A Look Back At The 1990s Dot-Com Bubble
In this blog post, we'll be going over the history of the late 90s dot-com bubble and why many dot-com companies were formed during this period. In addition, we'll go over what the eventual outcome of many of these companies were. We will also look at how following trends can impact your own business. Lastly, we will discuss the different financial and operational pitfalls you'll want to avoid to keep your business running and profitable.
There have been many technological booms over the previous decades such as railroads, automobiles, radios and television. The dot-com boom can be traced back to the rise of home computers in the 1980s. With the 1993 release of Mosaic web browser, users gained access to internet and an increasing percentage of households were getting access to computers between 1990 and 1997. An economy based of off Information Technology was starting to form around this time, creating many new companies as a result.
Also during this period, interest rates were low and the introduction of the Taxpayer Relief Act of 1997 lowered capital gains taxes. Because of this, people started to make more speculative investments. Investors were eager to invest in dot-com companies, at any valuation, especially if it had a ".com" suffix in its name thinking that they would generate huge returns on these investments. The investors were also ignoring traditional financial metrics and buying based on confidence about technological advancements. This further fueled the creation of dot-com startups.
Some examples of companies that launched and received funding during this time were Pets.com and Webvan.com.
Pets.com was an internet company that sold pet supplies to retail customers. Launched in November 1998 and shut down in November 2000. Pets.com received an initial investment of $10.5 million in March 1999 that was spent on large warehouses, shipping infrastructures and buying out competitor Petstore.com. Pets.com also had a high profile marketing campaign that included radio, print and TV ads including a super bowl commercial that costed about $1.2 million. During their first fiscal year Pets.com spent $11.8 million in advertising compared to only about $600,000 in sales. Due to being unable to stay profitable, Pets.com ceased taking orders on their website around November of 2000 and liquidated the company in January of 2001.
Webvan.com was a dot-com company and grocery business that delivered products to customers homes. Founded in 1996 and shutdown in 2001. More than $396 million was invested in Webvan from several capital investment firms and from E-Trade and Yahoo. The company's investors pressured it to grow fast to take advantage of being first in the market. Webvan spent about $1 billion to build warehouses and bought a fleet of delivery trucks. They also bought competitor HomeGrocer for $1.2 billion in stock. During its peak in 2000, the company had $178.5 million in sales but $525.4 million in expenses. Webvan.com shut down in June 2001, after losing over $800 million.
There were a number of internal and external factors that cause the downfall of dot-com companies. These companies were not responsibly budgeting and managing their capital. Much of the capital was spent on advertising and promotions to build brand awareness quickly. While other companies engaged in lavish spending on business facilities and product launch parties.
Many dot-com businesses had the assumption that by using the internet, their businesses could bypass distributions channels of existing businesses and therefore, would not have to compete with them. Unfortunately, established businesses countered this by developing their own internet presence. The dot-com bubble lasted between 1999 and 2000. After this point the capital that was fueling these companies started to run out.
Other external factors that had an impact on Internet companies include:
- The Year 2000 problem. Concerns that computer systems would have trouble changing their clock systems from 1999 to 2000
- Several accounting scandals including the Enron scandal in October 2001
- The September 11 attacks
The sites that survived after the bubble burst had 2 things in their favor: a sound business plan, a niche in the marketplace. You as a business owner should review your products and services to see what separates you from competitors. It is also important to be fiscally responsible with your business' capital. Over spending on one category of operation such as marketing can be detrimental to the long-term health of your business.
Overall, the 1990s trend of internet start-up businesses, as well as the fad-based investment into these businesses, had many negative consequences on investors, the economy and businesses. These trends also have similarities to modern technological trends such as crypto-currency, NFT's and AI. As such, it is important to take a step back when thinking about starting a business and ask yourself if this business has a unique product or service that separates it from other competitors, and if getting involved in a current trend would have a positive impact on your business.
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