The dot-com bubble (also known as the dot-com boom, the tech bubble, and the Internet bubble) was a historic speculative bubble and period of excessive speculation mainly in the United States that occurred roughly from 1994 to 2000, a period of extreme growth in the use and adoption of the Internet.
The NASDAQ Composite index spiked in the late 1990s and then fell sharply as a result of the dot-com bubble.
Quarterly U.S. venture capital investments, 1995–2017
Prelude to the bubble
In 1993, the release of the Mosaic web browser made access to the World Wide Web possible (prior Internet services like Usenet, Gopher, FTP, etc existed but HTTP was the new invention which triggered this growth). Internet use increased as a result of the reduction of the "digital divide" and advances in connectivity, uses of the Internet, and computer education. Between 1990 and 1997, the percentage of households in the United States owning computers increased from 15% to 35% as computer ownership progressed from a luxury to a necessity. This marked the shift to the Information Age, an economy based on information technology, and many new companies were founded.
As a result of these factors, many investors were eager to invest, at any valuation, in any dot-com company, especially if it had one of the Internet-related prefixes or a ".com" suffix in its name.Venture capital was easy to raise. Investment banks, which profited significantly from initial public offerings (IPO), fueled speculation and encouraged investment in technology. A combination of rapidly increasing stock prices in the quaternary sector of the economy and confidence that the companies would turn future profits created an environment in which many investors were willing to overlook traditional metrics, such as the price–earnings ratio, and base confidence on technological advancements, leading to a stock market bubble. Between 1995 and 2000, the Nasdaq Composite stock market index rose 400%. It reached a price–earnings ratio of 200, dwarfing the peak price–earnings ratio of 80 for the Japanese Nikkei 225 during the Japanese asset price bubble of 1991. In 1999, shares of Qualcomm rose in value by 2,619%, 12 other large-cap stocks each rose over 1,000% value, and seven additional large-cap stocks each rose over 900% in value. Even though the Nasdaq Composite rose 85.6% and the S&P 500 Index rose 19.5% in 1999, more stocks fell in value than rose in value as investors sold stocks in slower growing companies to invest in Internet stocks.
An unprecedented amount of personal investing occurred during the boom and stories of people quitting their jobs to engage in full-time day trading were common. The news media took advantage of the public's desire to invest in the stock market; an article in The Wall Street Journal suggested that investors "re-think" the "quaint idea" of profits, and CNBC reported on the stock market with the same level of suspense as many networks provided to the broadcasting of sports events.
At the height of the boom, it was possible for a promising dot-com company to become a public company via an IPO and raise a substantial amount of money even if it had never made a profit—or, in some cases, realized any material revenue. People who received employee stock options became instant paper millionaires when their companies executed IPOs; however, most employees were barred from selling shares immediately due to lock-up periods. The most successful entrepreneurs, such as Mark Cuban, sold their shares or entered into hedges to protect their gains.
The "growth over profits" mentality and the aura of "new economy" invincibility led some companies to engage in lavish spending on elaborate business facilities and luxury vacations for employees. Upon the launch of a new product or website, a company would organize an expensive event called a dot com party.
Bubble in telecom
Telecommunications equipment providers, convinced that the future economy would require ubiquitous broadband access, went deeply into debt to improve their networks with high-speed equipment and fiber optic cables. In many areas, such as the Dulles Technology Corridor in Virginia, governments funded technology infrastructure and created favorable business and tax law to encourage companies to expand. In Europe, mobile phone companies overspent on 3G licences, which led them deep into debt. The investments in infrastructure were far out of proportion to cash flow. The high levels of investment led to a heightened competition for customers, leading many telecoms providers to slash prices for services, especially in the hyper-competitive European marketplace. These were major factors that led to the telecoms crash.
Bursting of the bubble
Historical government interest rates in the United States
Around the turn of the millennium, spending on technology was volatile as companies prepared for the Year 2000 problem, which, when the clocks changed to the year 2000, actually had minimal impact.
