What is the .com bubble? And why did it burst?
In: Economics
A bubble is when something’s value is artificially inflated due to hype. People think it is worth more than it really is for reasons that have nothing to do with its actual value. During the .com bubble, many people thought that internet companies were worth a lot and invested a lot of money in them. The bubble burst when, and because, people came to realize the true value of what they had invested in was inflated.
back when the internet just started becoming available in everyone’s homes in the late 90’s investors were getting rich getting in early on companies looking for money. Imagine investing in Google, Facebook or Microsoft early on. If you were looking for money, all you had to do was come up with any wacky company idea and out .com at the end of it because investors wanted to be the first to invest in your company because it had .com at the end of it. This rush of investors lead others to jump in on it too inflating the value of your company. The early 2000’s recession burst the bubble when people started becoming more wary of where they put their money and started looking at earning statements of them and realized these companies weren’t actually doing anything so they rushed to pull their money out.
The explosion of the world-wide-web in the early 90’s brought the promise to completely revolutionize global commerce. It was obviously the new/exciting/extremely popular thing, so of course it can be monetized…
Investors believed that just about anything could make money online, so they threw money at anything and everything. You could create a business model around sending free virtual birthday cards, and somehow manage to convince investors to throw you a few million venture capitol. You blow that money on fancy offices and fast cars, and live the dream of being a millionaire internet entrepreneur. This was the “bubble”.
It burst when enough time passed that the majority of these businesses ran out of venture capitol, and failed to present any sort of actual profit. The majority of the businesses folded, and only the ones that actually provided a real valuable service survived.
The Internet rapidly became widely adopted around the world and many people saw endless business opportunities. Setting up a new business was now relatively cheap and easy and you could have a global customer base right from the start.
A lot of money was invested in various new companies. People wanted to put a lot of money in these new markets as early as possible. They saw the success of companies like Apple and Microsoft and wanted to get in from the start with companies that could well be the next big thing.
Some of them were successful and made their investors incredibly rich. Most companies (just like in the real world) failed miserably.
That initial investment boom quickly slowed down when investors realised that many Internet companies are risky bets.
I knew a guy who was part of a project called pocket pussy in San Fran which was conceived to be like Tinder.
They got a few million from investors as they were bright lads, but the technology wasn’t there. They ended up spending the investment dollars on shared accommodation in Height Ashbury, a parade, and coke.
Back in the 90’s people realized that some bastards had made beaucoup bucks off of some tech stock. You’d read stories about some how if you had only bought a few shares of the right IPO you would have been a millionaire.
So naturally everyone decided that they wanted some of those sweet tech dollars.
But what to invest in? As far as anyone knew, Microsoft and Oracle had topped out, IBM seemed to be going nowhere and Apple just sold overpriced toys to graphic designers. That left startups.
The allure of becoming an IPO millionaire was too much for many people. The problem was that your average person didn’t know fuck-all about technology so they had no way know what these companies were doing. This was on top of the general ignorance of how stocks, IPOs and financial markets work that persists to this day.
At first a few smart investors actually did snatch up a few good startups. But once they were bought the rest of the public were still hungry. This led to any tech IPO instantly getting sold out.
Since the internet was just becoming popular these new tech companies did something that almost no other company did, they had web pages. They also followed the original naming convention where .com was supposed to be reserved for commercial entities. Thus these new tech companies were collectively referred to as “dot coms”.
As we know now, most of these tech companies were crap. The general concept was that they attempted fill needs that nobody had by putting them on a shitty website. The employees got a lot of really fancy office furniture and beer and nothing useful was produced.
Eventually people figured out that they had bought into a bunch of steaming turds and tried to dump them on to other people. But that was around the same time everyone else realized that these companies were steaming turds so nobody wanted to buy them.
Hence, the “dot com bust” or as many people called it, the “dot bomb”.
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