During the rise of the Internet in the mid 90’s, a euphoric attitude has been created towards online businesses. As many saw the potential of the Internet, investors speculated that a “dot-com” company was surely going to succeed. Share prices of stocks in Internet-based businesses dramatically increased as many decided to buy early in anticipation of further price rises; thus, creating the “dot-com bubble.”
At the peak of the “dot-com bubble,” even startups that hadn’t made any revenue were pushed into the stock exchange and were trading at tremendously high prices. Many tech-focused investors and Internet-based companies made millions. But obviously, many dot-coms did not turn out to be huge successes, and some that were successful were overvalued. Eventually, the “dot-com bubble” began to “burst” in the early 2000s, and technology shares began to fall. Many online businesses went bankrupt, their funding dried up and investors ended up millions and billions of dollars in just a short time.
How did it happen?
It started when the Internet first became available to the public in 1994. Though the Internet has been around since the 1969, it was only used by the military and government agencies to exchange information. When it was made accessible to the public, it evolved as a way for people to browse websites and communicate via email and chat rooms.
Businesses immediately saw Internet’s potential to bring greater profits. Internet entrepreneurs sprouted with a dream of becoming dot-com millionaires. Investors were willing to invest large amounts on dot-com companies without considering the fundamental rules of investing in the stock market like reviewing business plans and analyzing price-to-earnings ratios. This method of investing was based on the New Economy theory or dot-com theory that for an Internet company to grow, it needs rapid expansion of its customer base, even if it meant huge initial loses. For Amazon and Google, it was true – it took them many years before they earned any significant profit.
During 1996 to 2000, the NASDAQ stock index incredibly increased from 600 to 5,000 points. Dot-com businesses were making an initial public offering (IPO) and raising substantial amount of money even though they had no earnings and lacked clear business plans. The dot-com theory of growth over profits became popular.
Due to the prevalent mentality that time, many dot-com companies believed the new economy was invincible, so they spent lavishly on building elaborate facilities, giving luxury vacations and benefits for employees, and celebrated their IPOs with frivolous parties. At the height of the boom in 1999, it was reported that every minute, a new millionaire was created in Silicon Valley.
By the early 2000s, investors started to realize that they have devolved into a speculative bubble. From 5,000, the NASDAQ stock index plummeted to 2,000 within a year.
In January 2000, dial-up Internet service provider America Online (AOL), and media company Time Warner signed a huge merging and acquisition agreement, forming AOL Time Warner. Back then, AOL was a favorite of dot-com investors. Due to disputes between the board members of the AOL Time Warner, the deal turned out to be a disaster. The tech market continued to slide further. Vast amounts of money ran out. Lots of dot-com companies had to be closed, and some who ran out of capital were either acquired or liquidated. However, there were few that survived like Google, Amazon.com and eBay.
In 2001, the US experienced a post dot-com bubble recession due to the September 11 terrorist attack. The Federal Reserve was forced to cut interest rates to stop more losses. By 2002, NASDAQ further plunged to 800. During the stock market crash from 2000 to 2002, $5 trillion was lost in the market value of companies.
Here are some of the notable dot-com failures during the bubble burst:
1. Pets.com – An online seller of pet supplies, Pets.com was probably the best known flop because of its famous dog sock puppet and the expensive Super Bowl ads. When it went public in February 2000, its stock started at $11 per share and rose to $14, but quickly fell below $1 in November. In just nine months the company lost $147 million, causing them to lay off around 300 employees.
2. WebVan.com – WebVan was the biggest epic fail during the bubble burst, losing around $800 million dollars. The online credit and delivery grocery business expanded too fast to eight cities in just one and a half year. In November 1999, shares traded at around $30 and the company was valued at $1.2 billion; but in July 2001, stocks were priced for only 6 cents per share. WebVan laid off around 2,000 employees then.
3. Kozmo.com – The company offered free one-hour local delivery of retail items in nine cities. However, it was only profitable in four of them, and small orders with free delivery have cost a lot for Kozmo. It lost around $280 million and laid off 900 out of its 2,000 workers in the first quarter of 2001. In April, it was forced to shut down ultimately.
4. eToys.com – eToys was a big competitor to Toys R Us back then. In October 1999, shares hit at around $84. It spent millions of dollars on marketing and partnerships to level withToysrus.com, Walmart.com, and Amazon.com. However, it failed to keep up. After two years in February 2001, it filed for bankruptcy with $247 million in debt.
5. theGlobe.com – TheGlobe might be the first social networking site ever, but it became well known because of its record-breaking largest first day gain of any IPO in history. In November 1998, it set the offer price at $9 per share, but stock opened at $87. The company was valued at $842 million then; but in August 2001, it failed to stay above $1 per share. That year, it stopped its Web hosting business, but its online gaming sites remained. By 2007, the company finally closed due to lack of funds.
6. Go.com – Owned by Disney and launched as a web portal to compete with Yahoo and AOL in 1998, Go.com was one of the first chat room networks and search engines. However, its user base remained less than half of each of its competitors, probably because it restricted adult material. In January 2001, Disney shut down Go.com, losing around $790 million. Now, it serves as a hosting site for ABC.com and ESPN.com.
7. GeoCities – GeoCities hosted many Internet users’ very first websites. In 1998, it became the third-most visited site behind AOL and Yahoo. The next year, Yahoo acquired it for $3.6 billion and GeoCities shares sold at $117. It lasted longer, unlike many dot-com flops, but Yahoo failed to upgrade it to a more modern social network and fell beside MySpace, Blogspot, and Facebook. By 2009, Yahoo finally closed it down. However, Japan is the only country that’s actively using the service.
8. Boo.com – Online fashion retailer Boo.com tried to offer too much too soon. As a startup, it opened its business internationally and underestimated the hassles of dealing with different tax structures in other countries. Also, the site was impressive but bandwidth-heavy, making it difficult to browse during the dial-up days of the Internet. As a result, the company didn’t make enough revenue to support itself, blowing up $160 million in venture funds.
9. Flooz.com – Flooz provided an online currency that people can use instead of credit cards. The idea was absurd that time, but still, it managed to raise $35 million from investors. The company even spent $8 million for a TV commercial featuring Whoppi Goldberg. However, due to lack of demand, the Flooz filed bankruptcy in 2001, less than two years after it launched.
10. govWorks.com – The failure of govWorks was classic enough to be featured in a documentary film Startup.com in 2001. The company, which was launched by childhood friends in 1998, offered a web portal where users could interact with their local governments. However, due to mismanagement, lack of proper service execution and inadequate funds, it filed for bankruptcy in 2001.
Many lessons can be learned from the first Internet bubble, but some say that it seems like we’re about to repeat history. The New Economy theory was proven wrong but sadly, it seems like it will continue to happen in the future. With the public obsession with social media, big players like Facebook, Twitter, LinkedIn and Snapchat are now valued at billions with net income up to 100 times less. Does it ring a bell?