In February 2000, with the Year 2000 problem no longer a worry, Alan Greenspan announced plans to aggressively raise interest rates, which led to significant stock market volatility as analysts disagreed as to whether or not technology companies would be affected by higher borrowing costs.
On March 10, 2000, the NASDAQ Composite stock market index peaked at 5,048.62.
On March 13, 2000, news that Japan had once again entered a recession triggered a global sell off that disproportionately affected technology stocks.
On March 15, 2000, Yahoo! and eBay ended merger talks and the Nasdaq fell 2.6% but the S&P 500 Index rose 2.4% as investors shifted from strong performing technology stocks to poor performing established stocks.
The dot com bubble was not just a US phenomenon. On March 17, 2000, the Netherlands-based World Online (WOL) was floated, with a €12 billion valuation. WOL was the largest ever IPO for the Amsterdam exchange, and the largest IPO of any European Internet company.
On March 20, 2000, Barron's featured a cover article titled "Burning Up; Warning: Internet companies are running out of cash—fast", which predicted the imminent bankruptcy of many internet companies. This led many people to rethink their investments. That same day, Microstrategy announced a revenue restatement due to aggressive accounting practices. Its stock price, which had risen from $7 per share to as high as $333 per share in a year, fell $140 per share, or 62%, in a day. The next day, the Federal Reserve raised interest rates, leading to an inverted yield curve, although stocks rallied temporarily.
On April 3, 2000, judge Thomas Penfield Jackson issued his conclusions of law in the case of United States v. Microsoft Corp. (2001) and ruled that Microsoft was guilty of monopolization and tying in violation of the Sherman Antitrust Act. This led to a one-day 15% decline in the value of shares in Microsoft and a 350-point, or 8%, drop in the value of the Nasdaq. Many people saw the legal actions as bad for technology in general. That same day, Bloomberg published a widely read article that stated: "It's time, at last, to pay attention to the numbers".
On Friday, April 14, 2000, the Nasdaq Composite index fell 9%, ending a week in which it fell 25%. Investors were forced to sell stocks ahead of Tax Day, the due date to pay taxes on gains realized in the previous year.
By June 2000, dot-com companies were forced to rethink their advertising campaigns.
On November 9, 2000, Pets.com, a much-hyped company that had backing from Amazon.com, went out of business only nine months after completing its IPO. By that time, most internet stocks had declined in value by 75% from their highs, wiping out $1.755 trillion in value.
After venture capital was no longer available, the operational mentality of executives and investors completely changed. A dot-com company's lifespan was measured by its burn rate, the rate at which it spent its existing capital. Many dot-com companies ran out of capital and went through liquidation. Supporting industries, such as advertising and shipping, scaled back their operations as demand for services fell. However, many companies were able to endure the crash; 48% of dot-com companies survived through 2004, albeit at lower valuations.
Layoffs of programmers resulted in a general glut in the job market. University enrollment for computer-related degrees dropped noticeably. Anecdotes of unemployed programmers going back to school to become accountants or lawyers were common.
As growth in the information technology sector stabilized, companies consolidated, some, such as Amazon.com, eBay, and Google gained market share and came to dominate their respective fields. The information technology industry came to more closely resemble other sectors of the economy, albeit with still a faster growth rate and higher valuations than other sectors. There are now many information technology companies ranked at the top of the Fortune 500.
In a 2015 book, venture capitalist Fred Wilson, who funded many dot-com companies and lost 90% of his net worth when the bubble burst, said about the dot-com bubble:
A friend of mine has a great line. He says "Nothing important has ever been built without irrational exuberance". Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases and server structure. All that stuff has allowed what we have today, which has changed all our lives... that's what all this speculative mania built.
Blucora (formerly InfoSpace): Founded by Naveen Jain, at its peak its market cap was $31 billion and was the largest internet business in the American Northwest. In March 2000, its stock reached a price $1,305 per share, but by 2002 the price had declined to $2 a share.
