114.11 points. It was a colossal loss of 78% of the index compared to its peak 2.5 years before. In addition to many technology startups, many communications companies also ran into problems because they had to cover the billions of dollars in loans they took to invest in network infrastructure, the payback of which was now suddenly set aside for much longer than anticipated.
Napster story
Regarding legal issues, Microsoft was not the only dot-com that appeared in court. Another well-known technology company of the era was founded in 1999 and was called Napster. She was developing an application that enabled the sharing of digital music on a p2p network. Napster was founded by 20-year-old Sean Parker and two of his friends, and the company quickly gained popularity. But due to copyright infringement, she almost immediately fell under the fire of the music industry and eventually ceased to exist.
Multi-millionaire hacker
Kim Schmitz perhaps best illustrates the actions of individual entrepreneurs regarding the dot-com crisis. This German hacker became a multimillionaire, launching various Internet companies in the 1990s, and eventually changed his last name to Dotkom, hinting at what made him rich. In early 2000, right before the collapse of the new economy, he sold TÜV Rheinland 80% of his shares in DataProtect, which he founded, which provided data protection services. In less than a year, the company went bankrupt. In the 1990s, he was the central figure in a series of sentences for insider trading and embezzlement related to his technology enterprises.
In 1999, he had a tuned Mercedes-Benz, which, among many other electronic gadgets, had a unique high-speed wireless Internet connection at that time. On this car, he participated in the Gumball European rally. This is a competition when many people in expensive cars compete on public roads. When Kimble (his nickname at that time) got a tire punctured, a new wheel was delivered to him on a jet airplane from Germany.
He survived the effects of the dot-com crash and continued to launch new startups. He was again arrested in 2012 on charges of illegally distributing copyrighted content through his Mega company. He currently lives in New Zealand in his $ 30 million home and is awaiting extradition to the United States.
Have investors learned a lesson?
Some of the companies that were launched during the inflating the dotcom bubble survived and became tech giants like Google and Amazon. However, most failed. Some risk-taking entrepreneurs were active in the industry and eventually created new companies, such as the aforementioned Kim Schmitz and Sean Parker from Napster, who became Facebook's founding president.
After the dot-com crisis, investors became wary of investing in risky ventures and returned to evaluating realistic plans. However, in recent years, a number of high-level IPOs have thundered. When LinkedIn, a social network for professionals, entered the market on May 19, 2011, its shares instantly grew more than 2 times, which is similar to what happened in 1999. The company itself warned investors that they were not too optimistic. Today, IPOs are conducted by companies that have been doing business for several years and have good prospects for profit, if they are no longer profitable. Another IPO held in 2012 was expected for many years. The initial issue of Facebook shares was the largest among technology companies and set a record for trading volume and the amount of attracted investments equal to 16 billion US dollars.
