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.
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:
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.
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.
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?