Blue Coat Systems (formerly CacheFlow): Its stock price rose over 400% on its first day of trading in November 1999.
Boo.com: An online clothing retailer, it spent $188 million in just six months. It filed bankruptcy in May 2000.
Books-a-Million: A book retailer whose stock price soared from around $3 per share on November 25, 1998 to $38.94 on November 27, 1998 and an intra-day high of $47.00 on November 30, 1998 after it announced an updated website. Two weeks later, the share price was back down to $10. By 2000, the share price had returned to $3.
Broadband Sports: A network of sports-content websites that raised over $60 million before going bust in February 2001.
CDNow: Founded by Jason Olim and his brother, it was an online retailer of compact discs and music-related products that reached a valuation of over $1 billion in April 1998. In 2000, it was acquired by Bertelsmann Music Group for $117 million and was later shut down.
Chemdex.com: A company founded by David Perry that operated an online marketplace for businesses, it reached a market capitalization of over $7 billion despite minimal revenues.
Covad: Shares rose fivefold within months of its IPO.
Cyberian Outpost: One of the first successful online shopping websites, it reached a peak market capitalization of $1 billion. It used controversial marketing campaigns including a Super Bowl ad in which fake gerbils were shot out of a cannon. It was acquired by Fry's Electronics in 2001 for $21 million, including the assumption of $13 million in debt.
CyberRebate: Promised customers a 100% rebate after purchasing products priced at as much as 10 times the retail cost. It went bankrupt in 2001 and stopped paying rebates.
Divine: Founded by Andrew Filipowski, it was modeled after CMGI. It went public as the bubble burst and filed bankruptcy after executives were accused of looting a subsidiary.
DoubleClick: An online advertising company that soared after its IPO, it was acquired by Google in 2007.
eGain: Its stock price doubled shortly after its 1999 IPO.
eToys.com: An online toy retailer whose stock price hit a high of $84.35 per share in October 1999. In February 2001, it filed bankruptcy with $247 million in debt. It was acquired by KB Toys, which later also filed bankruptcy.
Gadzoox: A storage area network company, its shares tripled on its first day of trading giving it a market capitalization of $1.97 billion; the company was sold 4 years later for $5.3 million.
Geeknet (formerly VA Linux): A provider of built-to-order Intelpersonal computer systems based on Linux and other open source projects, it set the record for largest first-day price gain upon its IPO on December 9, 1999; after the stock priced at $30/share, it ended the first day of trading at $239.25/share, a 698% gain, making founder Larry Augustin a billionaire on paper.
Global Crossing: A telecommunications company founded in 1997; it reached a market capitalization of $47 billion in February 2000 before filing bankruptcy in January 2002.
theGlobe.com: A social networking service that launched in April 1995 and made headlines when its November 1998 IPO resulted in the largest first day gain of any IPO to date. CEO Stephan Paternot became a visible symbol of the excesses of dot-com millionaires and is famous for saying "Got the girl. Got the money. Now I'm ready to live a disgusting, frivolous life".
MicroStrategy: After rising from $7 to as high as $333 in a year, its shares lost $140, or 62%, on March 20, 2000, following the announcement of a financial restatement for the previous two years by founder Michael J. Saylor.
NorthPoint Communications: Agreed to a significant investment by Verizon and a merger of DSL businesses in September 2000; however, Verizon backed out 2 months later after NorthPoint was forced to restate its financial statements, including a 20% reduction in revenue, after its customers failed to pay as the bubble burst. NorthPoint then filed bankruptcy. After lawsuits from both parties, Verizon and NorthPoint settled out of court.
Palm Inc.: Spun off from 3Com at the peak of the bubble, its shares plunged as the bubble burst.
Prodigy: An ISP whose stock price doubled on its first day of trading.
Pseudo.com: One of the first live streaming video websites, it produced its own content in a studio in SoHo, Manhattan and streamed up to 7 hours of live programming a day on its website.
