Project Outline

  • Reference to the dotcom boom and bust in the USA between 1999 and 2003-4.
  • The purpose is to expand the case that the collapse was totally predictable based on investor behavior during the preceding period after the take off of Internet and WWW in 1995 and especially in 1998-99.
  • The research has to be conducted to document evidence that can be used to predict the collapse.
  • The main type may be examples of how investors elevated the share value of internet and other technology based companies far above historical norms for price-earnings ratio. Some companies became worth billions which had not ever made a profit or did not own any real assets. It becomes especially evident when they are compared with traditionally successful 'brick and mortar' companies.

Research Information


Here is what really happened. Before 12/31/1999 a lot of computers were fixed by the geeks. A lot of data that normally would be sent from one computer to others did not arrive or arrived with errors that had to be made up by work-arounds. A lot of data were of this nature -- one person, not receiving a payment from another, arranged for it to be made later -- easy enough to do if these instances were not numerous. But perhaps the most important fact, that few noticed; a lot of companies bought in increasing numbers through 1999 new computers built to eliminate Y2K limitations. Indeed 1999 was a banner year for new computer sales that did not peak exactly at year end but one quarter after. At that point with computer sales headed toward the sky almost everybody thought that the dot com boom was going to last forever and for a few months after the March 2000 peak, the drop in computer sales was not large. It was dismissed as just "a little reversal". Thereafter the dot com bust followed the boom with a vengeance.

Did Y2K cause the bust? No one could say that. But the fact that the bust occurred when it did, in early 2000 when the successful resolution of the Y2K threat had raised the optimism of the IT industry, suggests that the post Y2K era optimism only enhanced the optimism for dot com that was already probably excessive. What is reasonable to say is that the dot com bust would probably have occurred later than it did, and possibly, though not likely, it might not have happened at all.

Ever since the Dot Com crash started in early 2000, everybody has blamed the crash on the pure-play sector's "reckless entrepreneurs" and on the sector's so-called "flawed business models." While these and other related factors certainly doomed some pure-plays, they definitely weren't the primary factors that actually caused the crash.

I've thoroughly researched the crash and I'm now convinced the Net's business analysts can't support their crash theories with any facts. First of all, public records, including the pure-play sector's SEC filings, show that well over 80% of the Net's 700-plus failed pure-plays were managed by reasonably bright, talented and qualified CEOs, not by a bunch of reckless entrepreneurs. While some pure-plays were no doubt grossly mismanaged by reckless entrepreneurs, most pure-plays, however, were run by dedicated, hard working career managers, many of whom formerly held upper-level management positions with some of the business community's most respected companies.

Second, the business models that were used by the vast majority of the Net's failed pure-plays weren't "flawed," but were modified adaptations of the same tried-and-proven business models that thousands of conventional businesses have used for years. I'm not suggesting that the VCs and investment markets didn't fund some pretty wacky ventures. They certainly did, but most pure-plays, probably upward of 90%, received IPO funding precisely because their business models were considered reasonably credible by the investment community.

When these researchers release the results of their studies, it's likely that they'll conclude that the crash was primarily sparked by the pure-play sector's excessively high customer acquisition cost, which in turn was primarily aggravated by the following circumstances: 1) the Internet public's concerns about the security aspects of online shopping, 2) the somewhat difficult task of using electronic shopping carts, and 3) the public's innate slowness to embrace new technical innovations (e.g., ATMs were introduced in the mid '70s, but didn't achieve a 50% public usage rate until the late '80s).

Another important dot com lesson was that advertising, no matter how clever, cannot save you. Take online pet supply store Its talking sock puppet mascot became so popular that it appeared in a multi million-dollar Super Bowl commercial and as a balloon in the Macy's Thanksgiving Day Parade. But as cute--or possibly annoying--as the sock puppet was, was never able to give pet owners a compelling reason to buy supplies online. After they ordered kitty litter, a customer had to wait a few days to actually get it. And let's face it, when you need kitty litter, you need kitty litter. Moreover, because the company had to undercharge for shipping costs to attract customers, it actually lost money on most of the items it sold. raised $82.5 million in an IPO in February 2000 before collapsing nine months later.

On a very simple level, the vast number of Internet pure-plays, or dot com brands, put too much faith in awareness building and left little investment for product or service strategies that accumulate genuine market mass around a value proposition, not just brand awareness. Momentum: :How Companies Become Unstoppable Market Forces By Ron Ricci, John Volkmann

Dot com companies were stereotyped as having extremely young and inexperienced managers wearing polo shirts with lavish offices including foosball, free food and soda as well as Aeron chairs. Companies frequently held parties or expositions where free pens, t-shirts, stress balls, and other trinkets were given away emblazoned with the company's logo. The companies were also stereotyped as requiring extremely long work hours and high pressure.

Some reasons given as to why the bubble burst when it did are the six interest-rate increases made by the Federal Reserve in 1999 and early 2000 finally catching up with the economy.

