DotCom Bubble- Collapse & Escape

Any situation wherein a rapid escalation of assets is observed over time is termed an economic bubble. It is also known as a speculative bubble. This upsurge in the asset prices forms a bubble, which is really fascinating for the companies as their valuation is substantially hiked, which results in high prices of their market shares. Irrational exuberance enables big corporates as well as small startups in the same business line to raise funds easily. This ideal situation is a blessing in disguise until the bubble bursts and a collapse is observed. The impact of bursts is so adverse that an economy struggles for years to revive and gain momentum.

Dotcom bubble- The Booming Phase (1995–2000)

9th August 1995, when ‘Net Scape Communications Corporation’ became the first internet sector company to issue shares at the stock exchange, marks the date of birth of the internet bubble. The 1990s was the time when the internet started to evolve. Bricks and Mortar businesses started transforming and were set to create their online presence. A plethora of bricks and clicks companies incorporated and the internet sector was substantially gaining a lot of fame and market share. They were believed to have untapped potential, which may yield huge wealth when explored.

Investing in these businesses was like a fad. Everybody from investors to the general public started investing heavily in dot-com companies. Valuations of these companies doubled, tripled, and even quadrupled in a single day! It encouraged new startups to emerge as getting funds for the business was a doddle. Low interest rates on fixed-income investments like FDs swayed people into investing in the trend. This again favored internet companies as they could easily gather funds from IPOs. Many investors and venture capitalists did not even bother to check the basic metrics of the companies like the debt-equity ratio, profitability ratio, cash flow position, basic business model, market trends, etc. they trusted blindly and invested over-enthusiastically. In short, easy alternatives for people, speculation, and market overconfidence filled the internet companies' pockets. Everyone had their eyes on them. They were looking forward to getting good returns on their investments. Little did they know, a collapse was about to knock on their doors.

Deflationary Spiral- Bursting of the bubble (2000- 2002)

With ample funds in their pocket, internet companies made impetuous use of money. Instead of utilizing funds on managing the business operations of product development, employee maintenance, making profitable investments, etc. they utilized it on heavy advertisements and infrastructure development, and other kinds of not-so-required expenditures. Due to irresponsible allocation of funds, dot-com companies failed to rise to their stakeholders' expectations. When it was time for them to show results, they were catastrophic! There was a situation of panic selling of shares which lead to a drastic deflationary spiral. Markets crashed and the valuation of dot-com enterprises dived down to approximately 10%. Many companies like softbank.com became bankrupt.

Now the tables have turned. Now it became arduous for new startups to raise funds. Many companies and new startups failed. Even the stock prices of big conglomerate amazon.in smashed. Investors who ignored the company valuations in the first place had faced a terrible setback facing extreme losses. Dotcom enterprise’s ‘GET BIG FAST’ approach to attracting investors and raising their valuations eventually flopped and caused this bubble to burst. The impact worsened when the country was hit by a terrorist attack in 2001 on the US’s World Trade Center.

Fine Escape- The Dotcom Survivors!

Bubble burst was a tight slap on the faces of dot-com companies who failed to manage their resources. Now, it was a hard time for them to overcome the unprecedented times. The only tactics that they could apply to prevent themselves from shutting down were mergers and acquisitions. Many companies even had to change their names to survive the bearish market. They were bound to remove “.com” from their names.

However, on the other side, many dot-com enterprises shined above all and well survived the burst tenure. These include Amazon.com, eBay, Priceline.com, Shutterfly, coupons.com, and many more. In an interview, Amazon.com CEO, Jeff Bezos revealed his dot-com survival plan. He emphasized the need to have organized business operations. An effective fund allocation can help a company survive tough times. He said that Amazon didn’t need any funds when the bubble burst, so low stock prices didn’t affect his enterprise directly. Amazon worked on the principle of ‘brand recognition instead of ‘get big fast and now today, it is one of the biggest e-commerce businesses operational.

These survivors are the best teachers for modern-day business entrepreneurs. One can get the best lessons by studying the journey of these dotcoms.

Lessons to remember-

Investing is the air inside the bubble. Over investing leads to bubble burst just like a balloon bursts when excessive air is blown into it. Therefore, rational investing after studying the metrics properly can prevent a bubble burst to the great extent. Funds should be invested in a manner where all of your money is not at the stake of losses. Companies realized that the ‘GET BIG FAST’ approach will not work. After all slow and steady wins the race. Making a strong customer base can help them succeed with flying colors in the future. understanding the needs of people is what matters. Venture capitalists cannot ensure the success of their businesses. The business environment is dynamic, so companies must adopt flexible policies to transform themselves as and when required.

It’s a valuable lesson for all the budding entrepreneurs and investors out there.

Do not let another internet bubble form, learn from history, don’t repeat it!