growth, financeI keep hearing phrases like “For a startup which survived the dot com bust, …….”, etc.
So, what exactly is the dot com bust?
I have gone through the wikipedia page of the “Dot com bubble” but the finance terms are bit heavy for me, so I’m looking for a bit simpler explanation
And also, why and how did it affect startups at that time in such a huge scale?
The dot com bust was a period of hubris that occurred around when the Internet crept into businesses and households. (And in a sense it was phase one of a much larger asset bubble which began to deflate after 2007.)
For context, there basically was a gold rush back then. It was unclear what would work online and what wouldn’t. Or so collective memory would want us to remember. The reality is it was pretty clear what would work back then already for those who were keen observers, and you could read very sensible online commentary on the merits, or lack thereof, of this or that business idea and business model. The issue, of course, were that a) investors were too busy getting rich by speculating to take note, b) young founders “knew better”, and c) some VCs were cynically throwing whatever money they could get their hands on at walls, hoping something would stick.
In the end, many new companies with dubious business plans got funded at the time, in the hopes that they’d do a land grab and lock their target market before other entrants came. One succeeded pretty well in this sense: amazon.com. Many didn’t.
These companies characteristically thought big and prioritized growth over profitability - at all costs. This led to exuberant spending to attract highly sought after talent, over-hiring, and over-investment. That led to outsized burn rates (e.g. boo.com burnt through $135M of VC money in 18 months) and, later, spectacular bankruptcies.
(Fun facts in passing: HTML “coding” was such a sought after skill at one point that it gave rise to this hoax, and you could find job offers in 1999 that required 10-years of Java experience - Java was then a 4-year old language.)
It was also a period of reckless risk taking and rampant fraud. The risk taking was not new in itself. Private leverage had already reached bubble proportions during the Reagan era. It merely zoomed even higher at an accelerated rate. (And it continued to increase even after the Nasdaq crashed, hence my earlier comment that it was merely phase one of the 2007 bubble.)
All that money needed to go somewhere. A combination of euphoria and fraud led it to the tech sector. The tech sector was a natural fit, of course, owing to its novelty and the idea that we were entering a “New Economy”. But analysts also contributed, by pumping tech stocks prior to IPOs like there was no tomorrow. A few of them (e.g. Henry Blodget) actually got condemned for doing so all while knowing they were promoting garbage. Methinks they were scapegoats to some extent - all investment analysts were arguably contributing to pumping tech stocks back then. Journalists happily - and uncritically - went along with the narrative anyways. And so did investors.
There occasionally was some accounting fraud in the companies themselves as well - most notably at Worldcom, which got caught after the second round of stock crashing that occurred in the wake of 9/11. (In other fraud news, the folks from DeepCapture would surely add that naked short-sellers helped the bubble grow and pop. But that’s another story.)
In the end, money dried up after the Nasdaq crash. Overnight, a business plan that would have gotten you millions of VC money in a heartbeat just weeks earlier was deemed too risky to touch with a 10-foot pole.
Existing companies with oversized burn rates had to rapidly revisit their head counts and their investment plans. To give you a sense of the scale, back in early 2,000 my 8 colleagues and I were in an office that could comfortably fit 120 people. We were trying to raise €150M to spend in 2 years. 6 month later we had revisited our business plan twice, and failed to raise €50M and €15M. We shut down and returned what remained of the initial investors’ money.
We were far from being the only ones who closed shop… Many more companies were forced to shut down after running out of money. Even more companies never managed to get any funding to begin with.
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