The dot-com fiasco: Anatomy of a (temporary) disaster
Three years ago, it was heralded as the new nirvana.
New economy "prophets" delivered persuasive orations outlining their fancy utopian vision of the emerging dot-com society. Many envisioned the Internet as the great harbinger of an electronic democracy. For teen-age geeks with business plans, it was an inexhaustible font of wealth. For venture capitalists, it represented unprecedented investment opportunity.
Dot-com was the way of the future.
That was then. The honeymoon lasted until March 2000. Then the bottom started falling out, and by November 2000 the dot-com saga was near its conclusion. Many erstwhile champions of the dot-com economy were down in value by almost 90 percent. Shares worth a few hundred dollars were suddenly not worth the paper they were printed on. Everyone seems to be asking the same thorny question, if dot-coms were money machines, why did they suddenly stop working?
What went wrong?
As always, Wall Street gurus seem to have the answer. According to Princeton University's Burton Malkiel, the Internet economy was a bubble waiting to burst. In his view, low barriers to entry and low profit margins spelt dot-com doom. Mark Mobius, emerging-market expert and manager of the Templeton Fund, who was among the first analysts to get on his soapbox and predict the end of the new economy, endorses Malkiel's views. Mobius is of the opinion that the dot-com collapse is the beginning of a global crash in this sector and might spread like the plague to other sectors, such as biotechnology and telecommunications as well. Some suggest that dot-com failure was the result of untrammeled market enthusiasm, untried valuation methods and unabashed hype.
There are many theories to explain the dot-com collapse. Simply put, many dot-com whizzes were oblivious to an age-old business rule -- companies are run for profit. Many went into business with a little more than an idea and OPM (pronounced "opium") or "other peoples money." The media shouted approval of any business that added a dot-com suffix. Initial Public Offerings were well received by the markets, which in turn spawned more flimsy start-ups founded on get-rich-quick fantasies. This, arguably, was when trouble began brewing in dot-com land.
Many dot-coms lacked sound revenue models, relying mostly on the shrinking advertising pie. This is precisely why Venture Capitalists hurriedly pushed their dot-com clients to the stock markets. Many of these companies would never have met earnings expectations as privately held enterprises dependent solely on their virtually nonexistent revenues.
The only way for VC's to realize profits on their investments was to push young companies to the glowing IPO markets, where mind-boggling and often nonsensical valuations would turn garage operations into multimillion-dollar corporations.
Following successful IPOs, VC's cashed out. The stage was set for disaster.
Publicly traded companies are accountable to their stockholders. Investors seek rich dividends and the promise of sustainable growth. Fledgling dot-coms could provide neither. Investors soon began to lose confidence as more and more dot-coms fell far short of Wall Street expectations. Finally, doomsday forecasts and massive sell-offs by major investors triggered off an avalanche of panic selling almost across the board.
So is this the end of silicon success? The obvious answer is NO. The Internet is a powerful tool, and will continue to play a vital role in the future of business. Those companies with diversified revenue models and some form of real-world presence that leverage the potential of the Internet to expand the scope of their business are most likely to succeed. The New Economy will go forward, though perhaps not quite as dramatically. Investors, temper your expectations and pick your stocks wisely. Remember the old adage, "all that glitters isn't gold." Entrepreneurs, it will take more than a good idea to change the world.
The era of the dot-com is still alive, only different.