Who made money off the internet boom?

Factual Questions
1

Say we’re considering some stereotypical internet company.

It gets started, has an IPO, has 100B market cap, hemmorhages cash, next thing you know the stock is trading for a penny.

Certainly people made money off the “hemmorhaging cash” part. They paid employees. They also bought computers, office supplies, office space, etc. So a lot of people made money there, including employees (I was kind of in that situation, but we weren’t even in the ball park of going public).

But, what about stock?

Certainly, some people sold at the top, or the stock would never have come down. Are there any stories about such heroes? Are there stories of investors that went big into cash in early 2000 and held onto it until 2003 or so? Were there people who bought near the bottom and sold near the top or were most gains made piecemeal? Considerd a stock that might have IPOed at 5 and went to 100. Were those gains realized by many people buying at 5, selling at 10, people buying at 10, selling at 15 until the stock hit 100? Now, I know that to do that, there must have been more buying than selling at each point.

But, logically, there must have been tons of people selling at every price point on the way down.

Did the underwriters make a killing?

Were there lots of Blodgetts/Grubmans who didn’t get in trouble, but who made a killing?

Certainly, there were people saying, “Look at these valuations. Pets.com is worth more than AT&T. We should be shorting this shit.”

Anyway, maybe you see what I’m getting at. Where did the money go?

2

Mark Cuban is a prime example.

http://www.nba.com/mavericks/news/cuban_bio000329.html

Lots of other people did the same, only with less self-publicity.

3

I’m not sure of the company, but the husband of one of my lead partners made his money in the same manner and cashed out before the crash. She now works (damn hard, I must add) simply because she wants to, not because of any need. That’s why I could never be a Gates or a Bezos. I would have cashed out early and gotten myself a nice tropical island rather than commit myself to the business the way they have.

Underwriters for any company going public made big bucks.
Venture capitalists for any company that eventually went public made big bucks.
Brokers made big bucks off of the volatile trading of these stocks.

Employees who got in late 1999 / early 2000 on the promise of more stock options than salary lost out big time.

4

My mom used to say “it’s better to be lucky than smart”.

I invested almost exclusively in high tech companies (Cisco, Microsoft, Intel etc.) throughout the 90’s when things were booming, but when I decided to build a large custom home I had to pull a good portion of it out in 1999 to finance it. I essentially transferred a large chunk of money from the then hot stock market to the (even hotter) California real estate market right before things went south.

Because of the crash I was forced to find a new job, but I have since sold that house and taken a nice profit from it. Smart move? Not really… just lucky.

5

To a certain extend it never was there. While Pets.com had a big total market capitalization at one point say for the sake of argument 10 billion dollars. That does not mean that 10 billion dollars of stock was bought. It means that the total number of shares times the current share price is 10 billion dollars. For startups that just go IPO usually only a small fraction of the stock is sold by the owners say about 5%.

6

That’s interesting. I was wondering how many folks out there have stories like that.

I started at a small start-up in 2000. The previous few years had run programmer/engineer salaries up enough so that I did pretty well salary-wise. At least well enough to convince a bank to loan me cash for a house.

But, I knew people who were graphic artists and generic IT people who were getting paid peanuts and then were tossed on their asses when things went south.

Usually you can tell a trend is dead when it hits Baltimore. The promise of “The Digital Harbor” was as much of a death knell for the industry as anything.

Follow-up: what of the “venture capitalists”? Wasn’t their compensation usually tied with stock price, too? If they put cash into a compnay that was eventually worth nothing, at what point did they make off with the money bag?

7

I just have to say I found this really funny.

8

Typically, a venture capitalist cashes out when a company goes public. Often, it’s part of the deal. Venture capitalists provide capital (cash, sometimes office space, equipment, industry contacts, etc.) prior to a public stock offering. They’ll front many firms and even if only one or two make it (annually), they have a great return. Venture capital is horrible for cash flow and very illiquid though.

9

For a few years there a lot of managers who weren’t actually producing anything of value paying themselves very nice salaries as well as other perks such as expensed trips. I worked for two defunct dot-coms which never made it to their IPOs, but did manage to spend a nice chucnk of the venture capital on a minority of the employees near the top of the pyramid.

10

With a model like that, there must have been some VCs who got slaughtered. . .never hit one. Especially when considered in conjunction with Crandolph’s anecdote.

I know the guy who put up the money for us didn’t get jack out of it.

11

Quite likely, Trunk. Venture capital is a high risk/high reward investment. One Yahoo! can pay for 10 nobody-ever-saw-me dot coms. (Well maybe not 10, but 4-5)

Typically, a venture capital firm will simultaneously line up investors and businesses. Investors will be accredited, and be able to commit large sums for extended time frames. Businesses should have a business plan that will take them to an IPO, which is when ventures usually cash out. As stated before, ventures will provide other services in addition to cash to help what the venture believes to be a promising business achieve its potential.

In the latter half of the 1990s, there was a glut of investors who wanted to fund the next Dell or Amazon or Compaq. It became easy for a company to find venture capital because venture capitalists could raise funds easily. Plus, in venture capital terms, Pets.com was a success. All they had to do was shepherd a company into its IPO, at which point the Board of Directors and the shareholders took over.

What Crandolph sites is fraud, and poor oversight from the VC firm. Better run VC firms will know what is happening within their investments (which means that a manager attempting to defraud them must work harder at it, not that it doesn’t happen.) Since 2000, cash has been tighter, opportunities have dwindled (dot com wannabe, “Whaddaya mean we need a plan that show a path to a profit now?!”), poorly run VCs have collapsed, and there has been consolidation at the top.

12

I have a friend-of-a-friend who was working some low level job at the capitol or something. He started some web hosting thing and started selling space. People bought ad space and whatnot.

He would come home from work to find that some people had bough some of his services while he was at work. The little hobby income on the side grew and grew, eventually exceeding his paycheck.

He quit his job.

Soon afterward, he sold his little hobby for millions.

Now, he’s just a regular guy who happens to be loaded. He travels to Spain for the summer, his wife started a little boutique clothing store just for fun.

Not really related to the OP, but I know of another guy who was familiar with the operations of a large communications company… I think because he worked there, not sure. The communications company also manufactured and sold electronic equpiment. One problem was that this communications company was so big that part of the company had no means of communicating with other parts of the company.

One part of the company would have to purchase electronic equipment from the other part of the company that made the stuff.

This guy had figured out that he could start a company to operate as a middle-man. He was selling this company’s own equipment to another part of the company, while raking a profit off the top.

13

Oddly enough, me.

I put 401K money into high-risk funds. I saw my money easily triple in 2 years!

When I started to hear the first, faint rumors that the tech bubble might burst, I got around 2/3 of my dough into fixed-rate savings in the 401K.

Lost part of what I appreciated, but saved most.

14

You mean besides Bill Gates?