Radvision: An online conferencing company, its stock price rose 150% on its first day of trading.
Razorfish: An internet advertising consultancy, its stock doubled on its first day of trading in April 1999.
Redback Networks: A telecommunications equipment company, its stock soared 266% in its first day of trading, giving it a market capitalization of $1.77 billion.
Register.com: A domain name registrar, its stock soared after its IPO in March 2000, at the peak of the bubble.
Ritmoteca.com: One of the first online music stores selling music on a pay-per-download basis and an early predecessor to the iTunes business model. It pioneered digital distribution deals as one of the first companies to sign agreements with major music publishers.
Transmeta: A semiconductor designer that attempted to challenge Intel, its IPO in November 2000 was the last successful technology IPO until the IPO of Google in 2004. The company shut down in 2009 after failing to execute.
uBid: An online auction site founded in 1997 as a subsidiary of PCM, Inc. that went public in December 1998 at $15 per share before its stock price soared to $186 per share, a market value of $1.5 billion.
Webvan: An online grocer that promised delivery within 30 minutes; it went bankrupt in 2001 after $396 million of venture capital funding and an IPO that raised $375 million and was folded into Amazon.com.
Aharon, David Y.; Gavious, Ilanit; Yosef, Rami (2010). "Stock market bubble effects on mergers and acquisitions". The Quarterly Review of Economics and Finance. 50 (4): 456–70. doi:10.1016/j.qref.2010.05.002.
Actua Corporation was a venture capital firm. During the dot com bubble, the company had a market capitalization of over $50 billion. The company was originally known as Internet Capital Group, Inc. and changed its name to Actua Corporation in September 2014. In 2018, the company underwent liquidation.
AlltheWeb (sometimes referred to as FAST or FAST Search) was an Internet search engine that made its debut in mid-1999 and was closed in 2011. It grew out of FTP Search, Tor Egge's doctorate thesis at the Norwegian University of Science and Technology, which he started in 1994, which in turn resulted in the formation of Fast Search & Transfer (FAST), established on July 16, 1997. According to FAST, AllTheWeb once rivaled Google in size and technology.
Books-A-Million, Inc., also known as BAM!, owns and operates the second largest bookstore chain in the United States, operating 260 stores in 32 states. Stores range in size from 4,000 to 30,000 square feet and sell books, magazines, collectibles, toys, technology, and gifts. Most Books-A-Million stores feature "Joe Muggs" cafés, a coffee and espresso bar.Stores operate under the names Books-A-Million, Bookland, Books & Company, and 2nd & Charles.The company owns Yogurt Mountain Holding, a frozen yogurt retailer and franchisor with 40 locations. The company also owns Preferred Growth Properties, which develops and manages commercial real estate investments.The company also owns and operates American Wholesale Book Company (AWBC), an e-commerce division operating as booksamillion.com, and an internet development and services company, NetCentral, in Nashville, Tennessee.In December 2015, the company was acquired by its chairman, Clyde B. Anderson, and his family, for $21 million.
CDnow, Inc. was a dot-com company that operated an online shopping website selling compact discs and music-related products. In April 1998, during the dot-com bubble, the company was valued at over $1 billion. In July 2000, it was acquired by Bertelsmann Music Group for $117 million; shortly thereafter Amazon was contracted to operate the website. At its peak, it employed over 750 people and had offices in Fort Washington, Pennsylvania, New York City, London, and Los Angeles.
A dot-com company, or simply a dot-com (alternatively rendered dot.com, dot com, dotcom or .com), is a company that does most of its business on the Internet, usually through a website on the World Wide Web that uses the popular top-level domain ".com". The suffix .com in the URL refers to commercial as opposed to non-commercial companies such as non-profit organizations that use .org. Since the .com companies are web-based, most of their products/services are delivered via web-based mechanisms even when physical products are involved. On the other hand, some .com companies do not offer any physical products at all.
The startup scene in Finland has given birth to companies such as Nokia, Angry Birds, Supercell, Wolt, and many others.
