Why did so many internet companies go out of business a couple of years ago?
I don’t like to point fingers, but I think it was the sock puppet.
The sock puppet, while I admit a certain affection for the guy, may indeed have played a key role in the downfall. More research is needed.
However, a prevailing view, as I understand it, is that a lot of internet firms weren’t profitable, or not profitable enough to justify the stock price. A stock price goes up when the expected dividend stream is high, or when the company has a lot of good growth opportunities (and will ultimately pay back in a very high future dividend stream, if I understand correctly). Evidently, internet companies couldn’t produce in either case. They got a lot of hype, stocks went up on speculation (my guess) and expectation of profits down the road. But those future profit expectations never materialized. Lenders lost faith and cut off the money to the firms and they went under.
That’s the simplified story as I understand it.
A few reasons, mostly Because they spent so much money, but people didnt buy much stuff from the net, so didn’t get much return.
Caveat emptor
That’s for my post, not Handy’s. I knew I shouldn’t have spellchecked that.
Well, there once was this guy standing on the shore, waiting for a ship to come in. He had just purchased the rights to the tulip bulbs that were on that ship. He had purchased them at a bargain price. But then, there was this storm, and…
A lot of the dot flops were just plain stupid, stupid, stupid.
They were based upon the idea that if you could get a million daily hits, that somehow it would result in piles of money.
In a way, they were right. Until the spring of 2000, these turkeys could often sell the company to an even bigger fool. Then the stock market prices for these things adjusted to their actual worth, 95-99.99999% less than the earlier price.
People were buying air. It was then discovered that air had no value.
A company which only consumes money, never generating any, will either keep being suckled at the VC teat, or will wither and die.
Another possible analogy is “The Emporer’s New Clothes” - eventually people realized that the companies were never going to be profitable.
In the 80’s it was real-estate, 90’s “internet stocks” any guesses where the boomers will run next? Wherever they go, get there early, and get out early.
On a recent episode of 60 Minutes, they interviewed a few stockbrokers who were bragging about how they illegally pumped-up the stock prices by various means, then sold them to Joe Public at ridiculously inflated prices, earning themselves profits of up to one million dollars per day. A classic case of the very few getting filthy rich off the stupid and uninformed.
After all, how many people do YOU know who got rich and were able to retire off the stock market boom?? Of course, with Dubya and other members of the Republican cabal controlling the government…we ain’t gonna see any convictions anytime soon.
“We don’t have those Enron-type connections!” – Tony Soprano.
Two main reasons:
- They were based on unrealistic business models
- They spent money like there was no tomorrow
FWIW, most dotcoms went bust before they could even have an IPO. It didn’t help when VC funds automatically handed out doughs upon hearing the magic word “Internet” either.
One of the IT gurus who worked for these dotcoms now works for my company. You remember those guys, who could “name their own price”.
He feel’s lucky. He knows a little about electronics and computers. He actually sold lattes for a while.
I agree, they were selling air.
Peace,
mangeorge
Bingo.
For a few companies I interviewed for and one that I worked for (that actually still exists - surprisingly enough), my dad would ask “So how do they make money?” And I couldn’t answer that, mostly because none of them were making money. There was always some kind of nebulous “plan” that involved becoming profitable 4 or 5 years later, maybe. (The one I worked for had a plan that involved giving away the product for free…same cost for supporting the thing). In the meantime, they paid reasonably good salaries, very nice stock options, and quite nice perks to hard workers - and competed for expensive office space with other companies doing the same thing.
And then the money stopped coming in.
Like Clinton would have done anything!!! Or Gore!!?
These companies were all wealthy on paper, but had no real assets to back up the value.
aahala wrote:
Urban Ranger wrote:
Urban Ranger’s well crafted answer is actually only a subset of aahala’s.
I worked for a dot com up till the big crash started. You can’t imagine how goofy they were. People way down the food chain could set up deals on their own that were binding on the company. We had one that offered what was essentially a lifetime of service for a fee that didn’t even cover what was to be paid to the people that sold the deal!!!
Those who say that the majority of the dot coms never made any money have it right. Stock market investors bid the value of the stocks up, apparently operating on the “greater fool” theory. I.e. “I know I’m a fool to pay this much for the stock, but I’ll sell it at a profit next month to a greater fool.”
Sooner or later the bubble will burst and price/earnings ratio will again begin to have at least a little effect. When that happens, bye bye.
Most shared the same business model of the underpants gnomes:
- Collect Underpants!
- <…>
- Profit!
Sure they had various step ones, but very few could elaborate step 2 any better than the underpants gnomes.
The use of the Internet was growing like a yeast culture. Several companies, which dealt with actually providing data management services to corporations, were very profitable. The idea seemed to be one of the classic cases of a ground floor opportunity in an entirely new realm of economic activity. When there was a market for venture capital, it had to be able to appeal to people who found the return rates of the boom market insufficiently attractive.
So, all you had to do was make up a fairy tale about on line presence for your “niche market” on the Internet, and examine the rate of growth for that niche. It was guaranteed to be doubling two or three times a year. (The entire Internet was growing at that rate.) The market didn’t have to be profitable now, it was always the idea to gain market share first, and count on the fact that consumer loyalty would keep your customer base buying after you stopped giving stuff away. Trouble is, the Internet customer has zero loyalty. He can search your competitors in seconds, every time he decides to spend a nickel, and your competitors include every new start up that is still giving stuff away.
In a remarkably short time the game changed. It became an industry entirely aimed at drawing in venture capital, and selling stock at rapidly increasing prices. The actual underlying “business model” didn’t need to have more than a paperwork existence. You didn’t even need to actually do any business at all, merely plan on doing business if it ever happened that you encountered a customer who couldn’t find your product anywhere else. Selling contracts among each other to supply advertising and referrals as part of your network structure could put enough money into circulation to provide a little smoke and mirrors. (Some base line figure to use to multiply times the expected growth rate of Internet access.) No one was actually producing any goods or services, and no one really wanted to.
But if your stock went up, you were a genius, an innovator. Look at the fortune you just made! You have to be a genius to make that kind of money, don’t you? Now you can make more money being a consultant to major companies, on how to harness the power of the Internet for their own corporate benefit. And you can incorporate your constancy into another Internet start up. There is no end in sight. You can’t see the edge of the cliff, because the bottom is too far away.
A guy not far from where I live was a multibillionaire one afternoon, and the next day, he was a billionaire, and the following week he was a multimillionaire. After that, he was out of business, but he personally was still a multimillionaire. His employees had worthless stock options, and a retirement fund that owned more of the same worthless stock. They were screwed. His corporation had zero assets. Zero. Obligations in the millions, and zero assets. Nothing. They didn’t even own their office equipment, or computers. They didn’t own enough disks to keep copies of their own data. Not that anyone wanted the data, since it was worthless too.
Tulips are at least pretty.
Tris
As a tiny insignificant pleb at teh bottom of the internet ladder (I was a beginner web designer) I was watching this all happen, and was shaking my head in disbelief at how obvious it was going to come crashing down around everybody’s ears, and nobody in a position of authority seemed to share my clear-as-crystal vision.
I could quite easily have gone to any conference going on at that time and pointed out the folly of every little move they were all making, and ,it turns out, I would’ve been 100% correct, as was evidenced by what happened little more than a year later.
I’m far from any kind of economic whizz-kid, but it was so blindingly obvious I still, to this day, do not understand why people bought into it.
Unless everybody involved had an intellect the size of a pea.
Bingo. It took the Sock Puppet Dog for it to actually register in the pea-brained public’s collective mentality, just how silly a plan it was.
