DOT COM CASE STUDY

BY PROF. SAMIE
WHERE DID IT ALL START?

 It was the low interest rates in the US that prompted venture capitalists to invest in start ups - the federal funds rate
in 1992 was 3%.
 Right across 1990’s money started pouring into start up technology companies because media had touted the
information superhighway (internet) as a zillion dollar market in the early 1990’s.
 The dot com bubble picked up roughly 1997-1998 and burst in 2000-2001.
 Wall street analysts added to the dot com fever by publishing research reports in favor of technology stocks in the
late 1990’s. - technology stocks were the darling of the investors during the late 1990’s.

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THE SIZE OF DOT COM BUBBLE

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LEADING THE PACK

 VA Linux – The company was into selling computers powered by standard Intel Pentium processors that run on
Linux, the free Unix-based operating system. VA Linux, which started the day with an offer price of $30, saw its
shares rise to a high of $320 before closing at $239.25, up a whopping 697.5%.
 Theglobe.com - Started by two 23 year old undergraduates from Cornell, the company promised to be largest
online community. The company went public in Nov 1998 and till date has an amazing record with a 606%
increase over its IPO price.
 Webvan – Founded in 1999 the online grocer within 18 months spent US$1bn on a futuristic warehouses and
rapidly expanded into multiple US cities. The company raised almost half a billion dollars by going public and
even bought out one of its largest rivals, HomeGrocer.
 Go.com – Media heavy weight Walt Disney floated go.com to compete with Yahoo and Google as a destination
site.

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STRATEGIC BREAKDOWN

 The Federal Reserve increased interest rates six times between 1999 and 2000 to slow down an overheated
economy. – the flow of funds from venture capitalists and investors was slowing down due to the tightening of
monetary policy.
 Most dot com companies had a very straight forward strategic approach – A stated goal often to "get big fast" i.e.
capture a majority share of whatever market was being entered.
 The companies were busy raking up capital without ever making profit with all resources focused on fast-tracking
to IPO, without adequate emphasis on a viable business plan, solid mission, and inspiring vision.
 This was a perfect recipe for a financial disaster.

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FALLEN STARS

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FALLEN STARS

 When the VA Linux IPO came out in December 1999, New York Times famously quoted – “A Tiny Company
Without Profits Goes Public With a Bang”.
 The article stated investors had paid huge multiples for a tiny company with powerful competitors, little revenue
and no expectation of earnings in the foreseeable future.
 Even the company’s prospectus stated that “''We do not expect to generate sufficient revenues to achieve
profitability and, therefore, we expect to continue to incur net losses for at least the foreseeable future. If we do
achieve profitability, we may not be able to sustain it.'‘
 A year later in October 2000, the stock traded at $3.

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THE RISE AND FALL OF DOT COM COMPANIES

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FALLEN STARS

 The flawed reasoning behind the business model of Webvan was that because customers have problems buying
groceries offline, customers would flock to buy groceries online.
 This exactly where Webvan got it wrong as the anticipated revenues where never achieved - the contribution
margin of Webvan was never large enough to take care of the fixed costs as the margins in grocery business are
very thin.
 The company reported an accumulated deficit of $830 million in its last annual report.
 The company tried to grow to soon to fast – during its existence of 18 months it acquired Home Grocer $1.2
billion and signed a $1bn infrastructure contract with Bechtel.

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WEBVAN STOCK

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FALLEN STARS

 Go.com was Walt Disney’s attempt to challenge Yahoo and Google as a destination site.
 First of all, the company had a late comer disadvantage and secondly, the hierarchy at Walt Disney made the
decision making process slow at Go.com
 Disney was never able to make Go.com popular enough to validate the millions spent on promotion and Disney
took a write-off of $790 million.
 May be Walt Disney should have stuck to its core business rather than trying to challenge Google and Yahoo on
their home turf.

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CORPORATE FINANCE PERSPECTIVE

 Raising Capital is an important aspect of corporate finance but using the capital wisely is the more critical aspect.
 Most of the cases mentioned were able to raise capital for investment through venture capital, IPO or internal
funding but were unable to use the capital efficiently through proper business strategies.
 Investments are made in a company to help companies generate higher revenues and make profits thereby
generating cash flows for investors.
 Investor greed and IPO manipulation by investment banks were the main reasons for the dot com bubble.

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