Entrepreneurship itself in Finland is quite an old phenomenon. However, as everywhere else, the first startups appeared in the early 1990s and some faced demise with the end of dot-com bubble in early 2000.
Fucked Company was a website created by Philip J. "Pud" Kaplan after the dot-com bubble in 2000 as a "dot-com dead pool" that chronicled troubled and failing companies in a unique and abrasive manner. The website also sold rumor listings to subscribers. The site's name is a parody of Fast Company, a magazine that began covering technology companies during the Internet dot-com boom.
A September 10, 2000, attempt by Kaplan to put the entire site up for sale on eBay attracted joke bids as high as $10 million but no serious buyers.
Infoseek (also known as the "big yellow") was a popular internet search engine founded in 1994 by Steve Kirsch.Infoseek was originally operated by the Infoseek Corporation, headquartered in Sunnyvale, California. Infoseek was bought by The Walt Disney Company in 1999, and the technology was merged with that of the Disney-acquired Starwave to form the Go.com network.
Inktomi Corporation was a company that provided software for Internet service providers (ISPs). It was organized in Delaware and headquartered in Foster City, California. Customers included Microsoft, HotBot, Amazon.com, eBay, and WalMart.The company developed Traffic Server, a proxy server web cache for world wide web traffic and on-demand streaming media which transcoded images down to a smaller size for users of dial-up Internet access. Traffic Server was deployed by several large ISPs including AOL.In 2003, after the bursting of the dot-com bubble, the company was acquired by Yahoo! for $241 million.
The company's name, pronounced 'INK-tuh-me', was derived from a legend of the Lakota people about a trickster spider character, Iktomi which was known for his ability to defeat larger adversaries through wit and cunning. The tri-color nested cube logo was created by Tom Lamar in 1996.
"Irrational exuberance" is the phrase used by the then-Federal Reserve Board chairman, Alan Greenspan, in a speech given at the American Enterprise Institute during the dot-com bubble of the 1990s. The phrase was interpreted as a warning that the stock market might be overvalued.
Lycos, Inc., is a web search engine and web portal established in 1994, spun out of Carnegie Mellon University. Lycos also encompasses a network of email, webhosting, social networking, and entertainment websites. The company is based in Waltham, Massachusetts, and is currently a subsidiary of Kakao.
Startup.com is a 2001 American documentary film about the dot-com start-up govWorks.com, which raised $60 million USD in funding from Hearst Interactive Media, KKR, the New York Investment Fund, and Sapient. The startup did not survive, but it became a reference for lessons learned, as it was the subject of a 2001 documentary that follows govWorks founders Kaleil Isaza Tuzman and Tom Herman from 1999-2000, as the Internet bubble was bursting.
Steel Connect, Inc. is a company that provides supply chain management services to software companies. During the dot-com bubble, the company had a market capitalization of $41 billion and owned the naming rights to the home stadium of the New England Patriots. Between 1995 and 1999, its stock was the best performing stock in the United States, returning 4,921%. After the crash of the bubble, the stock price fell 99%.
The company was formerly known as College Marketing Group, CMG Information Systems, CMGI Inc., and ModusLink Global Solutions, Inc.
theGlobe.com was an internet startup founded in 1995 by Cornell students Stephan Paternot and Todd Krizelman. A social networking service, theGlobe.com made headlines by going public on November 13, 1998 and posting the largest first day gain of any IPO in history up to that date. Part of the dot-com bubble, the company's stock price collapsed the next year, and the company retrenched for several years before ceasing operations in 2008.
The Industry Standard is a U.S. news web site dedicated to technology business news, part of InfoWorld, a news website covering technology in general. It is a revival of a weekly magazine based in San Francisco which was published between 1998 and 2001.
USinternetworking, Inc. (USi) was an application service provider. It offered outsourced business applications delivered over the Internet or a private network connection for an installation charge and a flat monthly fee. In October 2006, it was acquired by AT&T.
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