DOTCOM BUBBLE

This research looks at the causes, effects, and lessons learnt from the 2001 dot-com bubble
financial crisis. To support my statements I have investigated a variety of sources, including
articles on various websites, newspaper articles, and market reports. I find that the so called ―Get
Big Fast‖ business model that many dot-com companies employed was fundamentally flawed
and was a result of a rat race between frenzy investors to earn huge profits in a short span of time
by investing in emerging tech-start-ups, and after the bubble burst the companies worth millions
at the moment (2000s) dropped to the bottom and a majority of them shut down or filed for
bankruptcy within a span of few months.

OVERVIEW-

 The dot-com bubble (also known as the dot-com boom, the tech bubble, and the Internet
bubble) was a historic economic bubble and period of excessive speculation and
investment that occurred roughly from 1995 to 2000, a period of extreme growth advancement
in the usage of Internet.
 During the dotcom bubble, the value of equity markets grew exponentially, with the technology-
dominated NASDAQ index rising from under 1,000 to more than 5,000 between 1995 and 2000.
 Bubble V/S Debt- The economy grew at an unavoidable rate

CAUSES –

The invention of the Internet led to one of the biggest economic booms in history. The history of
this global network of computers traces back to early research activities in the 1960s, but it
wasn’t until the creation of the World Wide Web in the 1990s that large scale usage and
adoption of internet started to catch on. Once it became clear to investors that the internet had
created a wholly new and untapped international market, ipos of internet companies started to
follow each other in rapid succession. Media played a prominent role in spreading buzz about
―Get Big Fast Model‖, luring the inexperienced investors to invent their pool of savings in any
company with a suffix dot com. Forbes and Wall street journal encouraged general public to
invest in new ventures. ―On March 10, 2000, the Nasdaq Composite—the index for technology
shares traded on Wall Street—peaked at 5046.86 points, double the value of where it was the
year before.‖

The initial start-ups operated with a short-term loss business plan, insisting that by grabbing the
market share and dominating their specific sectors they could then charge what they wanted at a
later date thus many start-ups went for IPO. Sometimes the valuations of these companies were
based on nothing more than just an idea on a single sheet of paper. The excitement over the
commercial possibilities of the internet was so big that every idea which sounded viable could
fairly easily receive millions of dollars’ worth of funding as investors were afraid to miss out on
the next big hit. They were willing to invest large sums in companies which did not have a clear
business plan. The Low Interest rates attracted frenzy investors and venture capitalist. Analysts
used very high multipliers in their models and formulas for valuing Internet companies, which
resulted in unrealistic and overly optimistic values.
EFFECTS-

As a result of various factors the bubble burst and the effects were widespread-

Within the technology sector, Parsons (2012) argues that greater prudence is ensuring the
―sector is financially solid and is currently the only one to have more cash on its balance
sheet than debt”. Recent research (Pilbeam and Nagle, 2009) suggest that ―the high-tech IPO
market was dramatically affected by the Dot-Com Crash and that after the crash, the number of
high-tech ipos dropped considerably‖. Many companies drifted away from the ―Get big fast
model‖ and adopted the new prudent model of investing the bubble burst resulted in-.

1. Bankruptcy and liquidation of companies.

2. High acquisitions and merger rate.
3. Names of the companies got changed.
4. When the bubble burst in the spring of 2000 –
5. And an estimated $4 to $6 trillion of shareholder
wealth evaporated

LESSON LEARNT-

The companies which were launched during the build-

up to the dotcom bubble, out of them a few have
survived, however, the majority went under. Even though it is easy to get caught up in trends and
popularity, it is equally important to not be caught up in the hype when making any investment.
Instead, remember past mistakes, and realize that the potential to lose money by investing in a
potential bubble still exists. After the bubble deflated, investors became more careful of
investments in companies and started to put emphasis again on traditional pragmatic plans.
There is nothing wrong with investing in internet companies or start-ups but decisions shall be
made the way you would make any other potential investment – by proper balanced judgement
based on their balance sheet and profitability, rather than the surrounding buzz. It must be kept
in mind that popularity doesn’t equal to profit, Sound business model are efficient thus basic
business fundamentals cannot be ignored.

REFERENCES

https://en.wikipedia.org/wiki/Dot-com_bubble

https://www.investopedia.com/terms/d/dotcom-bubble.asp

https://www.moneycrashers.com/dot-com-bubble-burst/

http://www.thebubblebubble.com/dotcom-bubble/

https://writepass.com/journal/2012/10/2001-dot-com-bubble-its-causes-effect-and-lessons-learnt/