Another reason given was rapidly accelerated business spending in preparation for the Y2K switchover. Once New Year had passed without incident, businesses found themselves with all the equipment they needed for some time and business spending dried up. This correlates quite closely to the peak of U.S. stock markets. The Dow Jones peaked in January 2000 and the Nasdaq in March 2000. Immediately, hiring freezes, layoffs, and consolidations followed in several industries, especially in the dot com.

The dot com model was inherently flawed: a vast number of companies all had the same business plan of monopolizing their respective sectors through network effects, and it was clear that even if the plan was sound, there could only be at most one network-effects winner in each sector, and therefore most companies with this business plan would fail. In fact, many sectors could not support even one company powered entirely by network effects.

The goal of all these utterly unqualified web company owners was to set up their web site and think of the ways they would spend their billions and billions of dollars. “Sure kid, you can be a senior engineer. Just get the box up and running.”

Different thinking:

In this article, three business professors note that the business failure rate during the dot com bust was not as high as most media pundits would have us believe, with nearly 55 percent of fledgling business-to-business e-commerce sites remaining viable for at least two years after the Nasdaq registered its lowest point and 48 percent surviving five years. Yet the professors believe even more early Internet businesses would have survived if folks weren't so bent on getting an "early mover" advantage and on "getting big fast" — two strategies espoused by venture capitalists. They cite several examples of other sectors in which reality will have a hard time keeping pace with hype: nano technology, renewable energy, RFID and BPO/offshoring. Their advice: Test ideas with small bets and question conventional wisdom.

First, we report baseline estimates of the number of internet technology companies created from 1994-2001. Approximately 50,000 companies solicited venture capital to exploit the commercialization of the internet. Of these, less than 15% followed the GBF-model of venture-backed growth. Fewer than 500 companies (<1%) had an initial public offering. Within the larger set of initial entrants, however, the five-year survival rate was 48%. The survival rate is higher than most observers typically predict and similar to that associated with the introduction of other general purpose technologies.

Small Ideas, Big Ideas, Bad Ideas, Good Ideas: 'Get Big Fast' and Dot Com Venture Creation, DAVID KIRSCH, University of Maryland

BRENT D. GOLDFARB, University of Maryland - Robert H. Smith School of Business; November 2006

The 50 percent failure rate of the dot com era still seems high, until we put it into perspective. Compare the dot coms to other business realms: From 1996 to 1998, for example, the survival rate for independent restaurants open for three years ran 39 percent. That is, a form of business with a very measurable market, using cooking technology that has existed for decades or more, failed 61 percent of the time. By comparison, the failure rate of Internet-based businesses tapping unknowable market opportunities with an unproven technology platform seems far more tame.

Rather, to us, the low failure rate indicates that too few entrepreneurs were funded and too few new ventures launched. Had twice as many been launched, the short-term failure rate for individual businesses might have been higher, but a larger number of successful business models would probably have emerged, and these would have led to more enduring businesses in the long run.

What I found was, although it is true that there was a major setback regarding the internet, commonly called the dot com bust, the myth that it has never recovered, and that it is not, or will not be, a profitable industry is simply untrue.

During the internet bubble, dot com stocks rose by a factor of 35, creating what we now know were massively distorted price signals. This paper looks at net value creation in a sample of 441 venture-backed dot-coms that received over US$21 billion from private and public equity investors. As of the end of 2001, this US$21 billion corresponded to an estimated US$39 billion of enterprise value, giving an annualized return-on-equity capital invested of 19%. These results suggest that, despite the distorted price signals and contrary to popular perception, wealth was created during the dot-com investment boom.

Robert J. Hendershott, Finance Department, Leavey School of Business, Santa Clara University, Santa Clara, CA 95053, USA

As Kenichi Ohmae suggested in The Invisible Continent: Four Strategic Imperatives of the New Economy (HarperBusiness, 2000), the dot com era was like the exploration boom that launched the United States’ westward movement in the 18th and 19th centuries. The Internet opened up an entirely new continent for colonization. Many venture pioneers sought to settle this new land. Upon reflection, the fact that so many companies survived suggests that the first wave of the dot com revolution suffered from too little entry, not too much. The hype-happy phase of the bubble created a land-grab mentality, with early entrants seeking to control the high ground rather than continue exploring. And, when the bubble burst, new explorers could not get the funding to start a new expedition of the remaining uncharted territory. Had the fall not been so dramatic, more firms could have sought to productively exploit the new terrain.

Prior to 2001, there were billions of dollars being invested into the internet all around the world. Ideas for start up companies were abundant, and individuals who wanted to sink a massive amount of money into them were abundant, as well. For most of these venture capitalists, they predicted that the internet boom would happen quickly, that once these companies were up and running, customers would flock to use them. This did not happen. History tells us that in terms of new technology, society tends to accept it at a snails pace. Even the printing press, despite the fact that it was a fundamental and life changing invention, took decades to become part of mainstream society. So, with the customers not banging on the doors, the over investment of money into the dot com era forced a lot of companies to go bankrupt and lose their money and some, their livelihood.

