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Get big fast! Well, this was perhaps the motto of every Internet company towards the end of the twentieth century. And why not, anyone and everyone who had an idea were making their website and hence were epitomising their great American dream of becoming billionaires like Bill Gates. Even the roadmap seemed quite clear and easy!
Venture capitalists were pouring in millions of dollars in a young acne ridden industry that was showing unparalleled growth and most importantly, showing no visible signs of fatigue. Interestingly, the novelty factor of the Internet industry played a big role in getting investments from the venture capitalists and PE firms as they were struck by a fear of getting left behind in the global technology race. This obsession with the online El Dorado became a pandemic of sorts across global economies. For it was time to pop the bubbly and beat all the odds.
However, what ultimately did pop was not the bubbly, but the dotcom bubble, for the odds became too hard to beat. This joyous ride of exuberant of geeks & irrational investors came to a screeching halt. The fateful day of March 10, 2000 marked the beginning of the end of the dot com era. It was the day when NASDAQ’s tech stock index reached its all time high of 5,048.62 for the last time. Suddenly, the markets started crashing and most of the Internet companies lost billions of dollars in the market value, badly denting the global tech economy. As one analyst comments, “The greatest amount of wealth was created and destroyed in 2000, it was more than during any other period in the market’s history.” But what was it that led to the sudden downfall of the global tech economy?
Part of the reason was over inflated expectations about what the web could achieve for consumers as well as for businesses. “We were told that you’d be buying sandwiches over the Internet and having them delivered the next day by FedEx. Everything was about “eyeballs” and finding ways to attract customers, whether they bought anything or not. Every article in every newspaper in the country parroted the litany as to how you’d be out of business in a year or two if you were not present on the Web in a big way,” says leading technology analyst John C Dvorak.
Well, though industry watchers cite many reasons for this sudden dot com debacle, there is no consensus as to which was the sole reason for the dot com burst. Analysts have been trying to figure out a reason for the startling way in which the valuations of the IT firms reached at unprecedented levels and the way in which they fell flat post 2000. Why, indeed, were investors buying into companies at unprecedented valuations. What were they hoping for?
Interestingly, one reason that is being supported by most is the fact that the dotcom burst was a direct consequence of the emergence of a many radical Internet based models in the mid 1990s, which focused on attributes like networking and brand building before considering profits into account. This strange strategy followed by the Internet start ups lead to a situation, which made it difficult to evaluate these firms. Due to this, the firms were being highly overvalued considering their strong branding initiatives and web presence, which ultimately brought about irrational enthusiasm in the investors to buy these stocks.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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