Case study #1

Welcome to the era of the Dotcom bubble...

you started a company with the adoption of the internet you were very likely to get a lot of funding and you began a business with the use of the internet, you were highly likely to receive a lot of investment and a good assessment.

Consider the case of Priceline, which still exists today.

Jay Walker is an entrepreneur who has devised a clever solution to a significant problem: Every day, 500,000 aircraft seats go unfilled. Priceline made these seats available to internet customers who could choose their own price. Consumers got cheaper tickets, airlines got rid of surplus inventory, market inefficiencies were ironed out, and Priceline got a cut for facilitating the process: the traditional win-win-win situation that only the internet could give.

Priceline was a dot-com "overnight success," growing from 50 to more than 300 employees in its first seven months of existence and selling over 100,000 aircraft tickets. By the end of 1999, it was selling more than 1,000 tickets every day. With Walker's goal of bringing the Priceline model to every qualified market, it aimed to expand into hotel reservations, automobile rentals, and home mortgages.

Priceline went public in March 1999 at $16 per share. It reached $88 on its first day of trade before settling at $69. Priceline now has a market value of $9.8 billion, making it the greatest first-day valuation of an online firm to that point.

Few investors were worried that Priceline had lost $142.5 million in its first few quarters of operation. Or that it had to acquire tickets on the open market – at a loss – to meet consumers' lowball offers, losing $30 on average each ticket sold. Or that Priceline clients frequently spent more at auction than they would have paid if they had used a typical travel agent. Investors were more interested in acquiring a stake in a firm that might affect the course of business.

So, by 1999, losing money was considered a sign of a successful dot-com. Few could lose money as quickly or as ingeniously as Priceline.

Pets.com, eToys, Kozmo.com, and UrbanFetch all had some or all of the following characteristics: a business plan that promised to "change the world"; a Get Big Fast strategy to achieve ubiquity and corner a specific market; a willingness to sell products at a loss in order to gain that market share; a willingness to spend lavishly on branding and advertising to raise awareness; and a sky-high stock market valuation.

It became a running joke that dot-coms, which began with grand dreams of a more efficient method of conducting business, were nearly unprofitable.

Many investors were willing to invest in any dot-com firm, regardless of price, especially if it included one of the Internet-related prefixes or a ".com" suffix in its name. The venture capitalists who funded these businesses want supernova IPOs since that is how they were compensated. Any IPO represented an exit for venture investors. Do you remember those incredible first-day "pops" in dot-com stocks when they went public? The early investors were cashing out by selling their stock to the general public. The dot-com bubble was a dream time when many venture capitalists didn't care if a firm earned a profit since it didn't have to.

So what was the main cause for the dot com bubble to crash ?

Because most companies failed to implement sustainable business strategies, such as cash flow creation, they were overpriced and highly speculative. It resulted in a bubble that inflated at an alarming rate for several years.

These firms were overvalued, and share prices continued to rise since demand was overwhelming. As a result, the bursting of the bubble was unavoidable, resulting in a market meltdown, which was particularly visible on the NASDAQ Stock Exchange.

The three primary reasons of the dotcom meltdown were

1. Overvaluation of dotcom enterprises

Most IT and internet firms that went public during the dotcom era were grossly overpriced due to rising demand and a lack of sound valuation methodologies. High multipliers were used to tech firm valuations, resulting in inaccurate and overly optimistic estimates.

2. An abundance of venture capital

Money flowing into computer and internet firm start-ups by venture capitalists and other investors was a key cause of the dotcom bubble. Furthermore, inexpensive funds made available through very low interest rates made capital easily accessible. It, along with lower hurdles to obtaining capital for online startups, led to huge investment in the area, further expanding the bubble.

3. Media frenzy

Media firms encouraged individuals to invest in hazardous tech stocks by pushing too optimistic future returns and the "get big fast" motto. Business journals like as The Wall Street Journal, Forbes, Bloomberg, and numerous financial analyst periodicals fueled demand through their media channels, adding gasoline to the fire and further inflating the bubble.

So, how much money was lost when the dot-com bubble burst?

By 2002, 100 million individual investors in the stock market had lost $5 trillion.

Other internet-based firms, like Microsoft, Amazon, eBay, Qualcomm, and Cisco, suffered but survived the crash and are now giants.

Currently, a comparable bubble, the tech bubble, is emerging. A tech bubble is a rapid and unsustainable spike in the market caused by rising speculation in technology equities. A tech bubble is often distinguished by rapid share price increase and high valuations based on common criteria such as price/earnings ratio or price/sales, The future will reveal what happens to the tech bubble….