The dot com bubble set the stage for today’s high executive compensation packages. While cash compensation has stayed relatively constant, LTI jumped dramatically in the early years of our retrospective, resulting in substantial TDC growth in 1996 and 1999. This coincided with the increased use of stock options, which dominated the LTI mix through 2002. The result was median TDC of about $3.2 million in 1996, almost $5 million in 1999, and over $6 million by 2002.


Dot com bust

I got fired from a dot com and it led me to go into business for myself, take the first real vacation I had since high school (35 years ago), and got me eventually to a nonprofit library/museum, which I really enjoy. It also led to me getting a bimonthly history of science column, which is beginning its fifth year.

By the way, that dot com showed me there is no upper limit on how fast people can spend someone else's money.

-- Neil Gussman, Philadelphia, Pennsylvania

My partners and I had sold a small dot com business to VerticalNet, which was one of the hottest B2B internet companies in that brief era. Our business was acquired by VerticalNet on December 30th 1999. As you can see by the graph the stock was at the equivalent of $40,000 or so, give or take $10,000 a share! The stock continued to rocket higher over the coming few months while we shareholders tried to keep our heads from spinning off of our necks. Watching the value of our shares balloon like magic was a mind warping experience for me. I recall running upstairs one morning to tell my wife that our net worth had just gone up by $100,000 that morning. Ahhh… but then there was the bust. It’s too painful to paint the picture for you. So let’s just say it was ugly. See that decline from $60,000 to today’s $2.56?

I must have seen 5,000 proposals, at least, at one point or another. Every one of them sounded great. The real problem was that for every good idea, there were about 500 people trying to do the same thing. So unless you were first, and unless you got there quickly, and unless you executed flawlessly, it was a very difficult place to build a business, because there was so much competition.

Anyway, going back to the dot com boom and bust, I sometimes tell the story of how I was approached by some guy, early in the boom phase, suggesting I move to New York City and become the CEO for his startup. I looked pretty good on paper, plus had a web site pretty early, even some good press. I'd be like his trophy executive. Then, went the plan, once venture capital was secured and it was time to "go live," I'd be replaced with someone more savvy, no doubt one of my would-be recruiter's cronies, already waiting in the wings.

There might've been some real bucks in it for me, no question, but the prospect of leaving Portland was not appealing, plus when I got the guy's business plan in the mail, I could see through the jargon and buzzwords to another plain vanilla ISP, another Internet Service Provider.

I just didn't like the hollowness of the hype, so said thanks but no thanks.


The dot com phenomenon, in all its phases, should not be viewed as at all unique. The lead up to the crash followed the same pattern of previous business expansion and innovation generated by deregulation and globalization (a form of quasi-deregulation of supply sourcing and market barriers), which in so many ways is what the Web has added up to. The patter is apparent in the history of the US airline industry, telecommunications worldwide, PCs and electrical utilities. The first phase nothing happens. The status quo holds. In telecommunications five years after deregulation in the US and UK, AT&T and British Telecom still maintained around ninety percent share of the long distance phone market. The Internet had been in operation for well over a decade before the web browser began the transformation of Internet operations from a domain limited to academic and technical professionals to a browser on every PC. E-Life After the Dot Com Bust By Brigitte Preissl, Harry Bouwman, Charles William Steinfield

The only way you can be sure it's overvalued is after it's over. When you're living in a market and you're seeing these stocks go up, and if you take the position, "Well, it's overvalued," you're not in the market, and you miss it. You miss the whole market. And it's hard to do.

Historically the dot com boom can be seen as similar to a number of other technology inspired booms of the past including railroads in the 1840s, radio in the 1920s, transistor electronics in the 1950s, and home computers and biotechnology in the early 1980s.

Are tech prices rational? February 14, 2000: 8:56 a.m. ET

There's method to the madness of Internet and tech stock prices, at least according to John Hand.

The dot com boom has been the lifeblood of the market the last few years. But many experts think it has left the U.S. stock market like an aorta, rushing a bubble right to the heart where it can burst. The prices are irrational, made up, nonsensical.

Many academics feel tech stock prices don't make sense, and might whisper as much in private. But there's very little research proving that's true. That's because the stock boom is such a recent phenomenon

Mom and pop on the Web May 23, 2000: 12:17 p.m. ET

While more than half of small businesses in the United States now use the Internet (most often for e-mail and online research), only 27 percent of those companies have their own Web sites, IDC reported last month. Even fewer are set up to offer direct e-commerce services.

Silicon Valley Should Withstand Next Bust, By REBECCA BUCKMAN, November 5, 2007;

Economic damage was severe partly because companies that fueled the boom sucked up cash and got so big. Back then, Web businesses had to invest millions in computer servers and services like Web connectivity just to get up and running. They hired hundreds of employees and rented huge offices. They needed millions of dollars from venture capitalists, who back start-ups; venture investors hope to profit when their companies go public or get acquired by bigger firms. In 2000, at the dot com boom's peak, venture investors poured nearly $95 billion into start-ups.